Guardcliffe Properties Ltd v City & St James

There are before me three matters relating to an arbitrator's award (“the Award”) in a rent review of commercial premises at 38 to 46 Clayton Street West, Newcastle-upon-Tyne (“the Property”). The Claimant is the landlord of the Property and the Defendant is the tenant under a lease dated 27th February 1959 between Guardian Assurance Company Limited, as landlords, and Phillips Furnishing Stores Limited, as tenant ("the Lease").

The three matters are as follows. There is an application under section 68 of the Arbitration Act 1996 ("the 1996 Act") to set aside or remit the Award on the ground that there has been a serious irregularity in the conduct of the arbitration, which has caused substantial injustice to the Claimant. There is also an application under section 69 of the 1996 Act for leave to appeal against the Award, and, if leave is granted, to appeal against the Award on the ground that the arbitrator made an error of law in his interpretation of the Lease, and that such error has caused substantial injustice to the Claimant.

The Lease demised the Property for a term of 99 years from 27th February 1959 at an initial rent of £6,500 per annum, subject to the covenants and conditions contained in the Lease.

Clause 3 of the Lease provides for rent reviews at intervals of 21 years. A rent review was due on 27th February 2001. The next rent review after that date will be 27th February 2022. Accordingly, the rent agreed or determined on the rent review at 27th February 2001 will be the rent for the next 21 years.

Clause 3 of the Lease provides that, if the landlord and tenant do not agree the amount of the rent to be paid from the date of the rent review, the matter should be referred to be determined by an arbitrator appointed by the President of the Royal Institution of Chartered Surveyors.

The rent review of 27th February 2001 not having been agreed, the question of what rent should be payable for the Property with effect from that date, for the next 21 years of the term, was referred for determination by an arbitrator appointed by the President of the Royal Institution of Chartered Surveyors.

The arbitrator appointed was Mr David Roy Anderson FRICS, MCIArb (“the Arbitrator”).

The arbitration was conducted by way of written submissions and counter-submissions which were made in writing by the respective surveyors appointed by the Claimant and the Defendant. Following such submissions and counter-submissions, the Arbitrator held an informal hearing on 12th March 2002 with the respective surveyors.

The rent payable under the Lease, prior to the date of the rent review, was £27,000 per annum. The Claimant's surveyor, on the basis of the comparables which he submitted, contended for a reviewed rent of £126,000 per annum. The Defendant's surveyor, who submitted no comparables, contended there should be no increase from the passing rent of £27,000 per annum on the ground that the Property was unlettable.

By the Award, which was dated 3rd May 2002, the Arbitrator rejected the contention that the Property was unlettable, and determined that the rent payable from the date of the review should be £35,000 per annum.

It is apparent from the Award that, in arriving at the figure of £35,000, the Arbitrator took into account, among other things, the following. The most suitable use of the Property was A3 use as a public house or restaurant (para. 5.11). The hypothetical tenant would in practice restrict such use to the ground floor and basement of the Property, and would leave the upper parts vacant (paras. 5.11 and 5.16). The costs of those upper parts in terms of maintenance, empty rates, insurance and the like would be reflected in the hypothetical tenant's bid (para. 5.39). Various works would need to be carried out by a tenant to convert the Property from its existing retail use to A3 use, including installation of toilets, extraction equipment, noise installation, probably air-conditioning, and compliance with Fire Officer regulations, including fire compartmentalisation and new staircases (para. 5.21). The assumed condition of the Property was that it was fit for occupation and suitable for retail purposes, in working order, but with services, lifts and the like which might need renewal in the foreseeable future (para. 5.29). In considering a bid and an A3 use, the hypothetical tenant would take into account the likely cost of renewing the various services which were reaching the end of their useful life, any long-term overhaul of the fabric of the building that might be necessary, and the other conversion works that would need to be carried out as mentioned above (paras. 5.30 and 5.35).

