2/11/2022. Arbitral award

Underlying facts of the award and declarations of the parties

1. The Claimant leases certain areas from the Respondent. The lease of the leased premises is regulated by the Lease Agreement. The landlord’s position in the Lease Agreement was transferred to an entity and this entity transferred the title of the property to the Respondent whereby the Respondent has replaced the former landlord, as well. In consideration for the lease the tenant (the Claimant) shall pay rent, service charges and tenant utilities. Service Charges mean the Building Utilities and other non-utility costs, occurred in connection with the use of the leased premises and the use and management of the property, as defined in another Section of the Lease Agreement and ANNEX X.
2. Annex X of the Lease Agreement details the tenant utilities, the non-utility elements, and the trading goods. The non-utility elements include property management fee, technical facility fees, cleaning of common areas, standard security and reception services, pest control, gardening and following the modification of the Lease Agreement, extra security, and reception services for the Claimant only. In Annex X in the breakdown of the elements include the parties’ agreement regarding the cap (or non-existence of a cap) on the increase of the indicated amounts. Annex X indicates the total service charges established by the landlord in respect of the entire property. Service charges are invoiced and paid monthly. The Lease Agreement provides that the landlord shall prepare a reconciliation of service charges annually. The Lease Agreement provides that the parties agree that the service charges (excluding Building Utilities) can be increased annually maximum by the annual consumer price index published by the Central Statistical Office of Hungary for the preceding year (for the first time with effect of 1 January 2014, by the annual consumer price index published by the Central Statistical Office of Hungary for 2013). The Lease Agreement further provides that the landlord shall be entitled to include into the service charges new charges or operating or additional costs arising from time to time from the point in time at which day arise subject to the conditions set out in the Lease Agreement. The landlord shall advise the tenant in writing of any new costs arising, stating the point in time at which they will arise. The increase of the service charge shall be in line with the provisions of the Lease agreement. If the aggregate cost of new item exceeds the amount defined in the Lease Agreement a year, the landlord shall request prior approval of the tenant which shall not be unreasonably withheld. In 2020 disputes emerged between the Claimant and the Respondent as to the lawful increase of the amount of service charges payable for the years 2018 and 2019 which means that the Claimant disputed the amount of the service charges indicated by the Respondent for the years 2018 and 2019. The Claimant argued that according to the Lease Agreement the amount of the service charges is capped because it may only be increased annually by the consumer price index published by the Central Statistical Office of Hungary for the previous year.
3. The Respondent claimed that there were no restrictions as to the amount of the service charges in Annex X other than the amount defined in the Lease Agreement a year rule. According to the Respondent the service charges in Annex X are only estimates. The Claimant in response stated that the indicated amounts are exceeding the maximum amount of the service charges that can be charged by the landlord to the Claimant based on the Lease Agreement. The explicit intent of the parties was to cap the annual increase of the service. The Respondent argued that the cap is about the regular changes in the general price level and reflects the maximum yearly inflation-based increase of the cost rate of the services provided in the previous year and that is applicable to the costs of the specific items or sub-items of the service charges compared to the former year’s price level and not to the estimates under Annex X of the Lease Agreement The textual interpretation of the respective provisions of the Lease Agreement undoubtedly indicates that the service charges may be increased annually maximum by the annual consumer price index published by the Central Statistical Office of Hungary for the preceding year. An increase or indexation in the service charges may only be effectuated in a percentage that does not exceed the annual consumer price index for the preceding year. In the event of a dispute, the parties shall consider the presumed intent of the person issuing the statement and the circumstances of the case, construe statements in accordance with the general accepted meaning of the words[1]. The cap applies to all service charges and is applicable also to Annex X of the Lease Agreement. The Parties agreed to limit the indexation, increase of the service charge elements controlled by the landlord.
4. This Court of Arbitration has jurisdiction to entertain the case. The Claimant only asserts that the amount of the service charges exceeds the cap defined under the provision of the Lease Agreement, which is a question of pure legal nature and accordingly no expert may be appointed to this question of law. According to the Lease Agreement Hungarian substantive law is applicable and the language of the proceeding is English.
5. The Claimant requested the Arbitral Tribunal to declare that the net annual amount of the service charges (excluding the building utilities) paid under the Lease Agreement must not exceed, at any time, the amount of the service charges (excluding the building utilities) paid for the preceding year and increased by the annual consumer price index published by the Central Statistical Office of Hungary for the preceding year and declare that any annual amount of the service charges (excluding the building utilities) calculated is unlawful in the amount that surpasses the amount calculated in accordance with the Lease Agreement, including especially the amounts claimed by the Respondent and disputed by the Claimant regarding years 2018 and 2019.
6. The Respondent has submitted a request to the Arbitral Tribunal to bifurcate the present proceeding and decide first on the issue of jurisdiction and subject to its decision on the jurisdiction, on the admissibility, in a separate first phase.

