COMMERCIAL LEASE RENT REVIEW ARBITRATIONS
Kenneth J. Glasner, Q.C.
In considering how to approach the subject matter, I attempted, with limited success, to find other articles, papers, or textbooks published in Canada. Little was found.
The subject matter of alternative dispute resolution and, in particular, arbitration, has been dealt with in Canada and in England for well over a century. In fact, recourse to the arbitration process has been common practice in England since the middle ages and was codified in 1698, 9 Will. 3, c. 15. Arbitration has been defined in Halsbury as:
The alternative method of determining rent renewal disputes is to leave the matter to an appraiser (in England referred to as a valuator or surveyor) where parties agree on one person, the appraisal expert, to determine the new rent. When this, in fact, happens no other appraiser is instructed and no submissions are made.. . . the reference of a dispute or difference between not less than two parties for determination, after hearing both sides in a judicial manner, by a person or persons other than a court of competent jurisdiction.
2 Halsbury's Laws of England, 255 (4th ed.)
The appraiser makes his or her determination using his or her expertise on valuation solely. The Decision Making Process is not within a quasi judicial framework. The advantage of using an appraiser is, of course, speed and costs. The disadvantage may be involved in the fact that the determination by an appraiser, acting as an expert, is quite inappropriate to a point of law, even when involving a question of the construction of a lease. If a rent review clause provides for determination by an expert, and the determination involves deciding a point of law, the parties seeking to raise the point can only, in the absence of consent, raise it by commencing proceedings for declaration in the Supreme Court. This is less flexible and likely to be less effective than having the point decided in the course of an arbitration.
A. Why Arbitrate?
Subject to my comments regarding mediation, there is really no viable alternative. One must remember that by the very essence of the use of a rent renewal clause the parties will continue to deal with each other on an ongoing basis in a landlord/tenant relationship for a specific period of time; that is to say, the rent renewal period or periods. The alternative would be that the parties agree ahead of time, presumably at the time of drafting the initial lease, as to the rent renewal rates to come into effect at some time in the future. This, of course, would be done in a vacuum, with the obvious disadvantages to both parties, having regard to the value of the rental space and the exigencies of business in futuro. Lastly, the subject matter is not one which would lend itself to the parties being litigants in court ab initio.
B. Advantages and Disadvantages of Arbitration
Some of the advantages of arbitration are as follows:
Before continuing and elaborating on the arbitration process, it is well to consider one of the other forms of alternative dispute resolution - that of mediation.
While mediation is a process without a final result imposed upon the parties by the intervenor; the intervenor, using his or her skills, actively assists the parties in resolving their dispute so that there is a consensual binding agreement; usually ending in the form of minutes of settlement or a written amendment to the original agreement.
Some of the advantages of mediation are:
The process in a rent review situation may be as simple as dealing with the parties and their counsel after each party has obtained an appraisal report. The mediator may be able to deal with the scenario without requiring disclosure of those reports to "the other side."
Where costs are a governing factor, the arbitration process may be too
expensive and time consuming - serious consideration should be given to the
mediation process, using a lawyer who is not only skilled in the process, but
also in the subject matter.
