PETITION IN ARBITRATION APPEAL NO.4 OF 2019 [2020] ScotCS CSOH

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[1] The petitioner leased a number of properties from a landlord. In terms of the lease,

the petitioner was entitled to exercise an option to purchase the properties. The parties

could not agree on the price and that matter was remitted to arbitration. The arbitrator

issued his award on 12 August 2019. In this petition, the petitioner appeals against the

award and argues that the arbitrator erred on points of Scots law. The petition was served

on the landlord and also on the arbitrator. The landlord lodged answers and contested the

[2] As this is an arbitration appeal and the identities of the parties are anonymised, it is

important that I do not set out unnecessary information about them or indeed material from

which their identities can be inferred. This can create difficulties, when seeking to explain

the background and the relevant facts and circumstances. In the present case, it has

resulted in me not describing in any detail the operation or activities carried on by the

petitioner. Rather, I simply note that significant activities were carried on by the petitioner

in the area in which the properties were located. As a result, the petitioner’s personnel and

[3] The petitioner and the respondent entered into a contract on 12 June 1998 (“the

contract”). The contract provided for the construction of a number of houses on land in an

area in the north-east of Scotland. The respondent was to construct and maintain the houses

for a period of twenty years. Towards the end of 1999, the petitioner and the respondent

also entered into a lease (“the lease”). In terms of the lease, the respondent let to the

petitioner the premises defined in the lease (“the premises”). The premises comprised the

houses and the land upon which they were built. In accordance with clause 6 of the lease,

the petitioner was entitled to exercise an option to purchase the premises (“the option”). In

order to exercise the option, the petitioner required to elect to do so, at the latest, one year

and one day prior to the option date. The petitioner served notice exercising the option on

[4] The price to be paid by the petitioner to the respondent in relation to the exercise of

the option is determined in accordance with clause 6.4.1 of the lease. The critical part of

“’The Price’ shall be and mean such amount as the Landlord and the Tenant shall

agree as representing, or failing such agreement shall be determined by an expert as

hereinafter provided, the price which would be likely to be paid by a willing

purchaser to a willing vendor in the open market at the Option Date for the Premises

The clause then set out various assumptions to be made and a matter to be disregarded,

none of which are relevant for the purposes of this appeal. The parties were unable to agree

on the price and in terms of a joint deed of referral in March 2019 they agreed that an

arbitrator was to be appointed to determine the price. Notwithstanding the terms of the

lease, the parties agreed that the arbitrator was to act as such and not to act as an expert. In

his award, the arbitrator determined the price payable by the petitioner to the respondent

for the exercise of the option. In terms of their deed of referral, the parties had agreed that

either party could appeal against the award made by the arbitrator, under rule 69(1) of the

Scottish Arbitration Rules which provides that a party may appeal to the Outer House

against the tribunal's award on the ground that the tribunal erred on a point of Scots law (a

[5] In applying clause 6.4.1, the arbitrator took the view that

“… the [petitioner] as an hypothetical entity can be taken into account as contended

by the Respondent, and deemed to be a hypothetical bidder in the hypothetical

He made several references to viewing the petitioner in this way as a “factor” and later

“… can of itself have a potentially positive effect on the market. The petitioner as a

(i) As a matter of Scots law, the [petitioner] should not have been treated as a

hypothetical purchaser. The contract requires the value of the premises to be

determined on the basis of vacant possession, i.e. that the [petitioner] had not

exercised the option to purchase 12 months previously. It would therefore have had

to have relocated personnel to alternative housing by the termination of the lease

otherwise vacant possession could not have been given. There is no basis for

assuming that the [petitioner] would be in the market as the [arbitrator] did. Hence,

the assumption made by the [arbitrator] is not permitted by the terms of the contract.

Moreover the approach is contrary to the “reality principle” which is well established

in analogous valuation contexts. The [arbitrator] has made impermissible

assumptions as to what the [petitioner] would or would not have done prior to the

valuation date. He has in effect assumed it will have done nothing for which there is

no support in the contract and is in conflict with the reality principle. This error had

a material impact on the [arbitrator’s] determination of the Price.

(ii) If the arbitrator was entitled to consider the issue of whether the [petitioner] was a

potential hypothetical purchaser and so in the market which the petitioner disputes

for the reason set out in relation to Ground of Appeal (1), the [arbitrator] has erred by

making an impermissible assumption that the [petitioner] would be in the market for

properties similar to the Premises and would have taken no action to provide

replacement accommodation since its hypothetical decision not to exercise its option.

No suitable findings have been made in relation to what the actual needs of the

[petitioner], as [at] the valuation date, would have been if the option had not been

exercised. The evidence adduced by the petitioner in regard to this issue was simply

dismissed by the [arbitrator] as irrelevant. The [arbitrator] erred in law in failing to

consider this evidence. He erred in law in making impermissible assumptions that

(iii) The arbitrator erred in adopting a “comparator” valuation method when he has

found, as a matter of fact, that there were no suitable comparators. Whilst in

principle the choice of method of valuation was for the arbitrator he erred in law in

[7] The arbitrator had erred in law in treating the petitioner as a hypothetical bidder.

