Nissim & Ors v Ablethird Ltd

Under Arbitration Act 1996, the court may determine a question of law arising in an arbitration where the statutory conditions are satisfied and the question substantially affects the parties’ rights.

In construing a rent review clause, an express direction to disregard a rent uplift proviso requires the proviso to be disregarded as a term of the hypothetical lease, as well as in calculating the rent payable on the current review. The direction may also apply to increases due on future hypothetical reviews. The presumption of reality has limited force where the lease deliberately adopts a counterfactual valuation and the wording, read in its commercial context, supports that construction.

The claimants were the landlords and the defendant was the tenant under a lease of premises used as an amusement arcade. The lease contained detailed rent review provisions.

The parties applied under section 45 of the Arbitration Act 1996 for determination of a question of law arising in an arbitration. The dispute concerned the construction of clause 6.3. The clause required the hypothetical premises to be valued as a retail shop, directed the disregard of amusement-arcade value, and contained a proviso adding 25 per cent to the open market yearly rent.

The central issue was whether the 25 per cent proviso was to be disregarded only when calculating the rent payable by the actual tenant, or also when identifying the terms of the hypothetical lease and assessing its open market rent.

1. The court accepted jurisdiction under section 45 of the Arbitration Act 1996. The question arose in the arbitration, substantially affected the parties’ rights, and the statutory requirements for the application had been met.

2. Clause 6.3 required a hypothetical letting for ten years from the review date, with the relevant lease terms generally reproduced. Clause 6.3.9 expressly required the proviso at the end of clause 6.3 to be disregarded, together with any increase in rent made or to be made under it.

3. On its proper construction, the proviso was disregarded not merely for the purpose of excluding the 25 per cent increase immediately following the current valuation. It was also disregarded as a term of the hypothetical lease. The hypothetical lease therefore did not contain the proviso.

4. The words “to be made” were not confined to the increase arising at the current review date. They naturally extended to increases which might otherwise arise on later hypothetical review dates. The construction was workable and did not leave the rent review machinery incoherent.

5. The literal construction was confirmed by commercial common sense. The tenant’s construction would reduce a conventional retail rent because of an onerous rent review provision and then add 25 per cent to the reduced figure. That result was inconsistent with the wider structure of the clause, which valued a retail shop and then added 25 per cent to reflect the possible additional value associated with amusement-arcade use.

6. The presumption of reality provided limited assistance. The parties had expressly adopted a counterfactual retail-shop valuation, despite the actual use of the premises, and clause 6.3.9 itself displaced aspects of the real position. The court therefore preferred the landlords’ construction and made a declaration giving effect to it.