The Historic Buildings of Monuments Commission for England v Isambard Estates Ltd

MR JUSTICE LEWISON: This is an application for permission to appeal against part of an arbitration award dated 3 February 2005 and containing the award of Mr David Gilbert, FRICS, who had been appointed to determine a rent review. The rent review arises under the terms of a lease dated 26 September 1995 made between Church Ward plc and the Secretary of State for the Environment. The lease is currently vested in the Historic Buildings and Monuments Commission for England and the reversion in Isambard Estates Limited.

The property comprised in the lease consists of three buildings known as buildings 1A, 1B and 1C, at Church Ward, Swindon in Wiltshire. 1A and 1B are office buildings and 1C is a building used as an archive. All those three buildings together are comprised in the definition of premises contained in clause 1.23 of the lease. The lease also permits all three buildings to be used as offices, and, in the case of building 1C, archive storage as well.

Clause 31 of the lease contains provisions for review of the rent. The rent review is upwards only until 24 June 2023 and thereafter upwards or downwards but subject to the rent not falling below that determined on 24 June 2023. Clause 32 contains a definition of open market rent:

“Open market rent means the full yearly rent at which the premises might reasonably be expected to be let at the relevant review date by a willing landlord to a willing tenant.

32.1: Assuming that 32.1.1 the premises are available to be let as a whole vacant possession on the open market without a final premium under a lease for a term equal to the residue of the agreed term as at the relevant review date (subject to a minimum assumed term of 14 years) including provisions for review of rent on the review dates and otherwise on the same terms as the lease (except as to the amount of rent).”

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32.1.3 says that it must be assumed that:

“The premises may be used as and for offices in addition to the permitted user.”

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32.1.9 deals with the net lettable area of building 1C which is called “the new building”. 32.1.10, which is the provision principally in issue on this application, provides that it must be assumed:

“That the new building is to be valued at the same overall rate per square foot (net internal area) as existing buildings A & B.”

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The rent review determined by Mr Gilbert was, in fact, the second review which has taken place under the terms of the lease. An earlier rent review was determined by Mr John Taylor FRICS and his award was given on 14 October 1999. In the course of the arbitration before Mr Taylor, a question arose about the effect of clause 32.1.10. His award on that question reads as follows:

“The rent review clause provides that the archive store, building 1C, is to be valued at the same rate as that applied to the offices in buildings 1A and 1B. Mr Chivers makes the point that the rent review clause does not direct the valuer to value the new building 1C as offices but only to adopt the same overall rate per square foot as that applied to buildings 1A and 1B. He considers this to be onerous and makes an allowance in his valuation of 5 per cent. Mr Dolby disagrees. I have no doubt that the assumption that the archive store is to be valued at the same rate as the offices is onerous and would cause a tenant in the market to reduce his bid. I find the allowance sought by Mr Chivers is justified.”

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When Mr Gilbert came to consider his award, he specifically raised with the parties the question whether the lease allowed him to treat clause 32.2.10 as an onerous provision and if not, why not. Submissions were made to him, including legal submissions, on behalf of both parties. Questions of construction were urged upon him. Mr Gilbert came to the conclusion which he expressed in his award as follows:

“Building 1C is a specialist building constructed for the particular purposes of the tenant. Whilst it is undoubtedly used for storage purposes and is not an office, it is, from my inspection, manifestly not a normal warehouse such as would be expected of an industrial or distribution building. This leads me to conclude that the comments made by Mrs Webber in her letter of 13 December 2004 appendaged to Mr Brunell’s answers to my questions and dated 14 December 2004, that, doubtless, the landlord feared arguments on the part of the tenant that this would be a unique and difficult animal to value are, in my view, a logical explanation of the reason for the drafting of clause 32.1.10. I consider the wording of clause 32.1.10 to be perfectly clear, that is to say: building 1C is to be valued at exactly the same level of rent. Buildings 1A and 1B: having decided the rent for these two buildings, it follows that the same value per square foot of net internal area is to be applied to Building 1C. This approach is further supported by the direction of clause 32.1.9 that the area of building 1C shall be assessed on a net lettable basis. This follows the method of valuing offices, not storage buildings. As Mr Brunell has pointed out, had it been the intention to attribute a warehouse rent, this would have been specified and a gross internal area would apply. Mr Morrish’s second approach to valuation outlined at 4.11 above, I believe to be contrary to the provisions of clause 32.1.10. It simply reduces the value of buildings 1A and 1B to reflect the characteristics of building 1C. To adopt Mr Morrish’s third approach and treat this clause as onerous, by my analysis of the evidence, frustrates the intention of the draftsman and produces a result that was never intended. I hold as a matter of law that clause 32.1.10 should be interpreted literally and building 1C should be valued at the same rate as buildings 1A and 1B. No allowance should be made for the argument that this clause is an onerous provision.”

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It is against that ruling that the tenant now applies for permission to appeal. The application is brought under section 69 of the Arbitration Act 1996 which provides that an appeal may be brought:

“On a question of law arising out of an award made in the proceedings.”

Section 62(2) provides that the leave of the court is needed for an appeal. Section 69(3) provides:

“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.”

Section 69(4) provides:

“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.”