|1.||Read the Lease||At least two months prior to the time upon which the option to renew can be exercised and when first instructed||The parties to the lease, their agents and the solicitor for each of the parties|
|2.||Repeat point number 1|
|3.||Serve option to renew notice in writing||As directed by Lease and any modification||Generally from the tenant to the landlord|
|4.||Review renew notice||Promptly upon its receipt||The landlord, its agent or solicitor|
|5.||Confirm acceptance or rejection of the option to renew notice||Very promptly upon its receipt||The landlord, its agent or solicitor|
|6.||Acknowledge confirmation of acceptance of the option to renew||Within a reasonable time frame after delivering option to renew||The tenant, its agent or solicitor|
|7.||Assuming option to renew is accepted, attempt to ascertain value of premises pursuant to the terms of the lease||Promptly||The landlord and tenant, their respective agents and solicitors|
|8.||Attempt to agree on new rent||During time period permitted by lease||Both parties and their respective agents and solicitors|
|8A.||Consider mediation||After a boni fide attempt to agree on a new rent||Both parties and their respective agents and solicitors|
|9.||Seek to agree upon a suitable person as arbitrator||Agreement is not reached as to a new rent within the time limit permitted under the lease||Both parties, their respective agents and solicitors|
|10.||Obtain an appraisal of the premises, on the basis of the terms set out in the lease, from a qualified appraiser||Promptly, either just before or at the end of the period of time set out in the lease, prior to the matter going to arbitration||The respective parties, their agents, on advice of their solicitors|
|11.||Seek to agree upon a suitable person as sole arbitrator or seek the suitable person as your nominee to the arbitration board||Agreement is not reached at the end of the negotiating process||Both parties on the advice of their solicitors|
|12.||If a tribunal is to be used as opposed to a sole arbitrator, then give input as to who your nominee should suggest to be the chairperson of the arbitration||Promptly after the appointment of your nominee||The parties' solicitors with instructions from the parties respectively|
|13.||Read the Commercial Arbitration Act at least once||Just prior to stage 9||Each party's solicitor|
|14.||If the parties fail to appoint, then make application to the Supreme Court of British Columbia for an appointment pursuant to the Commercial Arbitration Act||Promptly if no agreement can be reached as to the appointment||Each party's solicitor|
|15.||Once a chairperson or sole arbitrator has been appointed, either by the parties or pursuant to a court order, obtain and review carefully the appraisal report received. In fact, meet with the appraiser before he prepares his final report to ensure that the appraiser has considered all relevant matters and in particular, instruct the appraiser of the basis upon which the valuation is to be made||Promptly just after the appointment procedure||The respective party's solicitors|
|16.||Consider whether or not to deliver to the other party a Calderbank offer||At any time during the arbitration process subject to the facts and circumstances of each case||The respective party's solicitors after obtaining instructions from client|
|17.||Attempt to agree with opposing counsel as to a number of matters,
d) one appraiser each;
e) dates and place of hearing;
f) viewing of premises;
|Within two weeks of the appointment of the sole arbitrator or chairperson of the arbitration board||The respective party's counsel|
|18.||Expect call from chairperson of the arbitration board or sole arbitrator||Within one week of the appointment of the arbitrator||Members of the arbitration board and respective counsel of each party.|
|19.||Attend to the delivery of any preliminary material which is required by one party to the other||The appropriate time prior to the hearing||The respective counsel|
|20.||Deliver appraisal report or reports to the other side||Within the time frame required under the British Columbia Evidence Act and the Supreme Court Rules, if applicable||The respective counsel|
|21.||Prepare case||One month before notice is served pursuant to point number 3 above||All parties|
1. Service of Notice
It is important from both the landlord's and tenant's points of view to read the lease at various times during the life of the lease and, in particular, just prior to the exercise of the option by the tenant, to refresh one's memory. The parties, particularly the tenant, should note the relevant time limitations and observe any stipulations as to the form of notice and as to the service.
Checking assignments and changes of name may also be necessary to obtain a preliminary valuation in order to include a figure in the notice, or to give an indication in a "without prejudice letter."
Particular attention should be placed upon the "use" section and the terms of the option to renew and any relevant factors which would bind an arbitrator in reaching his or her decision. The amendments to the addresses for service should also be noted so that one may not be in breach of any "technical" matter.
2. Responding to Notice
When, as in the usual case, the landlord receives the option to renew notice, the landlord should promptly review the terms of the lease and the validity of the notice. In circumstances where the landlord is in disagreement with the exercise of the option to renew, the landlord should review the lease to determine whether or not the tenant is in breach of the lease such that it will lose the right of renewal.
