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The Jersey Law Review - February 2005

SHORTER ARTICLES AND NOTES

BY ROYAL APPOINTMENT- RENT REVIEWS

Will Densham and Katie Bradford

Introduction

1       For the landlord of commercial property, his income stream (by way of the rent payments) is of acute concern. He wants his return on the property to keep up with inflation – and also to keep abreast with the property market. Yet he also likes to negotiate a long letting. He cannot foresee at year one how the market will move in the future and so the custom has grown to include in the lease a periodic review of the rent, to market levels. When leases were granted for 14 or 21 years, the reviews were on a seven year cycle, but inflation in the 1970’s, and perhaps the influence of decimalisation, moved lease terms to 10-15 years (and longer in those more stable days) and rent reviews every five years. Of course, the landlord would not wish to risk a complete adjustment to market since market rates can fall, so the review is generally “upwards only” – a provision under review by the Government in the UK.

2       The lease will include machinery for the review. If landlord and tenant cannot agree the new rent level, they phone a friend – or rather, appoint a valuer to decide it, either acting as arbitrator or as independent expert; and if they cannot agree upon a valuer, then the lease will provide for an independent appointing body – in England typically the President of the Royal Institution of Chartered Surveyors (“RICS”).

3       Either landlord or tenant makes the application, naming those valuers who have conflicts of interest. Similar and thorough conflict checks are required by the President of the RICS when he approaches the potential appointee. Commonly, to give comfort to landlord and tenant that the valuer can do his job, rent review clauses prescribe certain qualifications or experience needed of the valuer. This is particularly important where the valuer is to act as an independent expert (with a wide discretion on valuing the rent) as opposed to an arbitrator (who has to make his decision within the bounds set by the parties’ submissions).

4       The potential appointee is asked to confirm to the President of the RICS that he complies with those requirements. Once all the boxes are ticked, the President makes the appointment and the rent review procedure goes forward. The President of the RICS makes many thousand appointments in respect of commercial leases every year. It is perhaps surprising there have been no reported cases (in Jersey or in England and Wales) of any challenge to the valuer on the ground that he or she did not comply with the lease requirements.[1] Accordingly, when this point recently arose in the context of a Jersey lease, the Royal Court had to work from first principles.

Epoch Properties Ltd. v (1) British Home Stores (Jersey) Ltd. (2) Peter Fall as President of the RICS[2]

5       Epoch Properties Ltd. (“the Landlord”) was landlord of a lease of business premises in St Helier, in which British Home Stores (Jersey) Ltd (“the Tenant”) carried on business.  A rent review clause in the lease provided, in case of disagreement between the parties, for the appointment by the President of the RICS of a valuer to act as independent expert on the review.  There was a disagreement, and the President had to make an appointment, at the request of the Tenant. 

6       Subsequently, the Landlord applied to the Royal Court by representation for a declaration that the appointment by the RICS of the valuer who was to act as independent expert on their rent review was invalid, since it was contrary to specific provisions in the lease. These required that the valuer should be -

“experienced in the valuation and letting of premises so far as practicable of similar character or comparable to the demised premises within the Island of Jersey or if there are no such premises within the Island of Jersey then within the Channel Islands or nationally (as the case may require).”

7       The President of the RICS had appointed a chartered surveyor who was experienced in valuing and letting variety stores within the UK. He had no experience in Jersey. The Landlord argued that the property was a prime retail store and since there were experts within Jersey with experience in prime retail, the valuer should be Jersey based, and the appointment was invalid. The Tenant disputed this. It had made the application to the RICS stating that the premises were a variety store. There were no experts within Jersey with experience of variety stores and so the Tenant said it was appropriate to appoint a UK based valuer.

8       The Royal Court[3] had to decide the nature of the role of the RICS in making that appointment, whether the appointment could be challenged, and if so how.  The approach taken by the Royal Court, and endorsed by the Court of Appeal, has opened up a new line of challenge for discontented parties at rent review. This case demonstrates that the agreement between the parties, as enshrined in the lease, is fundamental. The parties to the lease had agreed that the President had the necessary expertise to select the valuer with the relevant experience and qualifications to carry out the rent review.  The Court of Appeal upheld the reasoning of the Royal Court and held that the President was acting as an expert for the purposes of the appointment and that the parties had chosen the President “because of his expertise in choosing other experts”.[4]

9       The duties of independent experts[5] are well documented. Where parties have agreed to be bound by the determination of an expert, that determination will not be open to challenge in Court unless the expert has departed from his instructions in a material way.[6] Thus, for example, if a lease stipulates that the valuer must be a chartered surveyor, but the President appoints a lawyer, the Court would set aside that appointment as going outside the scope of the instructions of the President acting as expert appointor.  In this case, the Court of Appeal highlighted that if the President of the RICS had appointed an English valuer from his arbitrators’ panel, despite there being a Jersey valuer who was suitably qualified as the lease required but not on the panel, then that appointment would be invalid.  Qualification depended on the lease terms, not on whether the valuer was on the President’s panel.