There was no provision in the contract which permitted or required that assumption to be

made. Furthermore, the assumption made by the arbitrator was contrary to the “reality

principle”, which is a well-established criterion in the context of valuation exercises. The

arbitrator had been addressed on the relevant principles concerning contractual

interpretation and on the reality principle. He erred in law by failing to correctly apply

these principles. The starting point was the correct interpretation of clause 6.4.1 of the lease.

Reference was made to the relevant principles on contractual interpretation recently

addressed by the Inner House in Scanmudring AS v James Fisher MFE Ltd 2019 SLT 295. In

the present case, the enquiry should start and finish by asking what is the ordinary meaning

of the words used. It was acknowledged that the court can in appropriate cases use the

concept of business common sense as a tool to aid construction. However, business or

commercial common sense should not be an integral part of ascertaining the intention of the

parties in the present case and in any event reference to business common sense was not

[8] Clause 6.4.1 required the arbitrator to assume “vacant possession” when determining

the Price. There was then a list of assumptions that had to be made. At no point was it

stated that the valuation should proceed on the assumption that the party exercising the

option (the petitioner) will be a hypothetical purchaser. If that had been the intention of the

parties, it would have been stated in the contract. The petitioner’s position was consistent

with the requirement that the valuation takes place on the basis of a hypothetical “willing

purchaser” purchasing in the “open market”. There was no assumption that required the

special characteristics of the petitioner to be considered. An interpretation of clause 6.4.1

which imported the petitioner as being a potential hypothetical purchaser was contrary to

the wording of the clause. The clause required the valuation to proceed on the assumption

that there is vacant possession, ie that the option has not been exercised by the petitioner. A

hypothetical purchaser cannot be invested with the qualities of the actual purchaser, but that

was what the arbitrator has done. To do so required a conflation of the hypothetical sale

and the real sale. Any such construction would not accord with commercial common sense.

It would amount to an impermissible rewriting of the terms of the contract.

[9] The respondent’s contention, that the reference to “open market” is wide enough to

include the petitioner, impermissibly viewed those words in isolation from the rest of the

provision in the context of the document as a whole, particularly the terms as to the exercise

of the option. The necessary logical consequence of the option not having been exercised,

and the assumption of vacant possession, was that the petitioner has met its housing needs

by other means. To do otherwise would ignore the requirement to assume the option has

not been exercised. It would involve a conflation of the hypothetical sale with the actual

sale. The arbitrator went further and hypothesised as to what the petitioner would have

done but for the exercise of the option; in effect he had assumed that it would have done

nothing. There was no basis for any such assumption to be made. The contractual

provision, properly construed, required the arbitrator to disregard the steps the petitioner

may have taken had the option not been exercised. These erroneous assumptions

underpinned the arbitrator’s assessment of the value of the premises and the discount that

was applied. For those reasons alone, the award should be set aside.

[10] Turning to the reality principle, it was well established that the hypothetical

purchaser should not be invested with the qualities of the actual purchaser. If a value is to

be determined on the basis that an option has not been exercised, then there is no basis to

assume that the party with the option will be a hypothetical purchaser. The arbitrator

rejected this standard analysis when he assumed that the petitioner could be treated as a

hypothetical bidder for the premises. The case of Cornwall Coast Country Club v Cardgrange

Ltd [1987] 1 EGLR 146 vouched these propositions. In that case the court held that the

incumbent could not be deemed a hypothetical tenant. The rent review provision required

the valuer to assume that the lease had come to an end and the court held that further

“hypothetical assumptions” were not appropriate. Such assumptions could only be made if

the contract or instrument demanded that further assumptions were necessary. When

applied to the present case, clause 6.4.1 of the lease required the valuation to proceed on the

basis of vacant possession. There was therefore a hypothetical assumption that the

petitioner did not exercise the option whereas in fact it did. There was no further provision

which made any stipulation about what the petitioner would have done but for the exercise

of the option. The arbitrator made the type of further assumption that Scott J warned

against in Cornwall Coast Country Club. In particular the arbitrator assumed that the

petitioner had done nothing to seek alternative accommodation since the assumed failure to

exercise the option. There was no provision in clause 6.4.1 which permitted the arbitrator to

go on to speculate as to what the petitioner would have done but for the exercise of the

option. There was no provision which permitted the arbitrator to treat the petitioner as a

potential hypothetical bidder and he therefore erred in law. The respondent’s contentions

[11] Reference was made to Harbinger Capital Partners v Caldwell [2013] EWCA Civ 492

and Trustees of Sloane Estate v Mundy [2018] EWCA Civ 35. The normal rule on valuation

cases is that the existing tenant should be excluded: Woodfall: Landlord and Tenant

(para 8.029). Reference was also made to First Leisure Trading v Dorita Properties