In an unreported decision, 5000 Kingsway Ltd. v. F & A Enterprises Ltd., d.b.a. Peachy Keen Restaurants, New Westminster Registry No. SO13805, Mr. Justice Hogarth dealt with a number of issues between a landlord and tenant wherein the landlord refused to accept the option to renew from the tenant, on the basis of:If performance of the Lessee's covenants is made a condition precedent to a right of renewal, the onus is upon the Lessee to show due performance: Loveless v. Fitzgerald, supra;Fingold v. Hunter,  O.W.N. 287,  3 D.L.R. 43 (C.A.); Richter v. Koskey,  O.W.N. 746,  4 D.L.R. 509 (H.C.).Williams and Rhodes, Canadian Law of Landlord and Tenant, Sixth Edition, Volume 2, p. 14-8In McLauchlin v. Bodnarchuk (1957), 8 D.L.R. (2d) 596, 22 W.W.R. 60 (B.C.C.A.), the right to renew was conditional upon rent being duly and regularly paid. Rent was paid late three times owing to the negligence of bankers and it was held that exact punctuality was not absolutely required.Williams and Rhodes, Canadian Law of Landlord and Tenant, Sixth Edition, Volume 2, p. 14-9
Ultimately, Mr. Justice Hogarth relied upon a decision in York Condominium Corp. v. Becker Milk Co. (1982), 37 O.R. (2d) 679 (Co. Ct) by Webb J. at 685:
His Lordship granted relief from forfeiture. He felt it was a proper case in which to exercise discretion under s. 21 of the Law and Equity Act. The lease renewal was, therefore, held valid.A review of the authorities indicates that the court has tended to exercise its discretion against forfeiture provided the landlord does not suffer serious financial loss or prejudice.
3. During Negotiations Between Parties
Monitor course of discussions. Is agreement possible? Is the other side dragging its feet? Are there any points of law which should be clarified with counsel as an aid to negotiation? What are the costs of fighting the review likely to be? Is it worth it?
4. Time for Appointment
Should a move be made or should negotiations continue? Should an attempt be made to agree to the appointment of a nominee or chairperson?
Take instructions from client and appraiser as to the name to suggest and to object to.
5. Making a Calderbank Offer
(Calderbank v. Calderbank,  Fam. 93,  3 W.L.R. 586:,  3 All E.R. 333: 5 Fam. Law 190 (C.A.). In view of s. 11 of the Commercial Arbitration Act, the parties should carefully review whether or not they wish to establish a process by which they will be entitled to costs, subject, of course, to the terms which may be explicit in the lease itself as to costs.
The principle set out therein is for a procedure for payment into court where a payment into court is not available; and is, therefore, applicable to rent review arbitrations.
The Calderbank offer is one of three forms of offers, the other two being the open offer, where it is desirable to make it known to the arbitrator during the course of the proceedings that one party is prepared to offer (or accept); the other being a "without prejudice" offer, where one party wishes to make an offer in the hope that it will be accepted, but fears that it will be prejudiced if the arbitrator knows that he is willing to offer (or accept) a particular amount.
The Calderbank offer is used where a party who wishes to protect itself against liability for costs may send the other party an unconditional written offer, setting out the terms upon which it is willing to settle the dispute. The offer should contain a figure for the rent and also make appropriate provisions for costs incurred up to the date of the offer. It is suggested that the appropriate provision for these costs will often be that each side should bear its own costs, plus one-half the arbitrator's fees and costs to the offer date. The Calderbank offer should contain the following phrase:
so that it may be produced to the arbitrator at the appropriate stage in the proceedings, but not before.Without prejudice save as to costs . . .,
The use of the Calderbank offer is consistent with the policy of law to encourage the compromise of disputes.
The effect of a Calderbank offer is that if an offer has been made which, if accepted, would give the accepting party a result better than it would have achieved by continuing the arbitration, prima facie the offering party should be awarded its costs from the date when the offer should reasonably have been accepted.
It is sometimes argued that, in a dispute as to quantum only, a Calderbank offer should be taken into account even if it is not quite enough to give the other party all that it has achieved by the award. The argument usually is that the offer, although not quite equal to the award, was so near that it was unreasonable for the other party to continue with the arbitration to achieve such a minor improvement.
