In two recent Scottish cases, the Court of Session has considered the question of whether – and, if so, under what circumstances – a lease can make rent review disputes the exclusive jurisdiction of an independent expert, with the result of excluding challenge through the courts.
Ashtead Plant Hire Company Limited v. Granton Central Developments Limited (Ashtead)
In Ashtead, a lease of a warehouse and surrounding land in Granton, Edinburgh provided for the level of rent to be reviewed every five years, on an open market basis. As is extremely common, the lease said that if the landlord and tenant were unable to agree upon the open market rent at any rent review, an independent expert should be appointed to determine the figure. The lease stated that the decision of the expert would be "final and binding" on the parties to the lease.
At the 2017 rent review, the landlord and tenant found themselves unable to agree on the open market rent figure. This was primarily because they had differing views on how a specific provision of the rent review clause should be interpreted, namely a statement that, in calculating the open market rent, there should be disregarded "the effect on any rent of the value of any buildings or other constructions erected on and any improvements carried out to the subjects of lease". The tenant argued that this meant the open market rent should be calculated on the basis of the ground only, disregarding all buildings, constructions and tenant's improvements on it. The landlord on the other hand argued that the disregard was only intended to prevent rentalisation of any improvements carried out by the tenant, meaning that the buildings which existed at lease commencement could and should be taken into account.
Before the dispute reached the stage of an expert being appointed, the tenant raised a court action seeking a declarator that the open market rent should be calculated on the basis of the ground only, disregarding all buildings. In response, the landlord argued that because the lease provided for reference to an expert (whose decision would be final and binding) in the event of a rent review dispute, the court had no jurisdiction to decide the matter, as it was within the exclusive jurisdiction of the expert.
Both the parties and the court agreed that in theory it would be competent to remit exclusive jurisdiction to an expert - not just on factual valuation matters, but also on legal matters such as the correct interpretation of the rent review provisions. The question before the court therefore came down to whether, on a proper interpretation of the lease, the parties had (expressly or impliedly) agreed that such legal matters were the exclusive jurisdiction of the expert.
The court concluded that the lease did not confer exclusive jurisdiction upon the expert on legal matters. Lord Doherty observed that a lease would have to "make it very clear indeed" if it were conferring exclusive jurisdiction as to the correct legal interpretation of such important lease clauses.
Cine-UK Limited v. Union Square Developments Limited (Cine-UK)
A similar dispute arose a couple of months later, in the Cine-UK case, which involved a lease of a multiplex cinema in Aberdeen. As in Ashtead, the lease provided for the level of rent to be reviewed every five years, on an open market basis, and for any disagreement over the open market rent to be referred to an independent expert to determine. However in marked contrast to Ashtead, the lease in dispute in Cine-UK said that the decision of the expert would be "final and binding" on the parties to the lease "both on fact and law".
At the 2014 rent review, the landlord and tenant were unable to agree on the open market rent figure and in due course an expert surveyor was appointed, issuing her determination of the revised rent in 2017. The tenant subsequently raised a court action disputing the level of the revised rent, alleging that the expert had made an error in law. The alleged error in law related to the expert's interpretation of one of the disregards in the rent review clause (being a disregard of landlords' concessions which might normally be given to compensate tenants for fitting out periods). The tenant argued that the expert had erroneously applied the disregard too widely, by also disregarding other types of concessions typically granted by landlords in the market.
Whilst the landlord disputed that there had been any error of law, its main argument was that the court had no jurisdiction to hear the action because the lease expressly conferred exclusive jurisdiction on the expert, including on matters of law.
The court found in favour of the landlord, confirming that it is competent for contracting parties to confer upon a non-legal expert exclusive jurisdiction on matters of both fact and law. In her judgment, Lady Wolffe made reference to Ashtead and other case law, and found that it is a matter of contractual interpretation as to whether parties have so conferred exclusive jurisdiction. She held that, in this instance, "there is no ambiguity in the finality provision. It could not be clearer in its terms". She noted that two other features of the lease reinforced the intention to confer exclusive jurisdiction: first, the absence of a requirement for the expert to provide reasons for her determination (as such a requirement might indicate a right to appeal); and second, the fact that the lease did not carve out from the expert's jurisdiction any particular types of dispute or legal questions (indicating an intention for all types of disputes remitted to the expert to have the benefit of finality on matters of both fact and law).
Lady Wolffe found that even if there had been an error of law, the expert's decision was final and conclusive unless it could be proved that the expert had not performed the task assigned to her. Here, the task assigned to the expert was to determine the new open market rent, and she had done just that. In any case, Lady Wolffe also found that the tenant had failed to demonstrate any error of law.
Reading these two cases together, it is clear that if parties to a lease wish to confer exclusive jurisdiction on an independent expert, particularly on matters of law, this must be clearly and explicitly stated in the lease. As seen in Cine-UK, the other clauses in the lease should reinforce this intention, for example by not requiring the expert to give reasons for his/her decision. If there is any room for doubt as to whether parties meant to confer exclusive jurisdiction, it is likely that the courts will follow Ashtead and say that none was conferred.
When entering into a lease, the parties should therefore think carefully about their preferred dispute resolution method(s) and the lease should be drafted accordingly. They should think about whether there are certain types of dispute (particularly legal) which might be more suitable for determination by the courts, and weigh this up against the speed, certainty and finality that reference to the exclusive jurisdiction of an independent expert can provide.