[1991] 1 EGLR 133 and British Airways plc v Heathrow Airport [1992] 19 EG 157. In these cases the

fact that the actual lessee was also the tenant of an adjacent property, gave him an

independent interest in the market and there was nothing in the vacant possession

assumption which required the valuer to ignore that interest. In the present case, the

arbitrator had disregarded the legal principles in the case law and fundamentally

misunderstood the reality principle. While the arbitrator had stated that the exercise of the

option should be ignored, his subsequent analysis failed to follow this through. There was

no basis for further speculation as to what the petitioner would have done next. An

assumption that the petitioner would be a hypothetical purchaser conflicted with the reality

principle. The respondent’s submission that the arbitrator had found as a matter of fact that

the petitioner was part of the market was flawed. It confused the hypothesis with reality. In

the hypothetical world it was not appropriate to make findings of fact in the sense alluded to

by the respondent. In any event, there was no finding of fact as to what the petitioner would

have done in the hypothetical world, because the petitioner’s evidence on that was ignored

[12] If, contrary to the submissions just made, the arbitrator was entitled to consider the

issue of whether the petitioner was a potential hypothetical purchaser, he had erred by

making an impermissible assumption that the petitioner would be in the market for

numbers of properties similar to the premises. The open market must be, so far as possible,

a market that corresponds with reality. The arbitrator had made an implicit assumption that

the petitioner had done nothing to satisfy its demand for housing and accordingly was in

the market as a hypothetical purchaser. He erred in law in attributing these hypothetical

qualities to the petitioner which did not accord with the real world and were not required by

the terms of the lease. He regarded the petitioner’s evidence on what its alternative actions

might have been had it not exercised the option as irrelevant. The arbitrator could not

proceed on the mere assumption that the petitioner would be a hypothetical purchaser

without making findings in fact that supported this position. He failed to consider the

relevant evidence. This arose from the arbitrator having misdirected himself in relation to

the applicable legal principles. This was an error of law: SS v Secretary of State for the Home

Department [2010] CSIH 72. He proceeded upon a misconstruction of the evidence. Having

failed to consider the petitioner’s evidence in relation to its actual housing needs, he reached

conclusions which had no evidential underpinning. His approach demonstrated that he

misunderstood and/or misapplied the reality principle. The simple point was that, if the

arbitrator was entitled to hypothesise about what the petitioner would or would not have

[13] The arbitrator held, as a matter of fact, that the circumstances in the present case

were unique. He also found as a matter of fact that there were no suitable comparators.

Nonetheless, he proceeded to determine the price on the basis of a comparison method.

There were no findings in fact which justified this approach. Accordingly, there was no

basis for the arbitrator to determine the price on the basis of a “comparison method”

[14] On a proper interpretation of the lease the arbitrator clearly was entitled to find that

the petitioner was a potential purchaser in the hypothetical market required by the lease. In

relation to contractual interpretation, reference was made to Wood v Capita Insurance Services

Ltd [2017] AC 1173 and Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900. An interpretation

which produces a more commercially sensible result is to be preferred. The purpose of the

option mechanism was to allow the petitioner to buy the premises at the full price, that is,

the open market price. There was nothing in the circumstances of the option to think the

petitioner would be expecting to pay a reduced price. To exclude from the market the

presence of one of the principal parties who would want to buy the premises was to

envisage an artificially reduced price. Fixing the price only in relation to others was

unattractive and did not make commercial sense. There was nothing in the words of

clause 6.4.1 which either expressly or by implication excluded the petitioner from being a

potential purchaser in the open market, if its presence was established on the facts. If the

parties had intended to exclude such a potential purchaser one would have expected that to

be clearly expressed. The phrase “open market” strongly indicated that it was the parties’

intention that anyone who would be in the hypothetical market desiderated by the lease

ought to be taken into account. The parties also contracted in the lease against the

background of the then current 1997 RICS Valuation Guidelines which contain a very wide

definition of open market value. These indicate that at the time of contracting the parties

would have expected the hypothetical market to include all potentially interested parties.

[15] The lease had to be viewed in the context of the earlier contract entered into whereby

the respondent undertook to design, build, fund, maintain and operate a substantial number

of residential units for the petitioner and to provide building and other services for a

twenty-year period. The lease was for that twenty-year period and had a peppercorn rent.

If the option to purchase was exercised the petitioner was to pay the price calculated as

against the open market. In these circumstances commercial sense would suggest that the

parties would have intended the respondent would be paid the full value for its property.