The Respondent asserted that this Court of Arbitration lacks jurisdiction under the Lease Agreement. The parties stipulated independent expert determination in service charges account disputes, which excludes arbitration in that subject matter. Even if the arbitration is possible in this subject matter, the case is inadmissible, as the Claimant did not exhaust the dispute resolution mechanism of the Lease Agreement, according to which the case should have been first referred to an independent expert proceeding after failed negotiations. The Parties in the Lease Agreement stipulated ad-hoc arbitration before an independent expert in service charges disputes, which excludes arbitration in this subject matter. No arbitration agreement was concluded between Claimant and Respondent. By acquiring the ownership of the building, the Respondent is not successor of the original owner, original contracting party. A new Lease Agreement was concluded between Claimant and Respondent with the same contents and this new agreement does not include the arbitration clause of the original lease agreement.

7. Respondent asserted that the claims of Claimant are not arbitrable because they are declaratory claims that are not capable of being litigated in ordinary courts. The claims of Claimant do not seek a declaration of existence or non- existence of a right or a legal relationship therefore are not capable of being litigated in ordinary courts and consequently, in line with Point1 of Article 3(1) of the Arbitration Act, not arbitrable.
8. The Respondent requested to establish and declare that the respective provision of the Lease Agreement shall not apply to the service charge payment, given that the later Addendum Y, containing contradictory provisions, supersedes such provision, without prejudice to the remaining provisions, does not constitute a part of the Lease Agreement in lack of mutual contractual intent.
9. The first declaratory claim should be rejected because the Lease Agreement does not limit the net annual amount of service charges as such. The definition of service charges refers to various utility and non-utility costs and not the aggregate amount thereof. Annex X defining the service charges speaks of non-utility elements and states in relation to these + 5% in the first reconciliation. KSH increase/every year, which refers to the increase of elements and not the aggregate amount. Annex X uses the word cap in relation to the building utilities but does not use that word in relation to service charges. The respective provision in the Lease Agreement, which allows for the landlord to include new service charges would not make any sense if the aggregate amount of service charges were maximised. The Lease Agreement does not tie any increase up to the annual consumer price index to the amount of the service charges paid for the preceding year. Nothing in the Lease Agreement prohibits re-calculation of the preceding years’ service charges and applying the consumer price index to the re-calculated elements.
10. Respondent considered that the second declaratory claim is not specific and thus, if granted would result in an award that does not say anything meaningful, is not enforceable and does not stand without extensive interpretations. Respondent further argued that the mere fact that provisions of the Lease Agreement also regulate the service charges means that the finding sought by the Claimant may not stand, as that would result in that a certain provision of the Lease Agreement would override all other provisions of the Lease Agreement relating to service charges, for which there is no ground. The Arbitral Tribunal is bound by the claims of the Claimant as they were formulated. Respondent referred to different invoicing practices, compared to the invoicing practices that the previous landlord carried out. It could not be the original landlord’s contractual intention to bear service costs and at the same time, not be able to allocate such costs proportionally to its tenants which provision would contradict good morals. The figure of Annex X of the Lease Agreement relates only to the Claimant and not the entire building. The figures included in Annex X are applicable to each specific lease agreement independent of each other and the actual service charges must be allotted between the tenants, not the amounts indicated in Annex X. Even if a cap would apply in respect of the Lease Agreement, meaning the yearly price index published by KSH, the figure in Annex X refer only to the Claimant, therefore the Respondent did not breach the cap in its service charges account of 2018 and 2019.
