Many landlords and tenants about to entering into leases will be required to consider the landlord’s solicitor’s standard lease precedent which will be issued as a draft lease for approval.
Hidden away within the rent review machinery under the lease will be a dispute resolution provision setting out what happens if the parties cannot reach agreement on the level of market rent at any given review date. There has been a tendency for modern lease precedents to automatically provide for an Independent Expert to determine the rent rather than an Arbitrator, often with little consideration given as to the suitability of the appointment relative to the premises. So does this matter?
An Expert is charged with deciding the rent based upon their own professional experience and should be able to reach that conclusion without receiving evidence from either party to assist them, although typically leases will provide that both sides can submit evidence to assist the expert. The advantage of appointing an Expert is that they are not constrained simply to deciding the case on the basis of the information provided by the parties, but can call the market where it is either rising or falling and the evidence is yet to catch up. The Expert’s powers are solely derived from the lease, and where a lease automatically provides that each side should bear one half of the expert’s costs, the economic consideration may be for the tenant that it is better to accept a modest rental uplift even where none is warranted rather than run the risks and uncertainty of the Independent Expert determination, and in particular the costs involved. Even where an Expert is granted discretion under the lease to award costs, this will normally be restricted only the expert’s costs with the parties each left to fund their own representatives’ professional fees in arguing their case.
In contrast, the option to appoint an Arbitrator to decide a rental dispute brings with it an appointment backed by statutory powers, normally the Arbitration Act 1996. Whilst it is true that an Arbitrator can only reach a decision based upon the evidence put before them, the Arbitrator is empowered to decide all matters under dispute, unless the parties agree to the contrary. including the costs of the arbitration. The Arbitrator is therefore able to decide how both their own costs and representative’s costs should be met by the parties in the absence of agreement. This means that in the event of the landlord or tenant running a spurious or ill-founded case, the other party has the benefit of being able to make a case that all the costs should be awarded against the losing side.
Additionally, an Arbitrator has the power of disclosure which is not available to an Independent Expert with the result that the parties are free to apply to the Arbitrator for an order for the opposing party to disclose documents which may be helpful to their own case but which otherwise would remain concealed. This can be a relevant consideration where the landlord owns a number of adjoining units in either a shopping centre, industrial estate or within an office building and it is believed by the tenant may have reached agreements with other occupiers which include terms or concessions which have not been disclosed.
In reality, the choice whether Arbitration or Expert Determination is the most beneficial means of resolving a dispute on any particular property will come down to the facts in any particular case, however provided parties and their solicitors engage with their appointed surveyor at an early stage before the draft lease is issued, appropriate decisions can be made rather than for the basis of appointment simply been decided by the solicitor’s favoured lease precedent which may or may not be the most suitable option in the circumstances.
Phil Dickins Bsc (Hons) MRICS
Lease Consultancy Department Stratton Creber Commercial.