There was no commercial reason why it should be paid a price below that full value based

on an artificially restricted version of the market. If the arbitrator was to find that as a

matter of fact the petitioner would have been in the market, it did not make commercial

sense to suggest that the parties intended to exclude the petitioner from the market. The

hypothesis of vacant possession on the option date necessarily involved a hypothesis that

the petitioner had not exercised its option and bought the premises on the option date. The

reference to “vacant possession” in the lease did not impute a meaning that the petitioner

should be excluded from the market. The ordinary meaning of that expression is to express

an intent that the valuation should be undertaken without any value being attributed to the

existence of legal rights or obligations of any tenants or sub-tenants under the lease. Given

that the assumption of vacant possession meant that the petitioner had not exercised its

option, it was open to the arbitrator to assess it as part of the hypothetical market. The

arbitrator had not invested the hypothetical purchaser with the qualities of the actual

purchaser. Rather, he had found as a matter of fact that the petitioner was part of the

[16] Cornwall Coast Country Club v Cardgrange did not assist the petitioner. That case

related to its own complex facts, as stated in First Leisure Trading v Dorita Properties. That

case, and British Airways plc v Heathrow Airport, made it clear that there is no general

principle that an existing lessee has to be excluded from the open market, which is normally

the hypothetical market, in ascertaining the appropriate market rent in a rent review.

Regarding the petitioner as a purchaser in the hypothetical open market did not extend the

hypotheses beyond those required in the lease. As to the reality principle, it was clearly

explained by the majority in Harbinger Capital Partners v Caldwell. The ratio of Trustees of

Sloane Estate v Mundy did not support the petitioner. In any event, even on the petitioner’s

view of the reality principle the arbitrator’s decision did not fall foul of it. Finding as a

matter of fact that the petitioner would have been within the hypothetical open market did

[17] The petitioner’s criticism articulated in ground 2 was without foundation or merit.

The relevance of evidence is not a point of Scots law in respect of which appeal is permitted

by rule 69 (1) of the Scottish Arbitration Rules. Rule 28(1)(c) made clear that the relevance

of evidence was a matter for the arbitrator. In any event, having identified the correct legal

principle the application of it was a matter for the arbitrator and not a point of law.

Reference was made to Benaim (UK) v Davies Middleton & Davies [2005] EWHC 1370 (TCC).

But even if it was a point of Scots law, the arbitrator did not err in law in excluding the

evidence as to what the petitioner would have done if it had decided not to exercise its

option. The arbitrator had regard to the real world facts as to what the petitioner’s demand

for housing was at the option date, on the hypothesis demanded by the lease. He quite

properly declined evidence hypothesising what steps would have been taken by the

petitioner more than a year prior to the option date and about the potential consequences, if

any, of this hypothetical action. In any event, the evidence was not material. The evidence

would not have been able to lead to a finding that the petitioner would have met its needs as

[18] This ground of criticism was both ill-founded and without merit. The question of

which comparison method is chosen was not a question of law but a matter for the

arbitrator. Reference was made to Trustees of Sloane Estate v Mundy and City of Aberdeen

Council v Bredero Centre 1998 SC 269. In any event, although the arbitrator found that there

was no transactional evidence in relation to a similar size of portfolio in a comparable

location being sold as one unit, he proceeded to use the comparator of the total value of all

the individual units, on which he had much evidence. He proceeded on the basis of the

[19] In Arnold v Britton, Lord Neuberger (with whom Lord Sumption and Lord Hughes

agreed) set out the key principles on contractual construction, including the following:

“15. When interpreting a written contract, the court is concerned to identify the

intention of the parties by reference to ‘what a reasonable person having all the

background knowledge which would have been available to the parties would have

understood them to be using the language in the contract to mean’, to quote Lord

Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd , [2009] AC 1101, para 14. And it

does so by focussing on the meaning of the relevant words ... in their documentary,

factual and commercial context. That meaning has to be assessed in the light of (i)

the natural and ordinary meaning of the clause, (ii) any other relevant provisions of

the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and

circumstances known or assumed by the parties at the time that the document was

executed, and (v) commercial common sense, but (vi) disregarding subjective

“17. … The exercise of interpreting a provision involves identifying what the

parties meant through the eyes of a reasonable reader, and, save perhaps in a very

unusual case, that meaning is most obviously to be gleaned from the language of the

provision. Unlike commercial common sense and the surrounding circumstances,

the parties have control over the language they use in a contract. And, again save

perhaps in a very unusual case, the parties must have been specifically focussing on

the issue covered by the provision when agreeing the wording of that provision.”

This approach, as is widely known, fits with a number of other authorities (eg Rainy Sky v

Kookmin Bank Co. Ltd and Wood v Capita Insurance Services Ltd) and is commonly applied by

the Scottish courts (eg Scanmudring AS v James Fisher MFE Ltd, HOE International Ltd v

Andersen; British Overseas Bank Nominees Ltd v Stewart Milne Group Ltd 2019 SLT 1253; Ashtead

Plant Hire Company Limited v Granton Central Developments Limited [2020] CSIH 20; Midlothian

Council v Bracewell Stirling Architects [2018] CSIH 21). The role of commercial common sense

primarily concerns the situation in which there are two possible constructions and one is to

be preferred as being more consistent with commercial common sense: Rainy Sky v Kookmin

Bank Co. Ltd; Midlothian Council v Bracewell Stirling Architects. However, as Lord Neuberger

explained in the passage above the parties have control over the language used, which is a

paramount consideration, and as others have observed (eg Lord Reed in Credential Bath