10     This is harder to apply to more subjective requirements such as experience and expertise. In cases where the President is exercising a discretion, the Court of Appeal agreed with the approach of the Royal Court:  the test is that of Wednesbury[7] unreasonableness – the decision of the President as to whether his appointee has the stipulated experience would have to be shown to be “one to which no reasonable President could come.” As in public law,[8] that is a high test. The Landlord failed in this case because it was reasonable for the President to appoint on the basis that the property was a variety store rather than prime retail. The Court agreed with that decision, but emphasised that, even if that judgment by the President were wrong, it was not so unreasonable as to be subject to challenge.[9]

What are the consequences?

11     As set out in evidence before the Royal Court,[10] the RICS takes considerable care in the appointment process. The issue was touched on by the English courts in a different context[11] but it has never been examined in this detail.  The categorisation of the appointor as an expert does have significant consequences in the rent review process. First, the appointment may be challenged for breach of contract or Wednesbury unreasonableness, causing delay and throwing the process into confusion. The President will have to justify his appointment to the parties and the Court, which has the laudable result of transparency of process, but which would increase the internal costs of the administration of appointments, costs which would no doubt be passed onto the parties in increased fees. There would now be uncertainty even after the valuer has completed his work and fixed the new rent. A party might be able to challenge the appointment (and hence the rent review decision) for a considerable period after the decision on rent. Although the Court has applied a Wednesbury unreasonableness test, this is in the context of a private law (contract) dispute, and there is no short cut-off period for challenge as in judicial review (where three months is the maximum under both Jersey[12] and English[13] law).  Instead, it is a question of the applicable limitation period for a contractual claim.  Indeed, since the Court of Appeal ruled that the President had a contract with the party applying for the appointment, and owes a duty of care to the other party, the limitation periods may even differ for landlord and tenant.

12     Further, if the President is acting as an expert, then he is open to an action for negligent breach of duty if he gets the appointment wrong, causing loss to one party (although when he is appointing an arbitrator, he can rely in England on the statutory immunity of s74 of the Arbitration Act 1996, which protects appointing bodies save when acting in bad faith).[14]

Comment

13     Why should a public law unreasonableness test apply to a private, contractual appointment?  When a new lease is completed, the President of the RICS is unaware that the parties have inserted a requirement that, in default of agreement, the President will appoint.  He only becomes aware when the applicant approaches him with his lease in hand to make an appointment.  The President has not agreed to be an expert in the appointment process and, therefore, he is not obliged to make that appointment.  The President could decline.  However, if he agrees to appoint, a contract is formed – the applicant pays a fee and the President appoints in accordance with his instructions. 

14     What are those instructions?  The President will have a copy of the lease and usually representations by the parties as to specific candidates.  There may be situations where the parties have agreed to vary the lease in some way.  For example, the applicant may say that the parties have agreed (attaching correspondence) that the third party need not have specific experience of a type of building.  They may know that there is no-one with that experience.  In our view, the President would need to consider the lease and his additional instructions.  He owes duties to both parties because his decision affects their lease relationship.  What if the President gets the appointment wrong?  The President will have a contractual duty to the applicant.  Breach of that duty would give rise to a possible claim for the loss it suffers.  The President will not have contracted with the other party but we consider that he will owe that party a duty of care.  There may be circumstances where breach of that duty causes the tenant to suffer loss (even if that loss comprises out of pocket expenses and fees in challenging the invalid decision).

15     We consider the courts could have analysed the position in contract to produce clearer guidelines as to the obligations owed by the RICS to the parties.  The test would be simple – has the President appointed in compliance with the lease and any agreed additional instructions?  If not, he may face challenge in the courts.

16     In the English courts, landlords and tenants have demonstrated a willingness to litigate rent reviews, which has kept courts and legal advisers busy for the past two decades. This decision upholds the President in the exercise of his discretion and sets an elevated bar for the challenger to jump over. Nevertheless, on past experience, it can be anticipated that many will try to make that leap.

Will Densham is an associate, and Katie Bradford a partner, in the Property and Finance Litigation Group at Linklaters, One Silk Street, London EC2Y 8HQ.

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