11. Respondent asserted that the Expert Opinion in the present proceeding contained and was based on legal findings, which are not admissible, as legal issues must be decided by the Arbitral Tribunal and further the opinion contained erroneous, not verifiable calculations and was not clear sufficiently. The expert evidence may only have limited role, if any, in the present proceedings. The declaratory claims do not require any calculations. The second declaratory claim in its part referring to 2018 and 2019 are not sufficiently specific, and it would require verification whether the 2018 and 2019 service charges exceed the previous year’s charges plus consumer price index only in the unexpected case the Arbitral Tribunal would find both that there is an upper limit on the aggregate amount of service charges and that Annex X applies to the entire building and not Claimant only. The second monetary counterclaim would require verification in case the Arbitral Tribunal would find that both there is an upper limit on the aggregate amount of service charges and Annex X is applicable for the whole building.
12. The Respondent has raised two counterclaims. The first counterclaim contains a request for declaratory relief seeks to declare that the basis of calculation of the non-utility elements is the amount under the 2015 reconciliation report as specified by Respondent in his counterclaim and supported by the annual reconciliation reports submitted by Respondent consequently the Claimant has systematically applied incorrect calculation as to the non-utility elements of the service charge. In addition, the Respondent further requested to declare that Annex X of the Lease Agreement, as replaced by Annex Y Addendum applies only to the Claimant being a party to the Lease Agreement and not the entire building. The title of Annex X- as amended by the Addendum - reads that service charge and tenant utilities for Claimant. The Arbitral Tribunal has, therefore, to establish that the net annual amount of service charges accounted by Respondent under the Lease Agreement for the accounting periods of 2018-2021 are in accordance with the Lease Agreement, thereby the Claimant unlawfully contested the related service charge reconciliation reports.
13. The second, the monetary claim of the Respondent’s counterclaim was to order Claimant to pay the unlawfully invoiced amount of service charges for the accounting periods of 2018-2021.The Claimant has not challenged any specific service charge elements for the 2018-2021 periods, no upper limit on the aggregate amount of service charges exists and even if it existed, it would not be tied to the amount paid in the previous year.
14. The Arbitral Tribunal in a separate order has decided that it has jurisdiction in the present case already in the first part of the proceeding. The Budapest-Capital-Regional Court (Fővárosi Törvényszék) rejected Respondent’s respective appeal and confirmed that the Arbitral Tribunal has jurisdiction to adjudicate the claims. of the Parties.

The arbitral award

15. The issue the Arbitral Tribunal had to decide is whether under the facts of the case,

• the Court of Arbitration has jurisdiction in this arbitration or not,
• the Claimant’s declaratory claims are arbitrable or not,
• the Claimant’s claim to establish that the net annual amount of service charges (excluding the building utilities) paid under the Lease Agreement must not exceed, at any time, the amount of service charges (excluding the building utilities) paid for the preceding year and increased by the annual consumer price index published by the Central Statistical Office of Hungary for the preceding year and therefore, any annual amount of the service charges (excluding building utilities) calculated is unlawful in the amount that surpasses the amount calculated in accordance with the Lease Agreement, including especially the amounts claimed by the Respondent and disputed by the Claimant regarding years 2018 and 2019, is well founded on the merits or not,
• the Respondent’s first counterclaim for declaratory relief to declare that the basis of calculation of the non-utility elements is the amount under the 2015 reconciliation report as specified by Respondent in his counterclaim and supported by the annual reconciliation reports submitted by Respondent consequently the Claimant has systematically applied incorrect calculation as to the non-utility elements of the service charge, to declare that Annex X of the Lease Agreement, as replaced by Annex Y of Addendum applies only to the Claimant being a party to the Lease Agreement and not the entire building, and to establish that the net annual amount of service charges accounted by Respondent under the Lease Agreement for the accounting periods of 2018-2021 are in accordance with the Lease Agreement, thereby the Claimant unlawfully contested the related service charge reconciliation reports, is well-founded or not. The second, the monetary claim of the Respondent’s counterclaim to order Claimant to pay the unlawfully invoiced amount of service charges for the accounting periods of 2018-2021, is well-founded on the merits or not.