Street Ltd v Venture Investment Placement Limited 2008 Hous LR 2 at [24], and Lord Hodge in

Wood v Capita Insurance Services Ltd at [28]) the concept of commercial common sense has

certain limitations. In the present case, both parties contend that their preferred

interpretation is the commercially sensible construction. I shall explore that matter below

when I come to apply the relevant legal principles, but only after considering the natural

[20] As was explained by Lewison LJ in Harbinger Capital Partners v Caldwell:

“22. There are many areas of the law in which an amount is to be ascertained by

postulating a hypothetical transaction of one kind or another. Rating is perhaps the

oldest example, for which purpose rateable value was measured by postulating the

hypothetical grant of a tenancy from year to year. But hypothetical transactions

abound in other areas of the law: for example compulsory acquisition, taxation and

rent review clauses. Sometimes the hypothesis is statutory and sometimes it is

contractual. The courts have developed a well-established set of principles that

apply to both kinds of case. The most important of these is that things are to be

taken as they are in reality on the valuation date, except to the extent that the

instrument postulating the hypothetical transaction requires a departure from

reality. In the old cases this is summarised in the Latin phrase rebus sic stantibus. In

the more modern cases it has been described as the principle of reality: Hoare v

Given the close similarity of the language used in rent review clauses in commercial leases

and the language used in relation to valuation in the present case, I accept that the cases

referred to by the parties provide assistance here. Lewison LJ went on to make these

The hypothesis is only a mechanism for enabling one to arrive at a value of

particular property for a particular purpose. It does not entitle the valuer to depart

from the real world further than the hypothesis compels: Hoare v National Trust, 380

(Schiemann LJ). The various hypotheses must be taken no further than their terms

make strictly necessary: Cornwall Coast County Club v Cardgrange Ltd [1987] 1 EGLR

146, 152. It is necessary to adhere to reality subject only to giving full effect to the

ii) Giving effect to the hypothesis may require a legal impediment to the

implementation of the hypothesis to be ignored or treated as overridden; but only to

the extent necessary to enable the hypothesis to be effective: IRC v Crossman

[1937] AC 26; The Law Land Company Ltd v Consumers’ Association Ltd [1980] 2 EGLR 109;

iii) The world of make-believe should be kept as near as possible to reality:

Trocette Property Co Ltd v GLC (1972) 28 P& CR 408, 420 (Lawton LJ); Hoare v National

Trust, 386 (Peter Gibson LJ). Reality must be adhered to so far as possible: Cornwall

Coast County Club v Cardgrange Ltd, 150 (Scott J). The valuer should depart from

reality only when the hypothesis so requires: Hoare v National Trust, 388 (Peter

iv) Where the hypothesis inevitably entails a particular consequence, the valuer

must take that consequence into account: East End Dwellings Co Ltd v Finsbury BC

v) But there is a clear distinction between hypotheses expressly directed to be

made and assumptions allegedly consequential on the express hypotheses. Where

the alleged consequence is not inevitable, but merely possible (or even probable),

then the consequence cannot be assumed to have happened: Cornwall Coast County

vi) The reality principle applies as at the valuation date. Events which postdate

While Lewison LJ gave a dissenting judgment, Beaton LJ and Mummery LJ did not contest

what he had said about the reality principle, but instead viewed the meaning of the

language in the provision as the key issue. In Trustees of Sloane Estate v Mundy, Lewison LJ

referred back to what he had said in Harbinger v Caldwell about the reality principle,

[21] In understanding the reasoning in the cases to which the parties referred, it is also

worth considering an earlier decision, F R Evans (Leeds) Ltd v English Electric Co Ltd (1977) 36

P & CR 185, in which Donaldson J made some helpful observations. He said (at 189-190)

“Similarly, in my judgment, the willing lessee is an abstraction—a hypothetical

person actively seeking premises to fulfil needs which these premises could fulfil.

He will take account of similar factors, but he too will be unaffected by liquidity

problems, governmental or other pressures to boost or maintain employment in the

area and so on. In a word, his profile may or may not fit that of the English Electric

“I reject entirely the proposition that the potential lessee either is, or necessarily has

any of the characteristics of, the English Electric Co. Ltd. He is a complete

abstraction, and, like the mule, has neither pride of ancestry nor hope of posterity.

He is someone whose needs are such that, in relation to the Walton Works, he is a

Put shortly, Donaldson J was making the point that the hypothetical person is not the real

[22] Under reference to Donaldson J’s decision, in British Airways plc v Heathrow Airport

“That does not mean, however, that the actual lessee is necessarily excluded from

consideration as a potential lessee of the property…there is no principle of law which

requires the valuer to assume that a lessee is not a potential hypothetical lessee of the

It could be said that this does not fit with Donaldson J’s clear position about the actual lessee

not being the hypothetical lessee. There could also be similar reservations about Vinelott J’s

comments in First Leisure Trading v Dorita Properties (at 136 H-J) where he seeks to explain

Donaldson J’s treatment of English Electric Co. Ltd as based upon evidence that it had

excluded itself from being a hypothetical lessee. However, when British Airways plc and

First Leisure Trading are each read as a whole, it is appropriate to view the analysis as not

that the actual lessee is personally treated as a potential hypothetical tenant, but rather that

on the facts the valuer or arbitrator may find that the hypothetical lessee is a person in the

same factual position as the actual lessee. I develop this point below.

