A hypothetical transaction lies at the heart of most valuation exercises, whether a capital valuation or a rental valuation. The parties must address a negotiation on assumed facts, based on ground rules set out in the lease or other contract and in case law.
An issue that presents itself is whether documents and information held by one party but not the other are relevant and ought to be disclosed to that other. The question is then turned round and the party against whom disclosure is sought asks: ‘How can these documents or information be relevant if they were not known to you?’ Battle is joined.
For example, a valuer must take into account the information that would be available in the open market to the notional purchaser, but cannot take into account information that would not be so available (Lynell v IRC ; Cornwall Coast Country Club v Cardgrange Ltd ).
Cardgrange applied that principle to a rental valuation, even where the method of valuation was a profits method of valuation and even where the information that was sought related to the actual profits of the business at the actual property that fell to be valued. Cardgrange is not without its textbook critics. Nonetheless, it was followed in Electricity Supply Nominees Ltd v London Clubs Ltd , where Hoffmann J said that he could not see how information about profitability, which the market did not know, could be relevant to the question of what the market would have thought.
In an unreported arbitration, a landlord of a prime shopping centre was seeking to conclude rent reviews of units in the shopping centre, the review dates being in the depths of the retail recession of 2008/09. The tenant wished to see the communications between the landlord and the landlord’s external letting agents around the review dates, which would have disclosed, the tenant contended, the landlord’s true view as to the state of the market at the review date.
In the real recessionary world, tenants never saw landlords’ private marketing advice. Nor, in a real boom, do landlords see the advice given by tenants’ agents to tenants .
Controversially, the arbitrator ordered disclosure. Had the reviews not settled, the disclosure order would have been challenged.
In the course of another rent review, the arbitrator made an interim award ordering disclosure of documents and information relating to licences granted by the tenant to third parties to use space within the demised premises as industrial workshops; particularly, the rents received by the tenant under those licences. Disclosure was ordered even though that information would not have been available in the open market and was not therefore admissible as evidence at the arbitration. The tenants tried to appeal. The judge refused permission to appeal, considering that there was no danger of the award and the disclosure ordered affecting the process of the review, as the arbitrator could later determine what evidence would be admissible (see Urban Small Space Ltd v Burford Investments Co Ltd (1990)).
For property-related arbitrations, ‘RICS Guidance Note (Eighth Edition) and Commentary’, paragraph G3.7.14, says that:
‘The arbitrator should reject an application for disclosure if he considers the documents called for are irrelevant to any issue in the dispute. Even if a document is perceived to have some relevance, and is not privileged, the arbitrator should nevertheless consider rejecting the application if the evidence is marginal and the cost of the exercise would be disproportionate.’
In litigation, various powers to order disclosure of documents and information are found in the Civil Procedure Rules (CPR).
CPR Part 18 provides that the court may, at any time, order a party to:
- clarify any matter that is in dispute in the proceedings (emphasis added); or
- give additional information in relation to any such matter, whether or not the matter is contained or referred to in a statement of case. CPR Part 31 deals with disclosure.
CPR Part 35, rule 9, confers a power on the court to direct a party to provide information where a party has access to information that is not reasonably available to another party. In that event, the court may direct the party who has access to the information to:
- prepare and file a document recording the information; and
- serve a copy of that document on the other party.
CPR Practice Direction 35, paragraph 4, states that under rule 35.9 the document served must include sufficient details of all the facts, tests, experiments and assumptions that underlie any part of the information to enable the party on whom it is served to make, or to obtain, a proper interpretation of the information and an assessment of its significance.
These powers were the subject of applications made to Morgan J at a case management conference in April 2011 (see Humber Oil Terminals Trustee (HOTT) Ltd v Associated British Ports (ABP) ). The judgment handed down by Morgan J is a case study in testing what is relevant and the interplay between relevance and directions obliging one party to disclose to the other information or documents.
The litigation concerned a claim for a new tenancy made by HOTT, opposed by its landlord, ABP, on the ground that ABP wished to occupy the premises for its own use and an interim rent application by ABP. The premises in question are an oil jetty in the Port of Immingham. The oil jetty lease provided (in clause 6(a)) that ABP shall not, without the previous consent of the lessees, levy or raise any dues in respect of lessee’s vessels for calling at or loading or unloading any lessee’s oil at the demised premises and other harbour dues as specified in the clause.
The assessment of the interim rent payable by HOTT is governed by s24D of the Landlord and Tenant Act 1954. The court must have regard to the rent payable under the current tenancy but otherwise assume that a new tenancy from year to year of the whole of the property comprised in the current tenancy were granted .
It was common ground that the notional tenancy from year to year for which a rent was to be assessed would be a tenancy that contains a provision in the same terms as clause 6(a). Therefore, the presence of such a term in the notional tenancy from year to year would be a relevant consideration when assessing the rent pursuant to these provisions.
