Levelling the land

In the past 12 months, there have been more reported cases of appeals against rent review arbitrators under the Arbitration Act 1996 than in all of the previous six years during which the act has been in force. Has the trickle turned into a flood because the arbitrators’ awards have become sloppy pieces of work, or are there wider factors at play? Can the rent review process still be trusted?

It is perfectly true that there have been cases recently in which arbitrators have appeared to go off the rails. In one, an arbitrator on a rent review made findings on two issues, neither of which had been raised by either party and so they had insufficient opportunity to comment on those matters. Mr Justice Etherton quite rightly found there to be a serious irregularity sufficient to allow the court to remit the case back to the same arbitrator for his reconsideration.

In another case, allegations were made by one party that the arbitrator had directed himself to visit all the comparable properties, but in the event, without letting either side know, had not done so.
However, these incidents are rare. In general, the quality of rent review arbitration awards has been rising in recent years. Awards are more comprehensive, precise and detailed than ever before.

In the recent Safeway Stores v Legal & General (2004), it did not go unnoticed by the judge hearing the application for permission to appeal the arbitrator’s award, that the award itself comprised 50 pages. Whatever other points could be raised about the findings, nobody could say that the award was slap-dash. And this reflects the trend: the evidence suggests that rent review awards are becoming more specialised and professional. Spurred by competition among themselves for the most demanding appointments, the relatively small number of expert commercial property arbitrators are producing awards of the highest standards.

No longer can it be said that the confidentiality of a rent review conceals a sub-standard judgment. For the most part, rent reviews remain a cost-effective, quick, but thorough way of resolving an issue between parties who will have to continue in their commercial relationship long after the dispute is settled.

There are two reasons for the recent rash of appeals. The first is uncertainty about the direction of the commercial property market. Since September 11, commercial tenants nationwide have stopped bracing themselves for large increases on rent review. Word that the commercial property market was – at least as far as pockets are concerned – a tenant’s market again, have lured tenants into expecting small increases in their rent. But landlords have not readjusted their expectations. In an era of relatively low interest rates, commercial property still remains an important part of any investment portfolio and a significant step-increase in the income stream at fixed intervals is an essential part of its attraction.

The contrasting expectations have led to surprise on at least one party’s side when the rent review is fixed. In Checkpoint v Strathclyde Pension Fund (2003), the Court of Appeal acknowledged the tenant’s surprise that during a five-year period of review, the rent was doubled.

An uncertain market leads to unexpected levels of review and can leave one party feeling that something must have gone wrong for such a result to come about. That prompts an appeal of the arbitrator’s award.

The second reason for the increase in appeals relates to the level of the market. In absolute terms, rents are high and in relation to large commercial properties, an issue on rent review that would give rise to a difference in around £50,000 would not be unusual. Multiplied over a five-year rent review cycle, that would make a £250,000 difference. If the lease continues after that, and the rent review clause is upwards only, the effect continues well into the future and is multiplied further.

The result is that it often makes commercial sense for a party to launch an appeal of a rent review arbitrator’s award, even when the chances of success on the appeal are not high. Typically, the legal costs of an appeal are not particularly large compared with the amounts at stake.

Since 2002, the chances of an appeal succeeding seem to have risen. Taking the reported cases together, statistically the chances of success seem to be about one in three. In short, the potential benefits of an appeal often outweigh the potential costs, even on the basis of a one-in-three success rate. That is particularly so because the process of applying for permission to appeal usually involves a decision by the judge on paper alone. As the Court of Appeal made clear in BLCT (13096) v J Sainsbury, there are limited rights to an oral hearing if the judge does not think one necessary – even taking into account rights under Article 6(1) of the European Convention on Human Rights (the right to a fair trial). The disposal of the matter of paper means that there are limited risks in applying for such permission. If permission is refused, the exposure to costs will have been contained. If it is granted, the appellant will have been given the green light that the court considers the ground of appeal one with at least some merit. Either way, it usually pays to test the water by seeking permission.

In time, of course, the process will work itself out. The more reported cases there are showing the court’s approach to the type of point that arises in rent review arbitrations, the more arbitrators will learn about the right way to proceed. Indeed, rent review arbitrators appear keen to study the outcome of appeals. An arbitrator’s decision that is criticised by the court is rarely repeated. The learning curve in this specialised field is steep.

In the meantime the appeals will continue. But just because they do, it does not mean that the underlying arbitration process is flawed.

Jonathan Seitler QC is a barrister at Wilberforce Chambers