It is suggested that the onus should be upon the party seeking to gain the benefit, by way of costs, of a Calderbank offer, to make it generous enough to overtop the likely award. However, this matter is for the arbitrator's discretion as set out in the Commercial Arbitration Act.
Again, the use of a Calderbank offer and the jurisdiction of an arbitrator to award costs may be curtailed if the parties to the arbitration have, in the lease itself, provided for other provisions as to costs, thereby stating that certain provisions of the Commercial Arbitration Act are inapplicable - the opting out procedure.
6. The Arbitrator
In dealing with the arbitrator, consider early on in the proceedings whether
there are any interlocutory matters which require attention, including any
agreement as to facts or certain facts, number of appraisals allowed, and
scheduling of witnesses.
The arbitrator must deal with three questions:There is really no dispute that the general purpose of a provision for rent review is to enable the landlord to obtain from time to time the market rental which the premises would command if let on the same terms on the open market at the review dates. The purpose is to reflect the changes in the value of money and real increases in the value of the property during a long term. Such being the purpose, in the absence of special circumstances it would in my judgment be wayward to impute to the parties an intention that the landlord should get a rent which was additionally inflated by a factor which has no reference either to changes in the value of money or in the value of the property but is referable to a factor which has no existence as between the actual landlord and the actual tenant, i.e., the additional rent which could be obtained if there were no provisions for rent review.
A rent review clause properly so called is a clause which permits the lessor (or lessee) to call for the reconsideration and reassessment of the amount of the rent. At stated intervals, and in accordance with the procedure laid down by the clause, the new rate of the rent is agreed by the then landlord and tenant or determined by the process laid down in the lease, the new rate applying until the next review date or the expiry of the term. Usually, if the new rate has not been agreed by a stipulated date the clause provides for reference of the dispute to an independent person, usually a surveyor, who may be appointed to function as an arbitrator or as an independent valuer, and who will value the demised premises in accordance with the formula laid down in the clause. (emphasis added)
In interpreting the rent review provisions I refer you to the quote in Basingstoke, supra.
The courts in British Columbia have dealt with the interpretation of rent review provisions in No. 100 Sail View Ventures Ltd. v. Janwest Equities Ltd. 26 R.P.R.(2d) 105, where Mr. Justice Tysoe dealt with the fair market value of bare land in question, coupling that value to the "use" section in the Lease. Essentially, he came to the decision that the fair market value must be based upon the limited use section in the Lease. In that case the land was to be used for a Hotel and related hospitality businesses and not for any other purpose or business.
The British Columbia Court of Appeal took a contra view, finding that in fact, the option to renew clause did not specifically refer to fair market value as bare land for the specific use. The Court of Appeal said that it was incumbent upon the parties to express this restriction in clear terms in the Lease.
The English authorities commencing with Basingstoke and Deane Borough Council v. Host Group Ltd.  1 All ER at 824 take the view of, or more closely related to that expressed by Mr. Justice Tysoe in the first instance. In Basingstoke, Nicholls L.J. states at page 828:
His Lordship continues on page 829 and 830 by stating:We pause here to observe that foremost among the provisions in the existing lease which the tenant is anxious to have taken into account when the ground rental value of the site is reassessed now and on future rent reviews are those relating to user. A long lease of a site restricted to user as a public house is likely to command a lower rent than the lease of a site whose user is not so restricted. If, in years to come, planning permission were obtained for some more profitable use, on the landlord's argument the valuer would be entitled and required to value the site as a bare site available for that more profitable use, and the tenant would thenceforth have to pay rent assessed on that footing, even though the tenant would not be able to put the property to the more profitable use but would remain restricted by the terms of the lease to using the property as a public house.