[23] It is important to recognise that the cases relied upon by the parties concern quite

distinctive facts and circumstances. In Cornwall Coast Country Club v Cardgrange Ltd the

existence of a gaming licence was contended to be a material factor in the valuation exercise.

Scott J stated that “Many of the complications in the rent review arise, directly or indirectly,

from the fact of Crockford’s gaming licence in respect of [the premises]”. In First Leisure

Trading the premises which were the subject of the rent review were on the ground floor of a

building and the floor above formed part of a hotel leased by the same tenant. In British

Airways plc one issue was whether the fact that the plaintiff was the tenant of the first

premises located at an airport should be disregarded when assessing the rent for the second

premises also located at the airport. However, when one leaves aside the specific

considerations and observations made in these cases which relate to their distinct facts, and

consideration is given to Donaldson J’s observations noted above, there are several

reasonably clear principles that emerge from these authorities. For present purposes, these

can be summarised as follows. Firstly, the well-established principles of contractual

construction apply. Secondly, the purpose of a rent review clause is to ensure that the rent

payable reflects changes in the value of money and the value of the premises let (British

Airways plc, at 144E). Thirdly, the court should be alert to the danger of confusing reality

and hypothesis (Harbinger, quoted above). The only relevant hypotheses are those agreed by

the parties in the provisions in the lease. Any hypothesis should be taken no further than is

strictly necessary (Cornwall Coast Country Club, at 152J, British Airways plc, at 144F-G).

Fourthly, the hypothetical lessee is not the actual lessee in actual occupation of the property

(British Airways plc, at 144H) and so he does not have any of the personal characteristics of

the actual lessee which might operate to increase or decrease the rent which he would be

willing to pay (F R Evans (Leeds) Ltd, at 189-191; British Airways plc, at 144H). Fifthly, there is

no principle of law which requires the valuer to assume that the actual lessee is not a

potential lessee (First Leisure Trading, at 137M; British Airways plc, at 144 J). However,

sixthly, as a qualification on the last point, the identity or characteristics of the actual lessee

are neither here nor there, but the factual circumstances relating to the actual lessee’s

reasons for being the tenant may well be relevant. Thus, in First Leisure Trading it was said

“…the arbitrator is not required to assume either that First Leisure is or that it is not

a possible hypothetical tenant. But he is entitled to find as a fact that a lessee of the

Greyhound Hotel, whoever he might be, would be a potential tenant” [emphasis

Properly understood, this is making clear that it is the actual needs or interests of a person

that results in him being regarded as a potential tenant. If he happens also to be the actual

lessee, that is neither here nor there. In Cornwall Coast Country Club, there was no such

factual basis and the only ground for treating the actual lessee (Crockford’s) as a possible

hypothetical tenant was the building of hypothesis upon hypothesis, or, as it was put,

having Crockford’s “invested with fictitious qualities and fictitious circumstances”, rather

than having a factual basis for it having an interest. Interestingly, in that case (at 152 G-H)

Scott J said that if the actual lessee is included in the market then the hypothetical lessee

must outbid the actual lessee. This supports the view that Scott J regarded the hypothetical

lessee as a different and imaginary entity. It is also important to note that Scott J had stated

“… for the purposes of the sublease rent review the hypothetical lessee will be a

person anxious to use 30 Curzon Street as a casino and anxious to obtain as soon as

possible the necessary consent and gaming licence that, on the rent review date,

When Scott J later came to reject the assumption that Crockford’s itself (that specific entity)

would be in the market for the premises if vacant, he was not departing from the earlier

position that those wishing to use the premises as a casino would be in the market. He was

simply ruling out the personal characteristics of the actual lessee.

[24] Distilling these points and viewing the valuation exercise generally, unless the

relevant provisions state otherwise the valuer or arbitrator should assess the strength of the

market. He should consider the hypothetical persons who would be actively seeking

premises to fulfil their needs, which the premises in question could fulfil. He should not

invest the hypothetical tenant with the characteristics of the actual tenant. He should

disregard the identity of the actual lessee, for two primary reasons. Firstly, the personal

characteristics of the actual lessee are of no relevance. Secondly, the hypothetical lessee can

in any event, if the facts thus indicate, be treated as being in the same position as the actual

lessee. Thus, in First Leisure Trading the actual tenant of the hotel (whoever he is) may have

an interest in the other parts of the building and in British Airways plc the actual tenant of the

first premises (whoever he is) may have an interest in the second premises. The decision on

whether such facts affect the valuation is one for the valuer or arbitrator. However, if an

arbitrator does not in his award disregard the identity of the actual lessee, but bases his

views on the factual reasons why the actual lessee may have an interest in the premises

rather than any personal characteristics of the actual lessee, then naming the actual lessee

makes no difference: a person, whoever he is, having that factual interest can be viewed as a