Conclusion of the Tribunal

16. Does the Court of Arbitration have jurisdiction in the present proceeding?
17. The Lease Agreement provided that the Parties agreed that any dispute arising from/or in connection with the Lease Agreement, including but not limited to its breach, termination, validity, or interpretation shall be settled first by amicable negotiations but in case these negotiations prove to be unsuccessful, the dispute shall be exclusively decided by this Court of Arbitration. The Arbitral Tribunal in a separate order has decided that it has jurisdiction in the present case already in the early phase of the proceeding. The Budapest-Capital-Regional Court (Fővárosi Törvényszék) rejected Respondent’s appeal and confirmed that the Arbitral Tribunal has jurisdiction to adjudicate the claims of the parties. The Arbitral Tribunal considered that the Respondent referred to itself as the legal successor of the previous owner already in its first payment notice. The Arbitral Tribunal agreed with the arguments of Claimant that Article 53/C of Act 177 of 2013 on the Implementation of the New Hungarian Civil Code provided that legal succession should be regarded as a new contract in respect of all rights and obligations transferred. The Respondent entered into the Lease Agreement as the legal successor to the original contracting party and this relates to the arbitration agreement incorporated in the Lease Agreement. The interpretation and applicability of the provisions set out in the Lease Agreement is subject to the jurisdiction of this Court of Arbitration. Pursuant to the Lease Agreement any dispute arising from or in connection with the Lease Agreement, including but not limited to its interpretation must be exclusively decided by this Court of Arbitration. The present dispute is not about determining the fair amount of the service charges but about the applicability of the fee cap set out in the respective provision of the Lease Agreement regarding the annual increase of service charges, excluding building utilities. The core issue to be decided in this arbitration is, how to correctly interpret the respective provision of the Lease Agreement. The Arbitral Tribunal concluded that as also confirmed by the Budapest-Capital-Regional Court, this Court of Arbitration has jurisdiction to adjudicate the case.

Are the claims of Claimant arbitrable or not?

18. The Arbitral Tribunal considered whether the Claimant’s declaratory claims meet the conditions specified for actions to be brought before an ordinary court. The Arbitral Tribunal states that Claimant’s claims meet the conditions specified in Article 172 (3) of the Hungarian Code of Civil Procedure. The Claimant correctly argued that there are two conjunctive conditions for bringing an action for declaratory relief: the declaration sought is necessary for protection of Claimant’s rights against the Respondent and by nature of the relationship, or in the absence of expiry of the obligation or for other reason, the Claimant is not able to submit a claim for damages or other remedy. Claimant stated in his first claim a declaration that the limit set out in the Lease Agreement is applicable and no service charges (excluding building utilities) can be claimed more than that limit. The second declaratory claim was closely linked with the first claim and requested a declaration that the amount of the service charges (excluding building utilities) that surpasses the amount calculated according to the limit set out in the Lease Agreement is unlawful. The Arbitral Tribunal in agreement with Claimant’s reasoning concluded that both of Claimant’s claim were to prevent the Respondent from claiming an amount which is not in line with the Lease Agreement. The declaration sought is necessary for the protection of Claimant’s rights against the Respondent and to decide in a legal dispute the subject of which is the right interpretation of a specific contractual clause. The Arbitral Tribunal shared the view of Claimant that the declaratory reliefs satisfy the requirements for a definitive claim. The claims are definitive because it clearly defines the reliefs sought by the Claimant against the Respondent and the contents of the judgement to be brought. The claims request to establish the applicability of the limit agreed in the Lease Agreement, and the declaration that the amount of the service charges (excluding building uitilities) that surpasses the limit is in contradiction with the correct interpretation of the Lease Agreement and therefore unlawful. The aim is to avoid further complex disputes in the future to be launched by either party or to avoid that the Respondent satisfies the contested unpaid payment requests from the security deposit.