The question raised on this appeal is one of construction of a rent review clause in a lease. In answering that question it is axiomatic that what the court is seeking to identify and declare is the intention of the parties to the lease expressed in that clause. Thus, like all points of construction, the meaning of this rent review clause depends on the particular language used, interpreted having regard to the context provided by the whole document and the matrix of the material surrounding circumstances. We recognise therefore, that the particular language used will always be of paramount importance. None the less it is proper and only sensible, when construing a rent review clause, to have in mind what normally is the commercial purpose of such a clause.
Vinelott J, adopted much the same approach in Pearl Assurance plc v Shaw (1985) 274 EG 490 at 492. In a cogent passage he said:We are fortified in this view by observations made in several cases. First, this view accords with comments made in passing in Ponsford v HMS Aerosols Ltd.  2 All ER 837,  AC 63. The point now in question was not in issue there, but in the context of a rent review clause that made no express direction for the terms of the existing lease to be taken into account on the review Viscount Dilhorne described the task of the valuer in these terms ( 2 All ER 837 at 842,  AC 63 at 76):Likewise Lord Fraser said that 'regard must, of course, be had to the terms of the lease', and Lord Keith made a similar observation (see  2 All ER 837 at 847, 849,  AC 63 at 83, 86).'Surely it is to assess what rent the demise premises would command if let on the terms of the lease and for the period the assessed rent is to cover at the time the assessment falls to be made.' (My emphasis)
Next, there is the British Gas case. There a rent review clause expressly provided for the notional letting at each review dated to be a letting 'containing the same provisions (other than as to the yearly rent) as are herein contained'. The question arose whether the direction to leave out of account the provision in the actual lease 'as to the yearly rent' was apt to exclude from the notional letting the fact that the actual lease contained provisions for future rent review. Sir Nicholas Browne-Wilkinson V-C held that the direction did not have that effect. Having referred to the general purpose of a rent review provision, as quoted above, he said ( 1 All ER 978 at 981,  1 WLR 398 at 401):'Such being the purpose, in the absence of special circumstances it would in my judgment be wayward to impute to the paries an intention that the landlord should get a rent which was additionally inflated by a factor which has no reference either to changes in the value of money or in the value of the property but is referable to a factor which has no existence as between the actual landlord and the actual tenant, ie the additional rent which should be obtained if there were no provisions for rent review. Of course, the lease may be expressed in words so clear that there is no room for giving effect to such underlying purpose. Again, there may be special surrounding circumstances which indicate that the parties did intend to reach such an unusual bargain. But in the absence of such clear words or surrounding circumstances, in my judgment the lease should be construed so as to give effect to the basic purpose of the rent review clause and not so as to confer on the landlord a windfall benefit which he could never obtain on the market if he were actually letting the premises at the review date, viz a letting on terms which contain provisions for rent review at a rent appropriate to a letting which did not contain such a provision.'
A similar approach was adopted in the unreported decision from Ontario, in Revenue Properties Company Limited v. The Board of Regents of Victoria University  O.J. No. 843, DRS 94-00006 where Adams J. concurring with Steele J. and McMurtry A.C.J.O.C. stated:'I think the court should lean against a construction which requires the rent fixed on revision to be ascertained without regard to the use which, under the lease, the tenant is to be entitled to make of the demised premises, unless, of course, that intention is spelled out in reasonably clear terms. Otherwise, the effect of the review might be to impose on a tenant on obligation to pay a rent appropriate to a very profitable use, but one very obnoxious to the landlord, and one which he had been careful to forbid in the strongest possible terms-the effect, that is, of making the tenant pay for something which he not only has not got, but which he cannot require the landlord to give him.'
It would be unreasonable to assume rent was intended to be based on a value the tenant could never exploit due to the very existence of the lease.
