25.Mar.2019

Having the last word – finality clauses in leases

No-one enters into a lease of commercial property looking for a fight, but experience has shown it is prudent for the parties to provide for what will happen if a dispute arises.

It is common for commercial leases to contain provisions for alternative dispute resolution, by referring any matter to an arbitrator or expert for determination. Such clauses invariably provide that the decision of such arbitrator or expert will be "final and binding on the parties". But how final is "final"?

Rent review determinations

Often the parties to a lease will have difficulty in agreeing the amount of the new rent where there is provision for rent review during the lease, and on these occasions the question will be referred to an expert – typically a surveyor with experience in assessing rent levels of similar properties – for a determination of the amount of the new rent, and the parties agree they will accept that surveyor's decision.

Two recent cases have considered whether the terms of a finality (or "ouster") clause prevents the parties from referring the matter to the courts instead, or appealing the decision of the expert if they think it is incorrect.

In both cases, the terms of the lease relating to a referral to an expert for determination of the rent were very similar, but with one key difference: in Ashtead Plant Hire Company Limited v Granton Central Developments Limited the expert's decision was stated to be "final and binding on the parties to the lease", whereas in Cine-UK Limited v Union Square Developments Limited, the clause went further, saying the decision would be “final and binding on the parties…both on fact and law”.

Interpretation of the lease

In Ashtead, the parties approached the court before appointing an expert, to clarify the basis on which the review was to be carried out, as they disagreed whether it should be of a lease of the ground alone with no value attributable to buildings, or include value for certain buildings on the site. A preliminary consideration was whether or not the lease had given the expert exclusive jurisdiction over disputes, and the court decided the wording in this lease had not, since "it would be very surprising if the parties had agreed that a surveyor should have exclusive jurisdiction to determine the correct legal construction of such important provisions”.

Accordingly, in a subsequent hearing the court considered the issue in dispute concerning the correct interpretation of the lease provision, which required the effect on any rent of the value of any buildings or other constructions erected and any improvements carried out to the subjects of lease to be disregarded.

Competence of referral to the court

In contrast, in Cine-UK, the parties had already referred their rent review to an expert, and received her determination, but the tenant disagreed with it, maintaining the expert had erred in law in her approach to the requirement to disregard the value of any rent-free period or other concession given to a tenant to compensate them for the time it would take to fit out the premises. This disregard is intended to deal with the anomaly identified in Bishopsgate No 99 v Prudential Assurance of giving credit to the tenant at rent review for a notional fitting out period which would not in fact occur.

Because of the additional wording in the finality clause in this lease, the court took the view that the parties had agreed to exclude the jurisdiction of the court. This was bolstered by the fact that there was no requirement on the surveyor to give reasons for her determination (even though in this instance, she did), and also the finality provision made no distinction about the sorts of disputes which might be referred to the surveyor: had the parties wanted to be able to challenge the surveyor's determination on matters of law in certain types of dispute, or on legal issues generally, they could have carved these out of the finality provision.

Right or wrong question?

There is nothing to stop parties agreeing an expert's decision is to be binding on them on all matters. For many contracting parties, having disputes determined in this way provides a swift route to certainty and finality. That is not to say if the expert fails correctly to deal with the issue before them the parties have no recourse. There is a distinction between the situation where the expert has answered the right question, but in the wrong way, and where they have answered the wrong question. If the former, then where the expert's decision is final in matters of law, that decision is binding – the parties have agreed to that being the effect. If the wrong question has been answered however, then the expert's decision is void.

The landlord in Cine-UK tried to argue, by wrongly interpreting one of the contractual provisions in the lease, the expert had answered the wrong question, but the court's view was this merely conflated the two questions, and if correct would render worthless the words "in law" in the finality clause.

To bind or not to bind?

Often dispute resolution clauses are regarded as "boilerplate" and may not receive any detailed scrutiny when negotiating the lease terms. The different outcomes in these two cases demonstrate that careful thought needs to be given to how the parties intend disputes of different kinds to be resolved, and whether the expert to which such disputes are remitted will have the necessary expertise to determine matters of legal interpretation.

The clause used in the Cine-UK Limited lease has the capacity to result in a "winner/loser" lottery in the event of a flawed legal decision. When dealing with high value leases, the parties may wish to think very carefully about excluding the role of the court. In Cine-UK, arguably the tenant ended up paying considerably more in rent than they might otherwise have had to pay if the rent review clause had been subject to detailed court scrutiny.

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