On basis of the above-mentioned arguments, the Arbitral Tribunal resolved that the declaratory claims of Claimant (and that of Respondent’s counterclaim) are arbitrable.

19. The Arbitral Tribunal had to resolve whether Claimant’s claim to establish that the net annual amount of Service Charges (excluding the Building Utilities) paid under the Lease Agreement must not exceed, at any time, the amount of service charges (excluding the building utilities) paid for the preceding year and increased by the annual consumer price index published by the Central Statistical Office of Hungary for the preceding year, is well-founded or not. Therefore, the question is whether any annual amount of the service charges (excluding Building Utilities) calculated is unlawful in the amount that surpasses the amount calculated in accordance with the Lease Agreement, including especially the amounts claimed by the Respondent and disputed by the Claimant regarding years 2018 and 2019, well- founded on the merits or not?
20. The Arbitral Tribunal notes that the core of the present proceedings and the whole dispute between the parties is the correct interpretation of the Lease Agreement. The wording of the relevant provision of the Lease Agreement is clear when it states. that the parties agree that the service charges (excluding building utilities) can be increased annually maximum by the annual consumer price index published by the Central Statistical Office of Hungary for the preceding year. The Lease Agreement does not contain any provision that is contrary to the cap set out or that could have served as a basis for interpretation that allows the Respondent to increase the service charges (excluding building utilities) in a percentage that exceeds the annual consumer price index published for the preceding year. The Claimant referred to the landlord’s offer on additional service charges, which reads that the Lease Agreement provides an absolute cap to the increase of the service charges. These additional service charges were shown in Addendum No. Y In the first (title) rows of the third column in the breakdown elements of Addendum No. Y have remained unchanged compared to Annex X. The Arbitral Tribunal considers that contrary to the arguments of Respondent, the application of a cap on the increase of the service charges in a lease relationship does not contradict good morals but is a common market standard widely used by the contracting parties and confirmed by the expert of the present proceeding, as well. The aim of such provision is not only to prevent that the landlord could increase the service charges payable by the tenant unilaterally and without any limitation but also to select the services and service providers more carefully so that the landlord could keep up the level of operating costs that had been argued by the contracting parties. The Arbitral Tribunal investigated the Parties arguments in respect of the relation of Annex X and Addendum No. Y and concluded that the arguments of Claimant were correct in interpreting and evaluating the relationship of the Annex and the Addendum. Annex X when determining the overall monthly service charges per square meter, divides the overall monthly service charges by the total number of the expected leasable square meters of the building at the time of the conclusion of the Lease Agreement. If Annex X were to contain only the amounts to be paid by the Claimant, the amount to be paid per square meter would not have been calculated by dividing the total expected leasable area of the building but by the square meter of the leased area contracted by the Claimant. Addendum No, Y which amended Annex X contains that it shall replace the respective Annex attached to the Lease Agreement, having the same subject matter. The Arbitral Tribunal considered, as well, that Addendum No. Y is identical in the subject matter. It also calculated with the same proportions. The Arbitral Tribunal also understands that only the last lines indicate a fee exclusively for the Claimant, the other amounts are identical to the figures of the original Annex X, which contained the amount of the service charges for all the tenants. The Lease Agreement defined the amount of fees set out in Annex X as the service charges and a certain provision narrowed down the service charges to be paid by the tenant to the portion payable after the gross office premises and specifies those areas after which no service charges are payable. The rent is automatically increased by indexation and not unilaterally by the landlord. The service charges can be unilaterally increased by the landlord but with limits in line with the agreement of the parties. If the parties had not wanted to set out a limit on the increase of the service charges, they would not have written that there is no cap on these items for the building utilities., since that would have been the general rule, and no exception would be needed. The Arbitral Tribunal shared this understanding of Claimant. Under the Lease Agreement the Parties have limited the conditions under which new service charges elements may be introduced unilaterally. If the aggregate annual fee for the new service charges the landlord wishes to introduce exceeds the aggregate amount agreed in the Lease Agreement, the landlord must request the consent of the tenant which consent may not be withheld unreasonably. The landlord must inform about his intent the tenant in writing. No such evidence was submitted in the present proceeding.