The Arbitrator considered that three comparables were extremely useful. One of them was 40 Collingwood Street, the basement and ground floor of which were similar in size to the ground floor and basement of the Property. 40 Collingwood Street had been let in December 2000 for a premium of £350,000 and a rent of £65,000. The Arbitrator considered that this was a particularly significant comparable because of the proximity of the letting of 40 Collingwood Street to the rent review date of the Property (para. 6.2). Ignoring the premium of £350,000 on the assumption that it was a payment for the fit-out of the premises, the Arbitrator concluded that the rent of £65,000 per annum equated to £5.42 per square foot for an unfitted unit let on a 25 year term from December 2000 (para 5.47). He acknowledged that the rent per square foot could be more if part of the premium related to rent.

In view of the inferior location of the Property to the comparables, however, he concluded that a hypothetical tenant would not be prepared to pay as much per square foot as the devalued rate of those premises.

The Arbitrator concluded that, if all other factors were the same as Collingwood Street, the appropriate rent from the rent review date would be £5 per square foot, producing a rent for the ground floor and basement of £53,440 (para. 6.2).

The Arbitrator then adjusted that figure downwards in two respects. First, he made an adjustment of £10,000 per annum to reflect the value of an extended rent free period or other inducement, that would have been agreed in recognition of the likely cost to the tenant of renewing services and overhauling other parts of the Property reaching the end of their useful life, together with the extra costs involved in converting the Property from retail to A3 use (paras. 6.3 and 6.4). He then made a further adjustment of £8,500 per annum to reflect the liability for the upper parts “and the overall nature of the Property in all its aspects” (para. 6.5.). Those adjustments produced a figure of £34,950 per annum, which the Arbitrator rounded up to £35,000 per annum (para. 6.6).

The Claimant's criticisms of the Award, for the purpose of the applications before me, may be briefly stated as follows. First, the hypothetical rent free period, reflected in the downward adjustment of £10,000 per annum, had not been raised by either side in the arbitration, as the Arbitrator himself expressly acknowledged in paragraph 6.3 of the Award. The Claimant had no opportunity, therefore, of dealing with the appropriateness of a rent free period, and, if it was appropriate, the likely duration of such a period.

Second, a deduction to reflect the tenant's ongoing liabilities and outgoings in respect of the vacant upper floors had also not been raised in the course of the arbitration. The claimant, therefore, had no opportunity of dealing with the appropriateness of such a deduction, and, if it was appropriate, the amount of such deduction.

Third, enquiries made shortly after the publication of the Award established that only some £30,000 of the £350,000 premium for 40 Collingwood Street was attributable to fixtures and fittings on the refit of those premises. Accordingly, contrary to the assumption of the Arbitrator, the rest of the premium ought to have been taken into account in working out the equivalent rent per square foot of those premises. At the date of the Award neither party had any clear evidence as to the reason for the premium. The Arbitrator ought not, in those circumstances, to have relied upon 40 Collingwood Street as a comparable without first giving the parties an opportunity to clarify the reason for the premium.

Fourth, the Arbitrator was wrong to say, in paragraph 5.28 of the Award, that there was no obligation on the tenant, under the terms of the Lease, to renew the services and the lift in the Property other than as required for repair. That error of law was carried by the Arbitrator into his allowance for a rent free period of an annual equivalent value of £10,000 per annum.

The applications are made under sections 68 and 69 of the 1996 Act. Section 68(1) provides that:

Section 68(2) provides, so far as relevant, that:

Section 33 is as follows:

Section 68(3) of the 1996 Act provides that, if there is shown to be a serious irregularity affecting the tribunal, the proceedings or the award, the Court may remit the award to the tribunal in whole or in part, for reconsideration, or may set aside the award in whole or in part, or declare the award to be of no effect, in whole or in part.

Section 69(1) of the 1996 Act provides that, unless otherwise agreed by the parties, a party to arbitral proceedings may appeal to the court on a question of law arising out of an award. Unless all the other parties agree, however, such an appeal may only be brought with the leave of the Court: S.69(2).

Section 69(3) provides that:

On an appeal under section 69, the Court may confirm the award, vary the award, remit the award to the tribunal, in whole or in part, for reconsideration in the light of the Court's determination, or set aside the award in whole or in part.

