Monella & Anor v Pizza Express (Restaurants) Ltd

In this action the claimants, Paul Paolino Montalto Monella and Gro Montalto Monella, seek an order under section 12 of the Arbitration Act 1996 extending the time within which they may apply for the appointment of an arbitrator to determine the revised rent to be paid under a rent review clause contained in a lease dated 30th October 1997. The relevant facts may be summarised as follows.

On 31st January 1997, the Arbitration Act 1996 came into force. Accordingly, it formed part of the background against which the lease in question was executed. Section 12 of the Act is in the following terms:

I need not quote or refer to subsections (4), (5) and (6).

As I have indicated, the lease in question was executed on 30th October 1997. It was made between two individuals and the defendant, Pizza Express (restaurants) Limited. By the lease, the former granted to the latter a term of 25 years in respect of certain premises commencing on 30th October 1997 at an annual rent of 15,000 but subject to quinquennial, upwards-only reviews. The relevant provisions of the review are contained in clause 8.

Clause 8 opens with the words: "The Revised Rent shall be determined as follows". Clause 8.1 provides for the rent to be agreed "or (in the absence of agreement) determined not earlier than the relevant Review Date at the option of the Landlord either by an arbitrator or by an independent valuer (acting as an expert and not as an arbitrator) such arbitrator or valuer to be nominated in the absence of agreement by or on behalf of the President for the time being of the Royal Institute of Chartered Surveyors or his deputy on the application of the Landlord or the Tenant made not earlier than six months before the relevant Review Date and so that, in the case of such arbitration or valuation the Revised Rent to be awarded or determined by the arbitrator or valuer shall be such as he shall decide should be the yearly rent reasonably obtainable in the open market at the relevant Review Date for the Demised Premises."

Paragraph (A) sets out the assumptions on which the valuation is to be made; paragraph (B) sets out the various disregards to which the arbitrator or valuer is to pay no attention.

Clause 8.2 states:

Then (B) deals with valuation and the relevant provision is paragraph (E), which is in the following terms:

On 31st July 2001, the Court of Appeal gave judgment in a case called Starmark Enterprises Ltd v. CPL Distribution Ltd [2002] 2 W.L.R. 1009. It is sufficient for present purposes to quote from the headnote. It states, and I quote:

Reference is then made to United Scientific Holdings Ltd v. Burnley Borough Council [1978] A.C. 904; Trustees of Henry Smith's Charity v. AWADA Trading and Promotion Services Ltd (1983) 47 P&CR 607; and dicta of Simon Brown  LJ in Bickenhall Engineering Co Ltd v. Grandmet Restaurants Ltd [1995] 1 EGLR 110, 116. The headnote concludes Mecca Leisure Limited v. Renown Investments Holdings Limited (1984) 49 P&CR 12 CA not followed.

On 9th October 2001, the claimants acquired the freehold reversion to the lease. On 18th June 2002, the claimants' agent wrote to the defendant's agent proposing a Revised Rent of 37,000 per annum. On 24th June the defendant's agent responded that such a rent was too high. There then ensued without prejudice correspondence or other communications and, so far as the court is concerned, the story recommences on 22nd October 2002 when the claimants' agent asked the defendant's agent to assist with the appointment of an arbitrator.

The 30th October 2002 was the first review date under the lease. On the same day the defendant's agent gave notice to the claimants' agent, which it claimed to be in accordance with the lease, proposing that the Revised Rent should be 21,000. Under the provisions of clause 8.2(E) the claimants had one month after service of that notice to apply for the appointment of an arbitrator.

On 2nd November 2002, a notice dated 30th October 2002 was served on the claimants. On 7th November the claimants' agents rejected the proposal for an annual rent of 21,000. Thereafter, further without prejudice communications ensued and on 9th December 2002 the claimants' new agent completed and posted a notice in the RICS form for the appointment of an arbitrator pursuant to clause 8.2(E). I should indicate at this stage that it is not suggested that the without prejudice negotiations either then or at the earlier stage gave rise to any arguable case under section 12(3)(b) of the Arbitration Act 1996.

The appointment of the arbitrator was duly communicated to the agents for the defendant and on 20th December their solicitors point out to the claimants that the notice had been given out of time. On 23rd January 2003, the claimants indicated that they would make an application for an extension of time under section 12. The defendant's solicitors asked in response on 7th February 2003 for a sight of the application in draft. That request was not complied with but on 18th February the claimants' solicitors reiterated that an application for an extension would be made. On 20th February the President of the RICS appointed an arbitrator in accordance with the request and on 10th March this year the claim form, which is now before me, was issued.