[25] Each side made the point that if the other side’s position about what was agreed was

correct it would have been the subject of provision in the agreement. I see no real force in

these submissions; we are concerned with the meaning of the words used. On behalf of the

respondent, certain background circumstances were identified and said to have a potential

bearing on the construction of clause 6.4.1. These included the prior contract between the

parties and the circumstances pertaining to its operation. Reference was also made in

submissions to the 1997 RICS Valuation Guidelines. While the petitioner raised no specific

issue as to these background circumstances not being part of the shared knowledge of the

parties prior to contracting, I do not regard them as being of any assistance in relation to the

construction of the terms of clause 6.4.1. In particular, they do not impact upon the meaning

of any of the words actually used. In relation to the RICS guidelines, which the petitioner

accepted formed part of the background, these were not mentioned in the lease and do not

supply any relevant material for the purpose of the assumption of vacant possession.

[26] I turn then to the language used in clause 6.4.1, the key part of which is the reference

to “…the price which would be likely to be paid by a willing purchaser to a willing vendor

in the open market at the Option Date for the Premises as a whole with vacant possession…”

In my opinion, the reference to the open market does not of itself provide support for the

respondent’s contention that the petitioner could be treated as a hypothetical purchaser. I

accept that the phrase supports the view that anyone who would be in the hypothetical

market desiderated by the lease ought to be taken into account, but the key point is whether

there is a basis for treating the petitioner as part of the market. I note that in, for example,

First Leisure Trading, British Airways plc and Cornwall Coast Country Club the clauses in

question each referred to the open market, but that phrase was not viewed in those cases as

adding anything of substance to the meaning to be reached. The key points which build the

hypothetical situation are the “willing seller”, “willing buyer” and the reference to “vacant

possession” and it is the latter phrase which is of crucial importance. In line with the reality

principle and the approach taken in the authorities, the hypothesis based on the expression

“vacant possession” should be taken no further than is strictly necessary. The only

consequences of the assumption to which regard should be had are those which are

inevitable. In the present case, those are limited to the petitioner no longer being in

occupation at the option date and, inevitably, having therefore given the necessary notice at

least one year and one day in advance. But the hypothesising ends there. It does not extend

into what the petitioner would or would not have done in that hypothetical situation.

Various possibilities might have existed, but there was no further inevitable consequence.

Senior counsel for the petitioner did not insist on a point made in his Note of Argument that

the assumption of vacant possession was that the petitioner had met its housing need by

other means. Going any further than the assumption that the petitioner no longer occupied

the premises and also that it had given notice in advance would invest the situation with

fiction, beyond that necessary assumption and its inevitable consequence.

[27] The petitioner seeks to found on this by contending that the arbitrator hypothesised

that the petitioner had done nothing. In my view, that argument must fail. The arbitrator

made no such finding, nor did he implicitly proceed on that basis. All that he did was to

limit himself to the hypothesis in question, which was the correct approach. Consequences

which were merely possible or even probable were not assumed to have happened. Instead,

he properly restricted himself to taking the hypothesis no further than was strictly

necessary. This is the approach taken in the rent review cases, where the vacant possession

assumption is applied but the consequences of it are not speculated upon, such as whether

the lessee, who on the hypothesis of vacant possession would have decided to leave the

premises and have been faced with a decision of what to do next, would have left the market

by going elsewhere. In cases such as First Leisure, where the facts support the proposition

that a hypothetical lessee in the same position as the actual lessee would be in the market,

the same point as was made by the petitioner in the present case could be argued: that this

assumes that he moved out but had then done nothing. There is no support in the

authorities for that approach. The fact that proceeding solely on the basis of the hypothesis

and otherwise on reality could be viewed as being consistent with the petitioner having

[28] It is correct that the arbitrator expressly stated that the petitioner “… as a

hypothetical bidder forms part of the hypothetical market”. Interestingly, he also stated that

the petitioner “as an hypothetical entity can be taken into account … and deemed to be a

hypothetical bidder in the hypothetical market …” [emphasis added]. Viewing the

petitioner itself as a hypothetical bidder might be argued to run counter to the approach

take in F R Evans (Leeds) Ltd and also in Cornwall Coast Country Club. These cases seem to me

to proceed on the basis that the hypothetical lessee is an abstraction and not a real person,

legal or natural. In short, they take a strict approach to the concept of a hypothesis; it is

something imagined rather than real. It appears that the line taken in the other cases (such

as First Leisure and British Airways plc) is that the hypothetical lessee or bidder can include

the actual person. But as I have noted above, this is a distinction without any real difference,

so long as the valuer or arbitrator ignores the personal characteristics of the actual person

and focuses on the facts which allow a hypothetical person in the same factual position as