In paragraphs 6.3 and 6.4 of the Award the Arbitrator said as follows:

Mr Norman Primost, counsel for the Claimant, pointed out that the allowance of £10,000 per annum amounted to £210,000 over the duration of the hypothetical term. He submitted that the allowance, therefore, reflected a rent free period of some four years.

In his first witness statement, dated 8th July 2002, Mr Andrew Tucker BSc MRICS, the Claimant's surveyor, said as follows with regard to this deduction:

Mr Primost submitted that the substantial allowance for a notional rent free period, without giving the parties an opportunity to comment upon the appropriateness of a rent free period or its duration, constituted a serious irregularity within section 68 of the 1996 Act.

Mr Primost referred to Zermalt Holdings SA v Nu-Life Upholstery Repairs Ltd [1985] 2 EGLR 14. That was a case which also concerned an application to set aside an award by a surveyor arbitrator as to the rent payable under rent review provisions in a lease. The complaint was that the arbitrator had made findings on matters which were never explored in the proceedings, never referred to by the surveyors for either side, never put by the arbitrator to the surveyors, and which appeared for the first time in the award. Bingham J, who set aside the award, said as follows, at page 15:

Handley v Nationwide Anglia Building Society [1992] 2 EGLR 114 was another case in which a party applied to set aside an award by a surveyor arbitrator as to the reviewed rent for premises on the ground, amongst others, that he reduced certain comparables without alerting the parties to his thinking and giving them a chance to comment on the figures he had in mind. Gatehouse J said, at page 115:

Mr Timothy Dutton counsel for the Defendant, submitted that there has not been a substantial irregularity in relation to the £10,000 per annum deduction in the present case because it was always clear that, in the light of the condition of the Property, there was to be a discount from what would otherwise be the rent, and the only question was the extent of the discount. He submitted that it was for the Claimant's surveyor to put forward his case as to the amount of any discount.

Furthermore, Mr Dutton submitted, it would not have been reasonable for the parties to expect the Arbitrator to issue, in effect, an interim award, stating that he was minded to apply a notional rent free period, and then give the parties a further opportunity to address him on the extent of any such rent free period.

Further, Mr Dutton submitted that, in view of the fact that the rent review provisions in the Lease envisage the appointment of a surveyor as an arbitrator, it was implicit in the arbitration process in the present case that the Arbitrator might rely upon his own general knowledge to permit a rent free period, if he considered it appropriate to do so.

Finally, Mr Dutton submitted that, even if there was a serious irregularity, it is for the Claimant to satisfy the Court that it has caused, or will cause, substantial injustice to the Claimant. The Court cannot, however, be satisfied in the present case that, if an opportunity had been given to the Claimant's surveyor to make representations to the Arbitrator in relation to a notional rent free period, the Arbitrator's decision would have been any different.

In my judgment, the Arbitrator's decision to allow an annual equivalent of £10,000 per annum in respect of a rent free period was a serious irregularity. The principle in Zermalt and Handley is directly in point. The notional rent free period appears, on the face of it, to be a very substantial one. The Arbitrator ought to have allowed the parties, and in particular the Claimant, an opportunity to comment on the principle of a rent free period and its duration. I sympathise, like Bingham J, with the dilemma of an expert sitting as an arbitrator when there is an important point (in his eyes) which has not been raised by the parties. Nevertheless, the fact that the Arbitrator in the present case is a surveyor, with the general knowledge of a surveyor, and that the appointment of a surveyor is envisaged in the rent review provisions in the Lease, is strictly irrelevant to the Claimant's complaint. The Arbitrator was not appointed as an expert but as an arbitrator. In both Zermalt and Handley the arbitrator was also a surveyor.

There was a breach of the general duties specified in section 33 of the 1996 Act. The Claimant's surveyor says in his witness statement that, if he had been given the opportunity, he would have refuted the appropriateness of the rent free period allowed by the Arbitrator, and would have backed this up with evidence from comparable lettings. In those circumstances, and bearing in mind the substantial amount of the discount over the 21 year period before the next rent review, the irregularity will, in my judgment, cause substantial injustice to the Claimant.