The contention of the claimant is clearly and adequately summarised in paragraphs 2.8 to 2.10 of the claim form. They read as follows:

In support of that claim, the argument for the claimants advanced by their counsel may be summarised as follows. The law as to time being of the essence in a case of a rent review clause was laid down by the House of Lords in United Scientific Holdings Ltd v. Burnley Borough Council [1978] A.C. 904. I take that law from the passage in the headnote, which adequately summarises the speeches of their Lordships in the following terms: "in the absence of any contraindications in the express words of the lease or in the interrelation of the rent review clause itself to other clauses, or in the surrounding circumstances, the presumption is that the timetable specified in a rent review clause for completion of the various steps for determining the rent payable in respect of the period following the review date is not the essence of the contract." .

Counsel for the claimants submits that the principle was applied by the Court of Appeal to a provision similar to clause 2.8(E) in Mecca Leisure Ltd v. Renown Investments (Holdings) Ltd [1984] 2 EGLR 137, in holding that time was not of the essence of that provision. That conclusion was followed and applied in other cases with review clauses having similar provisions, notably Taylor Woodrow Property Company Limited v. Lonrho Textiles Limited [1985] 2 EGLR 120; Phipps-Faire Ltd v. Malbern Construction Ltd [1987] 1 EGLR 129; Power Securities Manchester Limited v. Prudential Assurance Company Limited, [1987] 1 EGLR 121; and Bickenhall Engineering Company Limited v. Grandmet Restaurants Limited [1995] 1 EGLR 110.

Counsel submits that the consequence of Starmark Enterprises Ltd v. CPL Distribution Ltd [2002] 2 W.L.R. 1009 is that the decision of the Court of Appeal in Mecca no longer represents the law. This change in the law as perceived by the profession is, she submits, a circumstance which was outside the reasonable contemplation of the parties when the lease was executed in October 1997. She submits that it would be just to grant the extension sought because the defendant well knew that a rent of 21,000 per annum would be unacceptable and that arbitration was being proposed; that the time by which the notice for the request of the appointment of an arbitrator was out of time was very short and that the consequential prejudice to the claimant if no extension is allowed, when compared to prejudice to the defendant if it is, is excessive.

This is disputed by counsel for the defendants. She submits that the approach to be adopted is that set out by Waller  LJ in Harbour and General Works Ltd v. Environment Agency [2000] 1 W.L.R. 950, at various passages on 959 and 960. The passage at page 959 is in the following terms:

At page 960 appears this passage:

Waller  LJ added later, on page 960:

Later still he added:

Based on those passages, counsel for the defendant submits that the circumstance in question must be one which at least contributed to the claimants' failure to comply with the time bar. She argues that a change in the law is not a circumstance outside the reasonable contemplation of the parties and does not itself contribute to a failure to comply with the time bar. She suggests that, had the parties contemplated this change in the law, they would not have done anything different for all that has happened is that the provisions of clause 8.2(E) have been applied in accordance with their terms. She also challenges the proposition that the change in the law was in any sense unforeseen. She submits that there was at the time the lease was executed on 30th October 1997 at least one decision of the Court of Appeal which conflicted with Mecca. That was Trustees of Henry Smith's Charity v. AWADA [1984] 1 EGLR 116, and there were other indications that the majority decision in Mecca was questioned, including doubts expressed by Mr.  Hytner QC, sitting as a deputy judge of the Queens Bench Division in Taylor Woodrow and the refusal of the Court of Session in Scotland to follow that the Mecca decision in Visionhire v. Britell Fund Trustees Ltd [1992] 1 EGLR 128. For a variety of reasons she submits that it would now be unjust to extend the time even if the other condition were satisfied. Finally, for good measure, she submits that the relief should in any event be refused because of the claimants' delay in making the application that is now before me.

I have been referred by counsel for the claimant to a large number of cases on the construction and effect of rent review clauses and whether time is or is not of the essence. In my judgment, it is clear that the decision of the Court of Appeal in Mecca was never accepted without reservation. Not only was it a majority decision, with Browne-Wilkinson LJ in the minority, but doubts had been expressed in Taylor Woodrow by the deputy judge, in Bickenhall by at least Simon Brown  LJ and the Court of Session had refused to follow it in Visionhire. True it is that it took until the decision of the Court of Appeal in Starmark to get it overruled, but the doubts had always existed.