[29] In the present case, it was accepted by the respondent that the arbitrator treated the

petitioner as a potential bidder in the hypothetical open market. It might be said that the

arbitrator regarded the petitioner, as he expressly put it (quoted above), as “an hypothetical

entity” to be viewed as “a hypothetical bidder” and that he was therefore not treating the

petitioner itself as the hypothetical bidder. But, on balance, other statements made in the

award justify the respondent’s concession. Proceeding on that basis, for the reasons I have

given the reference to identity is of no consequence if the true basis for including the person

in the market is factual. Here, as matter of fact, the basis is quite independent from the

petitioner being the actual purchaser. As the evidence made clear, the petitioner was

running an activity in the local area which required a substantial number of personnel and

their families to be accommodated. So, in assessing the strength of the market, the arbitrator

had to have regard to the things which would cause such an entity to be interested in the

premises, based on the needs of that entity and whether the premises would fulfil those

needs. The evidence showed that the petitioner’s influence and demand for housing had

considerable impact within the market. Where an entity carries on an activity in the local

area which requires substantial housing accommodation, the entity may well be viewed as

in the market. While it could be said, strictly speaking, to be wrong to view the petitioner

itself as the hypothetical bidder, such an entity carrying on such an activity could, on the

facts, be regarded by the arbitrator as being in the market. In short, the existence of this

activity being carried on in the local area has similar effects to, for example, the lessee of the

hotel (whoever he is) in First Leisure having a lease of adjoining premises: it is a relevant

[30] I reach that conclusion based upon the terms of the relevant provisions in the lease,

and assisted by the discussions in the authorities. It does not found upon any view being

reached on commercial common sense. If it had been necessary to take that factor into

account, it would have supported the conclusion reached. It makes more commercial

common sense to include within the market an entity (whoever it is) which is running a

significant activity in the local area and requires substantial accommodation for that

purpose. If that entity also happens to be the actual purchaser, then so be it.

[31] This ground proceeds on the basis that, if ground 1 fails, the arbitrator had made

another impermissible assumption that the petitioner would be in the market for numbers of

properties similar to the premises. The simple point was that, if the arbitrator was entitled

to hypothesise about what the petitioner would or would not have done, he required to do

so based on the evidence. This argument fails because the arbitrator was not entitled so to

hypothesise and did not do so. He simply restricted the assumptions to those which were

required. He did not misdirect himself on the legal principles. Given that he approached

matters on the basis of the correct legal principles, an incorrect application of them to the

facts is not an error of law: Benaim (UK) v Davies Middleton & Davies [2005] EWHC 1370

(TCC) (at [107]). In any event, he did not incorrectly apply them. I also accept the

respondent’s position that the relevance of evidence is not a point of Scots law for the

purposes of this appeal. Rule 28(1)(b) of the Scottish Arbitration Rules provides that it is for

the tribunal to determine the admissibility, relevance, materiality and weight of any

evidence. The arbitrator considered and had regard to what he described as “the totality of

the evidence” about the petitioner’s demand for housing at the “valuation date” on the

[32] This ground relates to the valuation methodology deployed by the arbitrator in the

valuation of the portfolio of housing as a whole. On that matter, the arbitrator observed that

“the evidence before me is anything but ideal”. He concluded that “the Comparison method

is to be preferred if judiciously applied”. This approach “though not perfect does possess

the benefit of taking an objective view on far fewer variables” than the approach presented

at the arbitration on behalf of the petitioner. He observed that the case “produces

evidentially a unique situation”. Ultimately, he concluded that the Option Price could “best

be computed on the ‘Comparison method’ (as advanced by the Respondent) but, in contrast,

applying what I judge a significant discount …” The petitioner contended that there were

no findings in fact which justified this approach of determining the price on the basis of a

“comparison method” of valuation. However, while the arbitrator found that there was no

transactional evidence in relation to a similar size of portfolio in a comparable location being

sold as a whole, he used as the comparator the total value of all the individual units, as set

out in reasonably detailed evidence on behalf of the respondent. The fact that he adopted

the label applied by the respondent, describing this as a comparison method, is of little

consequence. It is true that he was not comparing like with like, in the sense of a sale of the

whole portfolio. But having been given two potential approaches, he rejected that of the

petitioner, which was entirely a matter for him to decide upon. He was then left with using

a comparator of a sort (albeit one which was decidedly imperfect) which gave an overall

value to which he could then apply a suitable discount. Faced with the valuation decision,

in a difficult and rare set of circumstances, he worked with what he had available to him.

He had a sufficient evidential basis for his findings. I therefore conclude that this ground of

[33] For these reasons, the grounds of appeal are not well-founded. Accordingly, I refuse

the petition and confirm the arbitrator’s award.

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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> PETITION IN ARBITRATION APPEAL NO.4 OF 2019 [2020] ScotCS CSOH_46 (19 May 2020) URL: http://www.bailii.org/scot/cases/ScotCS/2020/2020_CSOH_46.html Cite as: 2020 GWD 18-253, [2020] CSOH 46, [2020] ScotCS CSOH_46

Scottish Court of Session Decisions