In my judgment, the Arbitrator's allowance of £8,500 per annum in respect of the upper floors of the Property was also a substantial irregularity, for similar reasons to those I have already given in relation to the allowance of £10,000 per annum. Not only was the possibility of such an allowance in respect of the upper floors not raised in the arbitral proceedings, but it went beyond the contention of the Defendant's own surveyor, who was simply asking that no rental value be attributed to the upper parts.

Mr Tucker, the Claimant's surveyor, said the following with regard to this allowance in his first witness statement:

The allowance was a substantial one. Over the 21 year notional term it amounted to £178,500.

Mr Dutton's submissions in relation to the allowance of £8,500 per annum in respect of the upper floors were similar to those in relation to the £10,000 per annum allowance, and I reject them for the same reasons I gave in relation to that allowance.

The Arbitrator referred in detail to three comparables in the Award: 30 Grainger Street; the Union Rooms in Westgate, and 40 Collingwood Street. It is clear that the Arbitrator could not, and did not, rely to any material degree on the Union Rooms since, as he himself observed, the transaction relating to that property was not an arm's length transaction. He devalued 30 Grainger Street to £10 per square foot on the ground floor and £6 per square foot on the basement, with lesser rates on the upper floors. As regards 40 Collingwood Street, the Arbitrator devalued that property, as I said, to £5.42 per square foot, ignoring the premium of £350,000. As I have also already said, in view of the location of the comparables and other factors, he considered that a hypothetical tenant would not have been prepared to pay as much per square foot for the Property as the devalued rental values of 30 Grainger Street and 40 Collingwood Street.

It is clear that the Arbitrator considered the devalued rent for 40 Collingwood Street as particularly significant. He said at paragraph 6.2 of the Award:

The premium of £350,000 for 40 Collingwood Street was potentially very important in the calculation of the devalued rent if part of the premium related to rent. The Arbitrator himself said this in paragraph 5.47 of the Award. In their respective written submissions, the Claimant's surveyor said that the premium was reflected in a low rent, whereas the Defendant's surveyor said the premium was for fitting out costs and should be ignored for rent devaluation purposes. The reason for the premium was the subject of discussion at the meeting of the Arbitrator and the surveyors on 12th February 2002. The Arbitrator's notes of the relevant discussion, which were approved by the parties are as follows:

Accordingly, there appears to have been no factual basis for the Arbitrator's decision to treat the entire premium of £350,000 as payment for the fitting out of 40 Collingwood Street. As is now known, the Arbitrator's assumption was wrong, and only some £30,000 of the premium was in respect of the fit-out.

The evidence is that the Defendant's surveyor had indicated, in or before November 2001, that he, rather than the Claimant's surveyor, would take responsibility for investigating the letting at 40 Collingwood Street. The evidence is also that the Claimant's surveyor had said to the Arbitrator that, if the Arbitrator wished to have any further information in relation to the comparables, then he would attempt to obtain it.

Mr Primost submitted that, in those circumstances, it was a serious irregularity within sections 68 and 33 of the 1996 Act for the Arbitrator to have reached a decision on the treatment of the premium for 40 Collingwood Street without seeking and obtaining further clarification. Further, it was a serious irregularity for the Arbitrator to have relied on 40 Collingwood Street as a comparable without first obtaining such clarification. Further, or alternatively, it was an error of law for the Arbitrator to have reached the conclusion that he did as to the premium, in the absence of any evidence to support it.

Mr Dutton submitted that there was no serious irregularity, since both sides' surveyors were relying on 40 Collingwood Street as a comparable, albeit for different rental values, and neither told the Arbitrator that he should not take it into account. In effect, he submitted, there was an implicit agreement between the parties that the Arbitrator should decide between the two surveyors as to the proper treatment of the premium and the rental devaluation of those premises. Again, Mr Dutton submitted that, in view of the Arbitrator's experience as a surveyor, the arbitral process in the present case envisaged that the Arbitrator could rely upon his own knowledge in forming a view as to the likely reason for the premium.

