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Court reforms and arbitration: courting disaster

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Three recent cases reveal the difficulties practitioners face in understanding how the law will be applied by the courts.

Article first appeared in Estates Gazette, August 2014

Three recent cases reveal the difficulties practitioners face in understanding how the law will be applied by the courts. In addition to these difficulties, the courts’ new procedural rules, introduced by Lord Justice Jackson and which came into effect in April 2013, have led to practitioners extolling the virtues of alternative means of dispute resolution.

Game

Jervis v Pillar Denton Ltd [2014] EWCA Civ 180; [2014] EGILR 25 (Game) concerned tenants in administration and when rent should be payable as an expense of the administration. Game overturned the earlier High Court decisions in Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 (Ch); [2010] 1 EGLR 25, Leisure Norwich (II) Ltd v Luminar Lava Ignite Ltd (in administration) [2012] EWHC 951 (Ch), and the first instance decision in Game (where the court followed Goldacre and Luminar, but granted permission to appeal).

Prior to Goldacre, landlords and administrators invariably agreed that if a tenant fell into administration, but continued to use the landlord’s premises, the administrators would continue to pay rent at a daily rate. While this was not without its pitfalls, it provided a reasonable degree of certainty to the parties involved.

However, Goldacre held that this rent payment convention had no legal effect. If a tenant fell into administration, and continued to use leased premises, the administrators would be liable to pay rent in full on the day on which it fell due – if the premises were being used on a quarter day, the administrators had to pay the entire quarter’s rent as an expense (irrespective of whether or not the tenant vacated the premises during the quarter). This principle was affirmed and extended by Luminar, which determined rent was not payable as an administration expense if it fell due on a date before the tenant entered into administration.

The practical consequences of the rulings were wholly unsatisfactory:

  • administrators were tactically appointed very shortly after a quarter day to avoid liability to pay rents as an administration expense;

  • administrators then sought to minimise periods of use to avoid the liability to pay a full quarter’s rent on the next quarter day;

  • fire sales of companies’ assets frequently occurred before quarter days – a quick sale of assets at an undervalue was more cost-effective than incurring a rental liability by remaining in occupation; and

  • companies ceased to trade prematurely whereas they may have continued to trade for a greater period of time under the old rent payment convention.

The consequences flew in the face of the objectives of an administration – to rescue the company or achieve the best results for the company’s creditors and to realise the company’s assets.

Landlords were disadvantaged as they faced the possibility of recovering no rents as an expense if the administrators’ period of occupation did not coincide with a rent payment date, which administrators frequently sought to ensure was the case.

The rulings also hampered sensible commercial dealings between landlords and administrators and came at a time of significant economic turmoil – affecting the administrations of thousands of companies and their employees.

Fortunately, Game has now reversed these earlier decisions and given modern authority to the convention that rent can, and should, be payable on a “day-to-day basis” as an administration expense for the period that the administrator retains possession of the premises.

Friends Life

Siemens Hearing Instruments Ltd v Friends Life [2014] EWCA Civ 382; [2014] EGILR 29 concerned the validly of a tenant’s break notice. The landlord argued that the break notice served was invalid as specified wording, which the lease’s break clause stated “must be expressed” in the notice, was omitted.

There was very clear authority to support the landlord’s case – as Lord Hoffmann put in it Mannai Investment Co Ltd v Eagle Star Assurance [1997] UKHL 19; [1997] 1 EGLR 57, if a clause requires an option notice to be given on pink paper it is not validly exercised by giving it on blue paper no matter how clear the intention to exercise the option may be.

However, the High Court sided with the tenant, determining that a break clause’s use of the word “must” was not of itself decisive and that non-fulfilment of the conditions attached to a break notice may not be fatal. The court determined this break notice was valid, having regard to the fact that the wording which the lease provided “must be expressed” in the break notice was of no legal effect. While the decision appeared to herald a less strict approach to the exercise of break options, many practitioners were sceptical. Their scepticism was well founded.

The Court of Appeal overruled the decision and, in doing so, provided a stark reminder of the potential pitfalls when exercising a break right. The court determined that the notice was invalid as the wording that had to “be expressed” in the notice was omitted, even though (i) the notice clearly intended to terminate the lease in accordance with the break clause and (ii) the wording that had to “be expressed” in the notice was of no legal effect.

