Rent Review Dispute UK — Arbitration, Expert Determination, and the Time-of-the-Essence Trap

The Time-of-the-Essence Trap — Starmark and Missing the Trigger Date

Many commercial leases give the landlord the right to trigger a rent review by serving a notice (a 'trigger notice' or 'rent review notice') within a specified period before or after the review date. A critical question is whether time is of the essence in relation to that trigger mechanism — i.e. whether failure to serve the notice within the specified period bars the landlord from implementing the review: (a) The Starmark decision: in Starmark Enterprises Ltd v CPL Distribution Ltd [2001] EWCA Civ 1252, the Court of Appeal confirmed that where a rent review clause makes the trigger notice mechanism time-of-the-essence (either expressly, or because the lease contains a deeming provision that the rent continues at the existing level if no notice is served), the landlord who misses the trigger date permanently loses the right to that rent review; the rent continues at the pre-review rate until the next review date; (b) When is time of the essence: time is of the essence in a rent review context where: (i) the lease expressly states it; (ii) there is a deeming provision to the effect that if no trigger notice is served by a given date, the rent is deemed to continue unchanged (United Scientific Holdings Ltd v Burnley BC [1978] AC 904 — where no deeming provision exists, time is generally not of the essence for rent reviews); (c) Tenant's notice and counter-notice: some leases also provide for the tenant to trigger the review if the landlord fails to do so; a well-advised tenant may have an interest in triggering a rent review downward (where the market has fallen below the current rent) — in which case the tenant's trigger notice is the relevant one; (d) Deeming provisions: where the lease contains a deeming provision (treating silence as agreement to the reviewed rent) favourable to the landlord (i.e. where the proposed rent in the landlord's notice is deemed agreed if the tenant does not counter within a specified period), time-of-the-essence works against the tenant — a tenant who misses the counter-notice deadline loses the right to challenge the landlord's proposed rent; (e) Practical consequences: landlords (and their surveyors and solicitors) must diarise rent review trigger dates as hard deadlines; professional negligence in missing a time-of-the-essence trigger date has resulted in significant damages claims against surveyors and solicitors (failure to diarise the review date; failure to advise on time-of-the-essence consequences).

• Starmark Enterprises Ltd v CPL Distribution Ltd [2001] EWCA Civ 1252: where time is of the essence for the landlord's trigger notice, missing the deadline permanently bars that rent review — the rent continues at the pre-review level until the next review date
• Time is of the essence where: (a) the lease expressly says so; or (b) a deeming provision treats non-service of the trigger notice as agreement that the rent continues unchanged
• No deeming provision = time generally not of the essence: United Scientific Holdings Ltd v Burnley BC [1978] AC 904 — where there is no deeming provision in the rent review clause, time is ordinarily not of the essence for upward-only reviews and the landlord can trigger the review late
• Tenant's trigger notice: some leases give the tenant the right to trigger the review if the landlord fails to do so; a tenant may want to trigger a review in a falling market — check whether the lease is upward-only (and therefore a downward review would simply maintain the current rent)
• Professional negligence risk: surveyors and solicitors have significant liability exposure for missing time-of-the-essence rent review deadlines; the lost rental uplift can represent years of income on large commercial properties

Arbitration Under the Arbitration Act 1996

Where the lease specifies arbitration as the dispute resolution mechanism, the rent review is determined by an arbitrator appointed under the Arbitration Act 1996 (the '1996 Act'). Key features: (a) Appointment of the arbitrator: if the parties cannot agree on an arbitrator, either party can apply to the RICS (as the prescribed appointing body in most commercial leases) to appoint one; the RICS maintains a panel of qualified arbitrators with expertise in commercial property; the RICS charges an application fee for appointments; (b) The arbitration process: unlike expert determination, arbitration under the 1996 Act is a quasi-judicial process; the arbitrator must follow the rules of evidence; each party presents its case with written submissions; the arbitrator may hold a hearing; witnesses (including expert valuers) can be called and cross-examined; the arbitrator has statutory powers (equivalent to those of the High Court) to require the production of documents and evidence; (c) The arbitration award: the arbitrator produces a formal award determining the open market rent; the award is binding on the parties; (d) Challenging an arbitration award: the grounds for challenging an arbitration award are narrow: (i) serious irregularity (1996 Act s.68) — procedural failures that caused substantial injustice; (ii) error of law (1996 Act s.69) — only if the parties have not excluded appeal rights in their arbitration agreement; most commercial leases exclude s.69 appeals, making the arbitrator's decision on the law as well as the facts final and binding; (iii) lack of substantive jurisdiction (1996 Act s.67) — the arbitrator had no power to determine the dispute; (e) Costs in arbitration: the arbitrator has power to award costs; the usual principle is that costs follow the event; a party that obtains a rent significantly different from the other party's stance will usually recover its costs; (f) Sealed offers: in RICS arbitration, a party can make a sealed offer (similar to a Part 36 offer in litigation) before the award; if the outcome is no more favourable than the sealed offer, the offeror is entitled to its costs from the date of the offer — a powerful costs protection mechanism.