While again sympathising with the Arbitrator over his dilemma, there was, in my judgment, a serious irregularity in the Arbitrator's significant reliance on 40 Collingwood Street, without taking into account the substantial premium for those premises, when there was no factual basis for preferring one view of the reason for the premium over the other, and without giving the Claimant the opportunity to investigate the position further. I do not accept Mr Dutton's submission that there was, in effect, an agreement by the parties that the Arbitrator could decide to reject the Claimant's approach as to the premium without any evidence to support the contrary approach, and without giving the Claimant's surveyor the opportunity of investigating the matter further.

In view of the substantial size of the premium, and the strong likelihood that it will affect the calculation of the devalued rent for 40 Collingwood Street, there can be no doubt that the irregularity will cause substantial injustice to the Claimant.

The Arbitrator's conclusion as to the treatment of the premium was made without any evidence. Mr Primost submitted that, accordingly, it amounted to an error of law within the principle in Edwards v Bairstow [1956] AC 14.

In Capital and Counties plc v Hawa [1991] 2 EGLR 133, Millett J accepted that such an error of law (viz. a finding which no properly instructed tribunal could reach on the evidence) was an error of law for the purposes of section 1 of the Arbitration Act 1979. Mr Primost submitted that those provisions are, for the purposes of leave to appeal an award on a question of law, in all material respects identical to those in section 69 of the 1996 Act.

A contrary view to that of Millett J was expressed by Steyn LJ in Geogas SA v Trammon Gas Ltd, The Baleares [1993] 1 Lloyd's Rep 215, at pp. 3231 - 232. The other members of the Court of Appeal, however, declined to express a concluded view on the point. The view of Steyn LJ was followed and applied by Evans-Lombe J in Secretary of State for the Environment v Reed International plc [1994] 1 EGLR 22. It appears, however, that the latter decision was, strictly speaking, per incuriam since Millett's J decision in Capital and Counties was not cited. In the circumstances, were it necessary to do so, I would feel bound to follow Millet J's decision since I am not clear that the decision of Millett J was plainly wrong.

The point of law as to the treatment of the premium was not, however, raised in the Claimant's application for leave under section 69. There has been no formal application for permission to amend the Claimant's leave application in order to include reference to the new point of law. Nor has a written formulation of any proposed amendment been placed before me. In the circumstances, in view of my decisions on irregularity within section 68 of the 1996 Act, and in the absence of a properly formulated application for permission to amend, I do not propose to consider further the point of law.

Mr Primost submitted that the tenant's repair obligations under the Lease were more extensive than those reflected in paragraph 5.28 of the Award, and this had an impact on the Arbitrator's award as to the reviewed rent. As I have said, in paragraph 5.28 of the Award the Arbitrator stated that there was no obligation on the tenant to renew the services and the lift in the Property, other than as required for repair.

I can deal with this point quite shortly. Paragraph 5.28 of the Award was in the context of the Arbitrator considering the assumed condition of the Property at the date of commencement of the hypothetical lease. On this aspect, so far as relevant, the conclusions of the Arbitrator were quite clear. He stated as follows, in paragraph 5.29 and 5.39 of the Award:

Those conclusions, as to the condition of the Property at the date of the commencement of the hypothetical lease, seem to me to be entirely correct and in accordance with the repair obligations of the tenant under the Lease. Both Mr Primost and Mr Dutton agreed that those obligations were to keep the Property in repair, including renewing parts and services as and when necessary. Accordingly, I reject the Claimant's case on this aspect.

If there is shown to be a serious irregularity affecting the tribunal, the proceedings or the award, section 68(3) of the 1996 Act confers on the Court a discretion whether or not to remit the Award or set it aside or declare the Award to be of no effect. In view of the fact that there have been serious irregularities in the respects which I have stated in this judgment, and that they will cause substantial injustice to the Claimant, and in the absence of any other countervailing factors, I consider that it would be appropriate to grant relief in one or other of the ways specified in section 68(3).

Section 68(3) stipulates that the Court must not exercise its power to set aside an award or declare an award to be 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. I consider that it is appropriate to remit the award to the Arbitrator for reconsideration in the light of my findings.

Accordingly, I refuse leave to appeal under section 69 of the 1996 Act, but I direct pursuant to section 68 of the 1996 Act that the Award be remitted to the Arbitrator for reconsideration in the light of my findings in this judgment.