21. The expert introduced by the Arbitral Tribunal in the proceeding argued that it is a fundamental interest of the tenant that the landlord should not be able to change the fees completely freely. The separation of utility fees and their exclusion from the inflation cap could have served this purpose, as well. The economic contents of the inflation cap are to prevent the Respondent from passing on the impact of his own economic decisions (selection of subcontractors, accepting their price offers, accepting price changes) to Claimant exceeding the upper limit (inflation). This is what the parties determined. The expert prepared the calculation based on the data provided by the parties and confirmed that the second declaratory claim is well based though he pointed out that both the Claimant and the Respondent submitted incorrect numbers in the proceeding. The expert, however, could conclude that annual amount of the service charges (excluding building utilities) calculated was unlawful in the amount that surpassed the amount calculated in accordance with the Lease Agreement, claimed by the Respondent and disputed by the Claimant regarding the years 2018 and 2019.
22. The Arbitral Tribunal had to conclude that both declaratory claims of Claimant are well founded i.e., the net annual amount of service charges (excluding the building utilities) paid under the Lease Agreement must not exceed, at any time, the amount of service charges (excluding the building utilities) paid for the preceding year and increased by the annual consumer price index published by the Central Statistical Office of Hungary for the preceding year. Therefore, any annual amount of the service charges (excluding building utilities) calculated is unlawful in the amount that surpasses the amount calculated in accordance with the Lease Agreement, including especially the amounts claimed by the Respondent and disputed by the Claimant regarding years 2018 and 2019.
23. Is the Respondent’s first counterclaim for declaratory relief to declare that the basis of calculation of the non-utility elements is the amount under the 2015 reconciliation report as specified by Respondent in his counterclaim and supported by the annual reconciliation reports submitted by Respondent consequently the Claimant has systematically applied incorrect calculation as to the non-utility elements of the service charge, to declare that Annex X of the Lease Agreement, as replaced by Addendum Y applies only to the Claimant being a party to the Lease Agreement and not the entire building, and to establish that the net annual amount of service charges accounted by Respondent under the Lease Agreement for the accounting periods of 2018-2021 are in accordance with the Lease Agreement, thereby the Claimant unlawfully contested the related service charge reconciliation reports is well founded or not. Is the second, the monetary claim of the Respondent’s counterclaim to order Claimant to pay the unlawfully invoiced amount of service charges for the accounting periods of 2018-2021 well-founded on the merits or not.
24. The first part of the counterclaim is a request for declaratory relief. The Respondent relied on the fact that the figure in Annex X, as amended, related only to the Claimant and not to the whole building, which is wrong as already analysed in this proceeding by the Arbitral Tribunal. As for the second, monetary counterclaim, the figures presented in the Respondent’s counterclaim are incorrect and not in line with the Lease Agreement, given that they disregard the absolute cap set out in the Lease Agreement. The base of the counterclaim is the incorrect interpretation of the Lease Agreement and the approach that no cap is applicable on service charges.
25. The decision of the Arbitral Tribunal concerning the two declaratory claims of Claimant decides the outcome of the decisions of Respondent’s counterclaims.

The Arbitral Tribunal, concerning the arguments of Respondent relating to the Expert Opinion, emphasizes that the expert was required to interpret from economical professional aspect the relevant provisions of the Lease Agreement with special attention to the second declaratory claim of Claimant, but this does not mean that by answering the questions of the Arbitral Tribunal the expert decided the dispute. The reason of the involvement of the expert was to numerically determine the service charges amount in relation to years 2018 and 2019 in case the cap set out in the Lease Agreement is applicable according to the Arbitral Tribunal. (See the second declaratory claim of Claimant) The expert opinion contains this calculation.

26. The counterclaims were not verified and supported by the correct interpretation of the relevant provisions of the Lease Agreement especially Annex X and Addendum No. Y, therefore, the Arbitral Tribunal dismissed the counterclaims.

(Vb/20072)