• RICS arbitration: formal quasi-judicial process; arbitrator appointed by RICS if parties cannot agree; arbitrator has court-equivalent powers to compel documents and witness evidence
• Binding award: the arbitration award is binding and enforceable as a contract and (with leave) as a court judgment; most commercial leases exclude the right to appeal on a point of law (Arbitration Act 1996 s.69 excluded), making the award final
• s.68 serious irregularity: the only remaining challenge route in most leases; requires demonstrating a procedural failure that caused substantial injustice; the courts set the bar high — challenging awards is difficult
• Costs follow the event: arbitrators generally award costs to the successful party; a sealed offer protects against adverse costs from the date of the offer if the outcome is no better than the offer
• Sealed offers: the RICS procedure allows a party to submit a confidential sealed offer; if the final award is no more favourable than the offer (from the other party's perspective), the offering party recovers costs from the date of the offer

Expert Determination — Binding Decision on the Merits

Expert determination is an alternative to arbitration available where the lease specifies it as the dispute resolution mechanism. The expert (appointed by the RICS or agreed by the parties) is a qualified surveyor or valuer who uses their own expertise and judgment to determine the open market rent. Key differences from arbitration: (a) The expert determines the rent using their own expertise — they are not limited to the evidence submitted by the parties (unlike an arbitrator who must decide on the evidence presented); the expert may carry out their own inspections and comparisons and arrive at a figure not argued by either party; (b) No right of appeal on the merits: an expert's determination is binding and cannot be challenged on the grounds that the expert reached the wrong conclusion on the facts or valuation; the only grounds for challenge are: (i) the expert departed from their remit (decided something not asked); (ii) fraud or collusion; (iii) a manifest error of a sufficiently fundamental kind; (c) Expert may consult RICS guidance: the expert will typically have regard to the RICS 'Surveyors Appointed as Expert Witnesses' guidance and the RICS Red Book (Global Standards for professional valuations); (d) Speed and cost: expert determination is generally faster and cheaper than arbitration because there is no formal hearing, no cross-examination, and the procedural rules are simpler; this makes it the preferred mechanism for relatively straightforward rent review disputes; (e) Liability of the expert: where both parties jointly appoint the expert, the expert is immune from suit for negligence in the conduct of the determination (Jones v Sherwood Computer Services plc [1992]) — the expert is not exposed to a negligence claim from a dissatisfied party unless the determination falls outside the expert's remit.

• Expert uses own expertise: unlike an arbitrator, the expert can go beyond the evidence submitted by the parties and apply their own valuation knowledge; the expert may arrive at a figure not argued by either party
• No appeal on the merits: expert determination is binding and cannot be challenged because the expert reached the wrong valuation conclusion; only departure from remit, fraud, or manifest error can set it aside
• Jones v Sherwood Computer Services plc [1992]: the expert appointed by both parties has immunity from negligence claims in respect of the determination itself
• Faster and cheaper than arbitration: no formal hearing; no cross-examination; simpler procedure; preferred for straightforward rent review disputes where the amount in issue does not justify arbitration costs
• RICS appointment: if the parties cannot agree on an expert, either can apply to the RICS to appoint one from its panel of qualified valuers; the RICS charges an application fee

Collecting Comparables — The Evidence Base for Open Market Rent

Whether the rent review is determined by arbitration or expert determination, the central question is what a willing tenant would pay a willing landlord for the property on the review date, at arm's length, in the open market, on the terms of the lease. This is determined by reference to comparables — recent lettings of similar properties in the relevant market: (a) What makes a good comparable: a comparable is a letting of a property similar in: location; size (gross internal area); specification; lease terms (length; break clauses; rent-free periods; service charge structure); use; condition; the comparable should be as close in time to the review date as possible; headline rent may need to be adjusted for rent-free periods (an 'effective rent' calculation discounting the rent-free period over the term); (b) Adjusting for differences: no two properties are identical; the parties' surveyors (and the arbitrator or expert) must assess adjustments for differences in size (rental value per sq ft is not linear — larger properties typically have lower rental value per sq ft than smaller ones); specification; location; lease terms; (c) HMRC construction costs index and RPI/CPI adjustments: in long leases where very few comparables exist, parties may argue for index-linked adjustments to old comparables to bring them forward to the review date — this is contested territory; (d) Zoning for retail: for retail premises, the market uses 'zoning' — dividing the shop into zones from front to back, with each zone valued at a reducing fraction of the value of the A1 zone (front 6 metres); the 'ITZA' (in terms of Zone A) rate normalises different-shaped shops to a comparable rate per square foot; (e) Time limits for evidence: the lease will typically specify a period within which the parties must exchange comparable evidence before the hearing or expert's determination; missing this deadline may result in the exclusion of evidence — a significant risk in a disputed review.

• Open market rent: what a willing tenant would pay a willing landlord on the review date, in the open market, at arm's length, on the terms of the lease — adjusted for any rent-free period to produce an 'effective rent'
• Comparables must be adjusted: differences in size (larger premises have lower rent per sq ft); specification; location; lease terms (rent-free periods; service charges) require careful adjustment — the surveyors' valuation skill is in making these adjustments
• Retail zoning (ITZA): retail properties are compared using the Zone A rate per sq ft (front 6m = 100%; rear zones reduce by half); the ITZA normalisation allows comparison between different-shaped shops
• Exchange of evidence: most RICS arbitration procedures require exchange of comparable evidence at a specified stage — missing the evidence deadline risks exclusion of key comparables and a significantly worse outcome
• Expert's own inspections: in expert determination, the expert may carry out their own inspection and identify comparables not put forward by either party — the final determination may differ from both parties' positions

Frequently asked questions