The arbitration claim form identifies the questions of law as follows:

“(1)

Whether it was open to the arbitrator to reach a different conclusion on the construction and effect of clause 32 of the lease, and, in particular, the assumption in clause 32.1.10 from the conclusion reached by Mr Taylor on the same issue in the first arbitration. The applicant will contend that the award in the first arbitration created an issue estoppel by which the arbitrator was bound to determine the question in the applicant’s favour; (2) whether in any event the arbitrator was wrong to find as a matter of law that no allowance could be made for the inclusion of an onerous provision in the terms of the hypothetical letting.”

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Mr Morgan QC, who appears for the applicant, says that because of the decision of the arbitrator in the first arbitration, the arbitrator in the second arbitration, whose award is under appeal, was bound to follow the first arbitrator. He bases this submission either on the principle of issue estoppel or on the wider principle enshrined in the principle enunciated in Henderson v Henderson [1843] 3 Hare 100, which is, in essence, that of abuse of process.

The difficulty in the way of the submissions founded on issue estoppel is twofold. In the first place, the question was not raised before the second arbitrator, although there was ample opportunity for the tenant to have raised that question, had it thought fit. Secondly, the second arbitrator did not deal with the question in his award and was not asked to do so. Consequently, if, as the claim form assumes, the question of issue estoppel is a separate question of law from that of construction of the rent review clause, that question is neither a question of law arising out of the award, nor is it a question that the tribunal was asked to determine. It is clear that the issue estoppel point cannot be relied upon as a separate head of complaint.

Mr Morgan seeks to sidestep this problem by saying that the issue estoppel is simply a route by which the true construction of the clause is to be reached. However, it is more than a mere question of presentation. Had the question of issue estoppel been raised, the arbitrator would have been required to do a number of things. Firstly, he would have been required to determine what exactly had been decided in the first arbitration. Secondly, he would have been required to decide whether there were any special circumstances which might preclude an issue estoppel from arising. Thirdly, if he was applying the approach in Henderson v Henderson, he would have had to consider whether it was or was not an abuse of process to allow the same point to be argued again.

I was taken to the decision of the House of Lords in Arnold v National Westminster Bank [1991] AC 93, in which the House of Lords reviewed the question of both issue estoppel and Henderson v Henderson estoppels. Lord Keith of Kinkell, who gave the leading speech, referred approvingly to the speech of Lord Wilberforce in Brisbane City Council v Attorney General for Queensland [1979] AC 411, in which Lord Wilberforce said that the true basis of the Henderson v Henderson doctrine was the prevention of abuse of process. It is perfectly true that Lord Keith refers to the public interest in the finality of litigation, but he also went on to say at page 110, letter (f) of his speech:

“The public interest in seeing an end to litigation is of little weight in circumstances under which, failing agreement, there must in any event be arbitration at each successive review date. Estoppel per rem judicatam, whether cause of action or issue estoppel, is essentially concerned with preventing abuse of process.”

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These questions would have had to be considered by the arbitrator, had the point of issue estoppel been raised before him.

The second question which the claim form identifies is simply the question of construction of the clause, untrammelled by any question of issue estoppel. It is not a question of general public importance. Mr Morgan submits that, as a matter of law, the assumption relating to the rate per square foot applicable to building 1C must be treated as a term of the hypothetical lease. He accepts, however, that the question of whether such a term is onerous or not (and if it is onerous, whether any discount should be applied) is a question of fact upon which there is no basis for an appeal. The question for me is not whether the arbitrator was right to have excluded clause 32.1.10 from the terms of the hypothetical lease but whether he was obviously wrong not to have done so.

Essentially, the argument against the arbitrator’s decision is heavily dependent on the presumption of reality. That presumption as laid down by the cases is that parties to a rent review clause are to be taken to have intended a valuation of the buildings as they stand on the terms on which they are actually let, unless there is something in the rent review clause or the surrounding circumstances which points clearly to the contrary.

Mr Morgan submits that clause 32.1.10 is not clear enough to override that presumption. Mr Dowding QC, who appears on behalf of the landlord, says that the purpose of clause 32.1.10 was to elevate the value of building 1C to the same value as that of buildings 1A and 1B. That was done, he submits, by requiring the arbitrator to apply the same rate per square foot derived for buildings 1A and 1B to the square footage of building 1C. It cannot have been the intention of the parties, he submits, that having elevated the value of building 1C to that of buildings 1A and 1B it would then be right to devalue buildings 1A and 1B by the very same process that had elevated the value of building 1C in the first place.

In the legal submissions to the arbitrator, the landlord had relied on a line of authority which included the cases of Guys N Dolls Ltd v Sade Brothers [1984] 1 EGLR, 103 and Buffalo Enterprises Inc v Golden Wonder Ltd [1991] 1 EGLR, 141. Those cases do show that in some circumstances a term of the actual lease will be excluded from the terms of the hypothetical lease where the purpose of the term in the actual lease was to increase the rent payable. The rationale underlying these decisions is, as Mr Morgan put it, that what is given with one hand should not be taken away with the other.

There are substantial arguments both for and against the construction which the arbitrator adopted. That being so, I am not able to say that he was obviously wrong in the construction which he did, in fact, adopt. Whether I would have adopted the same construction myself is neither here nor there. The only question for me is: was the arbitrator obviously wrong? I cannot say that he was. In those circumstances I refuse permission to appeal.