The Court of Appeal’s reasoning was based on the nature of options (of which break clauses are a type). An option is an “if” contract. If you do it, it can be exercised. If you don’t, it won’t. The tenant in Friends Life failed to exercise the option by omitting the specified wording, and the lease continued with full force and effect after the break date.

Marks & Spencer

The court has addressed the perils of conditional break clauses on many occasions. Following case law, a well-advised tenant exercising a break option will ensure that all rents are paid in full up to and including the break date, as break clauses invariably provide that rent must be paid in full to effect the break.

Following recent authorities (see PCE Investors Ltd v Cancer Research UK [2012] EWHC 884 (Ch); [2012] PLSCS 84 and Canonical UK Ltd v TST Millbank LLC [2012] EWHC 3710 (Ch); [2013] 02 EGLR 193), it was widely considered that a tenant could not seek a repayment of the apportionment of rent paid for the period following the break date (unless the lease terms provided for the contrary).Marks & Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2014] EWCA Civ 603; [2014] PLSCS 150 dealt with this issue. The High Court determined that the tenant was entitled to a repayment of rents paid in respect of the period after the break date, concluding that a repayment provision should be implied into the lease. However, the Court of Appeal overturned the decision, concluding that: (i) if the parties intended rent to be apportioned following the break they could easily have expressly provided for this in the lease; and (ii) the test for an implied repayment term was not met in this case (albeit the door still remains open for tenants to argue for an implied repayment provision should the test be capable of being met).

Jackson reforms

The three cases above were all determined at a time when Lord Justice Jackson’s court reforms were being implemented. Lord Justice Jackson promised the reforms would boost efficiency and reduce litigation costs. Many commentators consider the reforms, in many respects, fail to achieve these objectives and lack commerciality.

One of the most time-consuming and costly aspects of the reforms is the new cost budgeting exercise – a requirement for parties to litigation to set, share and agree costs budgets with each other at the very outset of court proceedings. In almost all cases, this has resulted in upfront costs being incurred dealing solely with the issue of costs.

The Ministry of Justice’s Judicial and court statistics indicate that, in 2010, more than 1,600,000 civil (non-family) claims were started in the County Court. The overwhelming majority of these were settled or withdrawn – with the consequence that liability for costs was invariably agreed between the parties, rather than determined by the court.

High Court proceedings reflected a very similar trend. In the High Court there is a far greater prospect of the court ordering that costs should be the subject of a detailed assessment. If such an order is made, almost always the parties agree liability for costs between themselves rather than embark on the highly costly and disproportionate exercise of a detailed assessment of costs.

Therefore, prior to the Jackson reforms, the court did not determine litigation costs in almost all disputes. This may be one of the reasons why there has been criticism of the court’s lack of consistency in dealing with costs management issues following the implementation of the reforms.

Clearly all practitioners should advise their clients on costs and most were preparing costs, compliant detailed budgets and estimates before the introduction of the reforms. However, parties will now incur upfront costs determining litigation costs, notwithstanding that the overwhelmingly majority of disputes will settle or be withdrawn before the court falls to consider the substantive issues in dispute, let alone liability for costs.

On this basis alone, it is highly questionable whether the Jackson reforms will reduce litigation costs. That is before one considers the costs that have been and will be incurred in inevitable satellite litigation arising from the reforms.

Certainty and proportionality

Property investment has played a pivotal part in the UK’s economic recovery, and a key selling point to all investors is the reasonable degree of certainty the UK property market provides. Part of this certainty stems from the UK’s reputation for dispute resolution which is founded on inherent consistencies in the English legal system. The court’s oscillating approach reflected by the above cases does not extoll our talents for consistency and certainty.

Furthermore, and principally because of the Jackson reforms, an ever-increasing number of practitioners consider the court to be the place of last resort to satisfactorily determine a dispute. Standard arbitration clauses in new leases, and a growth in arbitration as an alternative means for resolving property disputes, appear inevitable.

A movement away from court determination for lack of certainty and proportionality is likely to impede on the government’s desire for the civil courts to become self-funding, and it will do very little for the international reputation of our legal system, but it should come as welcome news to arbitrators in the property sector.

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