The valuation experts for the parties had each made written reports. The gap between the interim rental valuations they each proposed was exceptional.
The tenant’s valuer stated that the market rent under s24D (before having regard to the rent under the current lease) is £1.9m per annum. The valuer stated that the question of dues did not arise because the annual tenancy assumption and the disregard of tenant’s improvements meant that the jetty would not be capable of use for at least 12 months. Thus, ship and goods dues would not be payable to the harbour authority even if clause 6(a) were not present in the notional tenancy.
The landlord’s valuer assessed the market rent for the oil jetty as £27.8m per annum. The valuer then applied a 10% discount to reflect the assumption of a tenancy from year to year, producing a market rent for such a tenancy of £24.1m per annum. A substantial part of the rental value arrived at was attributable to the fact that the tenant, under the notional tenancy, will be exempted from paying ship and goods dues. The valuer stated that a tenant with the benefit of clause 6(a), releasing it from such charges, would pay a much higher rent to secure such an advantageous position.
In correspondence between the solicitors for the parties, HOTT raised the question of the costs to ABP of performing its statutory duties and performing its other functions at the port. HOTT asked to be provided with disclosure of documents that would show the level and the detail of such costs.
HOTT stressed that the hypothetical negotiation contemplated by ABP’s valuation approach was one in which a port authority demanded an enormous sum by way of rent in return for exemption from harbour dues. The hypothetical tenant would not agree to this without undertaking a detailed analysis of what it would have to pay in the absence of clause 6(a).
However, the tenant did not argue that the cost of operating, maintaining or investing in the port was relevant to the assessment of the rental value of the oil jetty. Similarly, neither the landlord nor its valuer said that these costs were relevant to their assessment of the rental value of the oil jetty or the likely level of harbour dues, if the same were to be charged.
HOTT had not produced any material that attempted to show that a valuer whom it intends to call as an expert would wish to rely on these costs to assess the rental value of the oil jetty. Nor had it produced any material that attempted to show that another expert whom it intended to call would wish to rely on these costs to assess the likely level of harbour dues, if the same were to be charged.
The judge considered whether he should find as a matter of common sense, or by the use of logic alone, that these costs would be relevant to that assessment. The judge could not see a case that they were relevant.
Morgan J concluded that the only suggestion that such information would be provided to the hypothetical tenant is on the basis that the hypothetical landlord would volunteer such information to the tenant. This was a remote possibility. If such information as to costs would not be available to the hypothetical tenant, it could not affect the negotiation that is carried on and that results in the parties agreeing on a rent for the annual tenancy. The fact that the hypothetical landlord might have access to such information would not affect its negotiations with the hypothetical tenant.
HOTT referred to the fact that in Urban an arbitrator in a rent review arbitration had ordered disclosure of certain information even though that information would not have been available in the open market and was not therefore admissible as evidence at the arbitration.
However, Morgan J held that the costs information in question was not admissible in evidence because it did not relate to any issue that was to be decided and HOTT did not suggest any basis on which it would be right for the court to order its disclosure.
Whether the application for an order that a party provide information or documents is made under CPR rule 35.9, or CPR Part 18 or CPR Part 31, the information that is sought must at least be relevant to some issue that the court will be asked to try in the course of determining the interim rent. It was implicit in CPR rule 35.9, that the information sought is, at least, relevant to an issue. In Humber Oil for the same reason, Morgan J refused to make an order under CPR Part 31 for disclosure of documents. CPR rule 18.1(1) refers to ‘any matter which is in dispute’. InHumber Oil, there was no relevant dispute about the costs involved. Accordingly, it would not be right to make an order requiring ABP to give information about such costs.
A speculative attempt to obtain documents from the other side of a dispute is often dismissed as a ‘fishing expedition’. Humber Oil is a rare, if not unique, example of a juridical fishing expedition from a jetty. As Lord Neuberger MR once observed, some fishing expeditions do catch fish.
The critical question is what are the chances of landing a catch? It was the likelihood of coming across documents that are relevant and admissible that distinguishes Humber Oil fromUrban. In Urban there was an underlying issue as to admissibility. Did the Cardgrange principle render the documents inadmissible or not? The judge had decided not to interfere with the arbitrator’s decision, which was made on the basis that it was better for the parties to have all the documents so that the full hearing could proceed on an informed basis. If the arbitrator found, at the full hearing, that the documents were admissible, they were already available to the parties. In Humber Oil there was no such issue, just an attempt by the tenant to open a line of enquiry not supported by the issues.
Humber Oil is a welcome decision for two reasons. First, it puts Urban into its correct context. Secondly, it will discourage the use of seemingly wide powers in the CPR to seek disclosure and incur expense on investigations that are not related to the issues.