Brenda Sumner and Another v Costa Ltd and Another

Judge Simon Barker QC:

These proceedings concern a rent review determined by an arbitration under a lease of 35 Market Street, Falmouth in Cornwall. The claimants are the landlords, the first defendant is the tenant and the second defendant is or was the arbitrator.

35 Market Street comprises a ground floor, designated for class A1 and/or class A3 units with a connected basement; a first floor for letting as an office or residents; and the second and third floor also for letting as an office or residents. The lease was granted as from 29 September 2005 for a term of 15 years at an initial rent of £40,000 per annum. The first rent review date was 29 September 2010.

The lease provides for an upwards only rent review which, absent agreement, is to be determined by an arbitrator whose task is to determine, acting as an arbitrator not an expert, the sum at which 35 Market Street might reasonably be expected to be let in the market as at the rent review date, after making specified assumptions, which are set out in paragraph 1.1 of the second schedule of the lease, and having no regard to specific disregards, which are set out at paragraph 1.2 of the second schedule.

The second schedule also requires that the arbitrator is to be a suitably experienced chartered surveyor, who in default of agreement between the parties would be nominated by the President of the Royal Institution of Chartered Surveyors. The second defendant was nominated by the President and was appointed on 19 May 2011.

On 30 June 2011, the second defendant issued agreed directions for the conduct of the arbitration which included : (1) representation by surveyors, one for each party, who would submit reports as experts and written responses to each other's reports, again as experts; (2) there was no point of law in issues between the parties; (3) comparables were to be identified on the schedule and evidence about each comparable was to conform as far as possible with an agreed format of specific requirements; (4) the second defendant was entitled, at his self-discretion, to take the initiative in ascertaining any fact, point of law or other matter. In the event that he did exercise inquisitorial powers, the parties were to be informed and to be given an opportunity to comment on both the inquiry made and the response received; and, (5) the second defendant also observed the right to hold a hearing, if he considered it appropriate, otherwise the arbitration was to be an "on paper" exercise.

In the event Mr Richard Calder, of Calders based in Tamworth, submitted a report and response as the claimants' expert, and a Miss Katie Bapty, of Colliers International in Bristol, did the same on behalf of the first defendant.

The experts addressed three closely proximate potential comparables: (1) 37/38 Market Street, occupied by Mountain Warehouse, where the rent was agreed on a new lease commencing in October 2009 at £62,500 per annum, which equated to a Zone A Rental of £47,71 per square foot; (2) 34 Market Street, occupied by Go Mobile, where a new lease had commenced on 1 March 2010 at a rent of £20,500 per annum producing a Zone A Rental of £42,50 per square foot before certain allowances; and, (3) 33 Market Street, occupied by the Card Factory on a lease agreed in February 2011 and completed in May 2011 at an adjusted rent of £38,950 per annum equating to a Zone A Rental of £61,68 per square foot.

The second defendant's award was issued on 30 January 2012. In arriving at his valuation, the second defendant did not derive assistance from Go Mobile, as a comparable; this was principally because the Zone A Rental was much smaller and the shop had an obscure frontage.

The critical reasoning in the second defendant's Award appears at paragraphs 9.4 to 9.6 and is as follows :

"9.4 Ms. Bapty states that the Card Factory letting should not be attributed any significant weight due its timing post subject review date and could not have had any secondary effect of influencing a prospective tenant bidding for the subject property at the review date. Mr. Calder contends the transaction was agreed closest to the subject review date by inference drawn from the date on which the agreement to lease was signed.

9.5 On the basis of the evidence presented to me by Mr. Calder it was not until 4 months after the subject review date that the Card Factory signed a binding contract on 33 Market Street. Accordingly for this reason, having regard to the established case law on post review date evidence, I prefer Ms. Bapty's approach and have not accordingly attributed any weight to this transaction.

9.6 The transaction which I find to be most helpful based on the evidence presented to me is the Mountain Warehouse letting two doors away from the subject premises, 11 months before the subject reviewed it. I therefore feel that I can do no better than take the Zone A rate of £47,71 psf ITZA demonstrated by this letting transaction in relation to the ground floor retail unit."

The words to emphasise, in particular, from those three paragraphs containing the critical reasoning are from paragraphs 9.5: "… having regard to the established case law on post review date evidence".

The upshot was that the award reviewed rent for 35 Market Street at £36,200 per annum, the effect of which was that the rent remained the initial rent at £40,000 per annum.

By 3 February 2012, the claimants sent papers to counsel, Mr John Dagnall, to draft proceedings and on 3 February they, or the second claimant, wrote a pre-action letter to the first defendant contending that the second defendant was wrong to have attached no weight to the Card Factory and invited the first defendant to join them in a joint approach to the second defendant to reopen the arbitration. The claimant's essential line was that the relevant case law in fact supported reference being made to post review date comparable lettings.

As to case law, the second claimant's letter through his solicitor's practice, referred to the decision of Staughton J in Segama NV v Penny Le Roy (1984) 1 EGLR 109, cited from the passage of Staughton J's judgment at page 109 A-C . He also referred to Re ESC Publishing (1990) (Digest) a decision of Knox J. These authorities and the passage at page 109 of Staughton J's judgment are included in the "Handbook of Rent Review" at paragraph 7.9.6 under the heading "(e) Evidence of open market lettings and rent review agreements taking place after the review date: admissible."

Paragraph 7.9.6 of the Handbook had been expressly referred to in Miss Bapty's report where she observed at paragraph 7.2 of her report :

"…evidence of open market lettings taking place after the review date is admissible but that there remains at least one difference between pre-and post review date transactions, namely that post-review date lettings cannot have any 'secondary effect' on market sentiment at the review date."

Proceedings were issued on 24 February by the claimants against the first defendant. By their first claim, the claimants' complaint centred on the second defendant's un-particularised reference to case law on post-review date evidence and sought relief under section 68 of the Arbitration Act 1996 on the grounds of serious irregularity, alternatively under section 69 of the 1996 Act by way of an appeal of law.

The relief sought was : (1) under section 68, remitting the award to another arbitrator or to the arbitrator generally or at least on the Zone A determination and its consequences on rent review; (2) under section 69, granting leave to appeal and determination of questions of law ((a) whether a transaction agreed four months after the review date is admissible and has potential weight in relation to its primary effect, that of evidencing the state of the market at the review date; (b) this question was essentially a negative version of (a); and, (c) whether a reasonable arbitrator in a position of the second defendant could in the circumstances logically, reasonably and properly give the Card Factory letting no weight and simply derive the Zone A rent from that for Mountain Warehouse), and then remitting the award to the second defendant in whole or as to Zone A or varying the award to substitute £61.68 as the Zone A figure; and, (3) ordering costs against the first defendant following the arbitration.

Also on this date, 24 February 2012, the claimants issued a second claim pursuant to section 57 of the 1996 Act for the second defendant to clarify and set out his full reasoning and case law and for the removal of the second defendant as arbitrator and/or for relief sought in the first claim. However, these proceedings were never served and maybe ignored for present purposes.

At the same time, on 24 February 2012, agents for the claimant's solicitors wrote to the second defendant asking him (1) to set out and explain the case law to which he had regard and how he had applied it; (2) to admit that there had been irregularities in the conduct of the arbitration; and, (3) to withdraw or reconsider...