Summary and implications

In a recent decision1, the High Court refused a tenant’s application for permission to appeal an arbitrator’s rent review award.

The key points to be taken from the decision are:

  • The onus is on a tenant, in a rent review, to prove that the improvement works to be disregarded were carried out by the tenant, when they were carried out and at what cost;
  • The courts are reluctant to intervene in disputes where the parties have already agreed to arbitrate; and
  • The question of whether tenant improvement works undertaken outside the premises, but which provide a benefit to the premises, are to be disregarded for the purpose of rent review remains unanswered.

This decision leaves open the question of whether a disregard of tenant improvements applies only to works carried out to the premises or whether it extends to off-site works that benefit the premises.

Tenants must check the rent review provisions in their leases before carrying out improvement works. A failure to do so could result in these improvements being rentalised at future rent reviews.

The tenant did work to upgrade the power supply to the premises

The tenant applied for permission to appeal an arbitrator’s rent review award made in April 2010 in relation to premises on the Greenwich View Peninsula in Docklands.

The tenant wanted to convert the premises from an office to a data centre. In order to have adequate electricity to facilitate this use, the tenant had to upgrade the power supply to the premises. The tenant carried out the upgrade works, the majority of which were carried out on land outside the premises, and then operated the premises as a data centre. As a result of these improvements, the premises had a power supply 10 times greater than a standard office building.

The lease contained standard rent review wording that disregarded tenant’s improvements on rent review. When the review date arrived, an arbitrator was appointed to determine the rent at which the premises might reasonably be expected to be let on the open market.

The arbitrator valued the premises on the basis of current use: this increased the rent by more than £1m

In determining the rent, the arbitrator valued the premises on the basis of its current use as a data centre (and not as an ordinary office block).

This was on the basis that use as a data centre would be available to a hypothetical tenant on the open market. As a consequence of the arbitrator’s valuation, the annual rent payable by the tenant increased by more than £1m. The tenant sought permission to appeal against the arbitrator’s award.

The tenant’s arguments

The tenant argued that the arbitrator should have disregarded the upgrade works to the power supply for the purpose of rent review in accordance with the wording in the lease.

The tenant also contended that the award was based on an error of law, as the arbitrator had failed to recognise that, without the improvement works, the use of the premises as a data centre could not continue.

The court refused the tenant permission to appeal

The High Court refused permission to appeal the award as the tenant had:

  • Failed to produce any documentation dealing with the upgrade works outside the premises; and/or
  • Failed to produce a schedule of improvements outlining those works that should have been disregarded upon review.
  • The High Court held that the onus was on the tenant to establish:
  • That the improvement works were carried out by it;
  • When such works were carried out; and
  • The cost of those works.2

Both the tenant and its expert had failed to provide any of this information, despite being given ample opportunity to do so. The requirement to provide evidence was clearly stated in the directions the arbitrator had given, as well as a requirement of the terms of the disregard itself.

The High Court held that as the required information had not been provided, the issues had not clearly been put to the arbitrator and this meant that the court did not have to consider the effect of the rent review provisions in the lease (i.e. the disregard).