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High Court rejects challenge to award by arbitrator favouring council in property lease dispute

A High Court judge has dismissed a bid by a landlord to have set aside an arbitrator’s award that favoured a council as tenant of a city centre property.

The property at the centre of the case of Eric Wright Group Ltd v Council of the City of Manchester [2020] EWHC 2089 (Ch) (30 July 2020) was 103 Princess Street, Manchester, a grade 2 listed 19th century brick building, over several floors of about 20,000 square feet which the claimant told the judge was unmodernised and like a 19th century court building.

A lease dated 11 February 1988 between Eric Wright Group and Manchester City Council provided for rent review disputes to be determined by arbitration.

In a preliminary award dated 16 December 2019 the appointed arbitrator made findings interpreting the rent review provisions of the lease.

The claimant sought relief under s.68 and/or s.69 of the Arbitration Act 1996 arising in both cases from the arbitrator's determining the award without permitting the claimant to file and rely on evidence relevant to the factual and commercial background to the lease at the time it was signed.

The lease is for 125 years less 10 days from 11 February 1988 at an initial rent of £96,130 p.a. subject to rent reviews every 5 years.

The lease was part of a series of transactions where the freeholder (who is the defendant) leased the property to the claimant who then sub-let it via the lease to the defendant, who then in turn let it to those (or at least some of those) in occupation.

The last agreed rent under the lease was £386,000 p.a. and that had been effective from the review date of 11 February 2008. The rent for the review date from 11 February 2018 had not been agreed and was the subject of the arbitration relevant to the application.

HHJ Parfitt, sitting as a judge of the High Court, said the key provisions of the lease were:

Clause 3 which states that the revised rent can be agreed in writing but if not agreed "determined…by the Arbitrator".

Clause 4: "The revised rent to be determined by the Arbitrator shall be such as he shall decide should be the Best Rental Value at the relevant Review Date for the Premises making the Assumptions but disregarding the Disregarded Matters and having regard to open market rental values current at the relevant Review Date.

Clause 1.3: ""Best Rental Value" shall be such sum as is equal to 71.7% of the best rental figure per square foot achievable for prime office accommodation within the City of Manchester (including for the avoidance of doubt the City Centre itself) multiplied by the total lettable area in square feet of the Premises…"

Clause 1.4 ""the Assumptions" mean the following assumptions at the relevant Review Date: (a)…the Premises are fit for and fitted out for use…(b)…the Premises are available to let by a willing landlord to a willing tenant… for a term equal to such term as would produce the best rental figure for prime office accommodation referred to in clause 1.3 hereof…(c)…the covenants…have been fully performed…"

Clause 1.5 ""the Disregarded Matters" mean: (a)…[the tenant's / sub-tenant's occupation]…(b)…goodwill…(c)…[voluntary improvements]… (d)…restriction on user…other than use…as offices…(e)…any restriction… on Tenant's ability to deal with its interest…"

The claimant argued that under the terms of lease that the new rent must be benchmarked against the best rent achievable for prime office accommodation in Manchester.

The defendant said the new rent must be benchmarked against the best rent achievable for prime office accommodation in Manchester which is like the property.

HHJ Parfitt, sitting as a judge of the High Court, said it was obvious that the claimant's construction would most likely lead to a higher rent: “the arbitrator identifies what is the best achievable rent for prime office accommodation in Manchester at the date of the review and determines the rental figure at 71.7% of that "best achievable" figure which has nothing to do with the property. The property is benchmarked against the highest achievable notional office rent in Manchester (the "best" of the "prime" or "best of the best").”

The judge said that, on the other hand, the defendant council’s construction required the arbitrator to identify the best achievable rent for prime office accommodation in Manchester which was like the property at the date of the review and determine the rental figure at 71.7% of that sum.

“The Property is benchmarked against the highest achievable notional rent for a property in Manchester which is like the Property (the "best" of only those "prime" properties that are like the Property),” the judge said.

HHJ Parfitt said the logic of the two constructions meant that it would be impossible for the benchmark notional rent derived from the claimant's construction to be lower than that derived from the defendant's construction but the practical reality was that the defendant's construction would lessen the benchmark rent and so reduce the figure arising from the rent review.

“The Claimant, for present purposes at least, says substantially so: £240,000 p.a. difference against it or a reduction on capital value in the reversion of about £5 million….,” the judge said.

The arbitrator agreed with the council's construction although not on the basis put forward by the defendant but on implied terms reasoning which was derived from the view of a legal assessor, who the parties agreed should provide an opinion on the construction issues between them.

The claimant argued that "Prime Office Accommodation" was a descriptive term which excluded the property because the property was not in 1988 and would not have been expected to ever fall within the class of "prime office accommodation". Accordingly, the defendant's construction could not be reached by the implied term route because it would be contrary to the express instruction to the arbitrator in the lease to identify the best rent achievable for "prime office accommodation" which is a category which was always intended to exclude the property.

However, Judge Parfitt upheld the arbitrator’s award.

“The key question is whether the process in which the preliminary construction issue was determined without allowing the Claimant to put in its potential fact and expert context evidence was objectively unfair? This needs to be answered looking at the process as a whole,” he said.

“I have no doubt that it was not unfair at all.”

He also concluded that there had been no failure on the part of arbitrator to comply with his section 33 duty.

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