The point is, I think, sufficiently illustrated by reference to three standard textbooks in use in October 1997. Thus in Woodfall, Landlord and Tenant, February 1995, volume 1 section 8.011, the authors, which included Mr. Lewison QC, as he then was, set out under the heading "Time of the Essence, Contraindications of the Clause", various considerations to be derived from the reported cases, including Mecca; Taylor Woodrow; Phipps-Faire; Visionhire and others. The conclusion at the end of that heading is, and I quote:

The second textbook to which I was referred in this connection is the Handbook on Rent Review, edited by Mr. Bernstein and Mr. Reynolds, the Service Edition for October 1989 as updated by an August 1997 supplement, at page 305, the editors, having referred to the Henry Smith's Charity case and the Mecca Lesiure case observed, and I quote:

In the supplement as at August 1997, the editors referred for an analysis of these decisions from a Scots law viewpoint to Visionhire Ltd v. Britell Fund Trustees.

Finally, in the 5th Edition of Drafting Business Leases, edited by Mr. Lewison QC, at page 99, the author having referred to all the cases to which I have previously referred, summarised the position in these terms:

It was suggested by counsel for the claimant that what the parties had agreed in clause 8 of the lease was not a time bar within section 12(1) because at the time the lease was executed, time would not have been of its essence. I do not accept that proposition. Clause 8.2(E) was still a time bar, whether time was of its essence or not because it imposed a time limit, the only issue being how long it was and what, if any, other steps, such as giving a notice that the time is to be of the essence is required.

I have no doubt, and I so hold, that section 12(3) is applicable to clause 8 of this lease to determine whether an extension may be granted. Accordingly, two conditions must be satisfied; namely, first of all, the circumstances are such as to be outside the reasonable contemplation of the parties when they agreed clause 8.2(E); and, secondly, that it is just to extend the time as sought. I will deal with those two conditions in turn.

The first condition must be applied in accordance with the propositions laid down or approved by Waller  LJ, with whom Tuckey  LJ agreed, in Harbour and General Works Ltd v. Environment Agency [2000] 1 W.L.R. 950. Those propositions may be summarised as follows (and I give the reference to the quotation on which my summary is based after each proposition).

First, the court must assume that the parties had in contemplation at the time the lease was executed omissions to comply with its terms in not unusual circumstances arising in the ordinary course of business (see page 959, G-H).

Second, the relevant circumstances must include those which cause or contribute to the claimants' failure to comply with the time bar (see page 960 A-B).

Third, the purpose of the section is to preclude the intervention of the court in concluded contracts unless the circumstances are such that if they had been drawn to the attention of the parties when the lease was made, they would at least have contemplated that the time bar might not apply (see page 960 F-H).

Accordingly, it is necessary to identify the relevant circumstance. For the claimant it was contended that it was, and I quote from my note:

The formulation of the relevant circumstance by the claimant does not admit of any change in the law but not only is change foreseeable, in this instance it was certainly not unlikely. Further, the change in the law did not contribute to the claimants' failure to effect a reference; it was fully publicised a year before the review date and was well known to solicitors and surveyors operating in the world of commercial property. In truth, put in causation terms, the change in the law gave rise to the occasion for the failure to give notice in time but it did not cause it. The cause lay with the solicitors or agents for the claimant not giving it in the time permitted for the purpose. That such solicitors or agents might not give notice in time, for whatever reason, is a fact of commercial life and would have been readily contemplated in October 1997.

In those circumstances, I consider that the first condition is not satisfied. It follows that I have no jurisdiction to extend the time, even if I thought it just to do so. It is not, I think, helpful to consider the latter question as well because it is essential to bear in mind that the avowed purpose of section 12 of the Arbitration Act 1996, as explained by Waller  LJ in Harbour and General, in a passage I have already quoted from his judgment, is to restrict the circumstances in which the court can interfere in the contractual bargain made by the parties. To consider the justice of an extension in circumstances in which the court is not entitled to extend the time would be misleading because, ex hypothesi, Parliament considers that it is not just to do so in those circumstances. So the length of the extension required and the extent of the prejudice sustained by one party or another is irrelevant.

In these circumstances, it is not necessary either to deal with the submission of counsel for the defendant that even if the other conditions for an extension were fulfilled, it should nevertheless be refused because the application to the court was made too late.

For all these reasons, I dismiss this claim.