The value of experts have been dealt with in two decisions of the English courts, namely: University of Warwick v. McAlpine  42 BLR 1; The Ikarian Reefer  2 Lloyds Rep. 68
Michael Black, Q.C., in his article Experts' Report II, which was reported in Arbitration, The Journal of the Chartered Institute of Arbitrators, Volume 62, Number 2, May 1996. Mr. Black recapped the criteria dealing with experts as found in these two cases:
VI. A Non-Exhaustive List of Factors To Be Considered by Counsel, the Appraiser and the Parties in Their Submissions Before an Arbitrator
The first seven points have been extracted from an article titled "The Arbitration of Rent in a Commercial Lease" by David B. Greenspan, Q.C., of Toronto, Ontario and published in the Law Society Gazette of that Province some years ago. He states that there are seven simple rules to follow:
VII. Commercial Arbitration Act, S.B.C. 1986, c. 3 and Amendments Thereto
Section 1 of the Act defines a lease as a commercial agreement and, therefore, pursuant to s. 2, the Act applies to an arbitration agreement in a commercial lease.
Sections 5, 6 and 7 deal with pre-hearing matters, giving the authority to an arbitrator to require the advance production of documents, examination and production of records and evidence, including the right to issue a subpoena to a witness.
Pursuant to s. 9 of the Act, an arbitrator may, during an arbitration, make an interim award.
Section 11, dealing with costs, was amended in its entirety to grant the arbitrator the authority to make an order as to costs. The order as to costs is not limited to those costs which are set out in the Supreme Court Rules, but are significantly broader in scope. I believe this amendment was made in order to clarify the issue of costs after the decision in Ridley Terminals Inc. v. Minette Bay Ship Docking Ltd., et al., B.C. Court of Appeal, (B.C.C.A.) Number CA011504, April 10, 1990.
Section 22 of the Commercial Arbitration Act should be addressed at the time of the drafting of the lease. That section requires the parties to govern themselves by the rules of the British Columbia International Commercial Arbitration Centre for the conduct of domestic commercial arbitrations unless the parties (meaning all of the parties) to the arbitration have otherwise agreed. This matter was addressed in a decision before the Honourable Mr. Justice Scarth in Taylor v. Taylor, Vancouver Registry Number A893152, July 13th, 1990, and again by his Lordship on June 28th, 1991 in Mitsui & Co. (Canada) Ltd. v. Coldform Industries, Vancouver Registry Number A910859. For a copy of those rules, I suggest that you promptly contact the British Columbia International Commercial Arbitration Centre at Suite 670 - 999 Canada Place, World Trade Centre, Vancouver, B.C., Canada, V6C 2E2, (604) 684-2821.
Section 28 of the Act allows interest pursuant to the Court Order Interest Act and the Interest Act (Canada). However, the courts have long held that an arbitrator had the power to award prejudgment interest. See Westcoast Transmission Company Limited v. Majestic Wiley Contractors Ltd., 38 B.C.L.R. 310 (B.C.C.A.) and William Pankiw et al. v. John Pankiw et al., Supreme Court of British Columbia, Vancouver Registry Number C862144, C.J.S.C., February 18, 1987.
The award may be enforced by obtaining leave of the court pursuant to s. 29
and the judgment may be entered on the terms of the award.
In the case where agreement on the lease has yet to be reached, careful consideration should be given to the drafting of relevant terms, including answers to the following questions:
The purpose of this paper is to set out some of the relevant factors, from a practical point of view, which must be considered in the preparation of a rent renewal dispute between two parties who will have a continuing relationship.
I have not attempted to set out an exhaustive list of considerations, but simply to set forth the variables which must be considered in the process so that you may advise and guide your clients accordingly. Hopefully that advice can be given at the initial drafting stage, as opposed to you being "parachuted" into an arbitration set for "this coming Friday."
Above all, please remember that arbitration is to be a speedier process than "going to court". However, I'm reminded of Lord Denning's comments about an arbitration case which took 14 years where he said in Bremer Vulkan(Bremer Vulkan v. South India Shipping (1981AC 904 AT 933) he said,
"when I was young, a sandwich-man wearing a top hat used to parade outside these courts with his boards back and front, proclaiming "Arbitrate, don't Litigate". It was very good advice so long as arbitrations were conducted speedily".
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