Can I challenge an expert valuer's rental determination made under section 37 of the Retail Leases Act, 2003?

Rental Determinations

1.     Challenging Rental Determinations made under section 37 of the Retail Leases Act 2003 (RTA) has always been difficult. However, in the last 12 months there have been at least 2 successful VCAT challenges made to a valuer’s rental determination.

Dalmatino Pty Ltd v Creative Laser Pty Ltd

2.     In Dalmatino Pty Ltd v Creative Laser Pty Ltd [2017] VCAT 875, I appeared for the landlord, and Sam Hopper appeared for the tenant. Unusually, it was the landlord who was unhappy with the valuation in that case.

3.     Dalmatino is a well-established restaurant in Bay St, Port Melbourne. One of the 2 brothers that operated the business left the partnership, and the landlord alleged that things went downhill as a result.

4.     Several disputes erupted; the most significant related to what the rent was to be for the period after a new lease term commenced.

5.     The landlord alleged that there was an agreement reached about the rent for the second term of the lease, commencing in 2012, and the parties jointly appointed a valuer to determine the rent for the period commencing in 2015.

6.     The tenant denied the 2102 agreement, and sought to appoint a valuer for 2012 as well, under section 37 of the RTA. The rental determination that was completed concluded that the tenant had been overpaying the rent by thousands of dollars each year. 

7.     In VCAT, one of the main issues for the Tribunal’s determination was whether the 2012 valuation complied with section 37 of the RTA.

8.     The Tribunal rejected the contention that there had been an agreement reached about the rent for the period commencing in 2012. As a result, the rental determination became relevant.

9.     In the event, Member Kincaid found that the determination was flawed, as it did not comply with the requirements of section 37 of the RTA. For the purpose of determining the current market rent in respect of the first year of the third term of the lease, the valuer’s written reasons demonstrate that the valuer had regard to premises “...for the same, or a substantially similar, use to which the premises may be put under the lease” within the meaning of the section. However, the rental determination was still set aside for failure to comply with the requirements of section 37 of the Act.

10.  Section 37 of the Act provides, in part:

Rent reviews based on current market rent

(1) A retail premises lease that provides for a rent review to be made on the basis of the current market rent of the premises is taken to provide as set out in subsections (2)-(6).

(2) The current market rent is taken to be the rent obtainable at the time of the review in a free and open market between a willing landlord and willing tenant in an arm’s length transaction having regard to these matters:

(a) the provisions of the lease;

(b) the rent that would be reasonably expected to be paid for premises if they were unoccupied and offered for lease for the same, or a substantially similar, use to which the premises may be put under the lease;

(c) ...

(d) ...

but the current market rent is not to take into account the value of goodwill created by the tenant’s occupation or the value of the tenant’s fixtures and fittings...

(5) In determining the amount of the rent, the specialist retail valuer must take into account the matters set out in subsection (2).

(6) The valuation must-

(a) be in writing; and

(b) contain detailed reasons for the specialist retail valuer’s determination; and

(c) specify the matters to which the valuer had regard in making the determination 

Relevant Determination Principles

11.  At paragraphs 43 – 45, Member Kincaid analysed the relevant determination authorities, in the following terms:

In Commonwealth of Australia v Wawbe Pty Ltd and Anor [1998] VSC 82, Justice Gillard adopted the following statement of McHugh JA in Legal and General Life of Australia Ltd v A Hudson Pty Ltd as stating the law concerning challenges to valuation determinations (at [38]-[39]):

In my opinion the question whether a valuation is binding on the parties depends in the first instance upon the terms of the contract, express or implied...It will be difficult, and usually impossible, however, to imply a term that a valuation can be set aside on the ground of the valuer’s mistake or because a valuation is unreasonable. The terms of the contract usually provide, as the lease in the present case does, that the decision of the valuer is “final and binding upon the parties”. By referring the decision to a valuer, the parties agree to accept his honest and impartial decision as to the appropriate amount of the valuation. They rely on his skill and judgment and agree to be bound by his decision.

While mistake or error on the part of the valuer is not by itself sufficient to invalidate the decision or certificate of valuation, nevertheless the mistake may be of a kind which shows that the valuation is not in accordance with the contract. A mistake concerning the identity of the premises to be valued could seldom, if ever, comply with the terms of the agreement between the parties. But a valuation which is the result of the mistaken application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case the critical question must always be: Was the valuation made in accordance with the terms of the contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it represents a gross over or under value. Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract [emphasis of his Honour].

Justice Gillard went on to say (at [45]):

In my opinion it follows that the court should consider three questions-

1.     What did the parties agree to remit to the expert?

2.     Did the valuer make a mistake and what was the nature of the mistake?

3.     Is the mistake of such a kind that demonstrates that the valuation was not made in accordance with the terms of the contract and accordingly does not bind the parties?

The leading authorities on setting aside a rental determination (including the above extract from Wawbe) were summarised by Croft J in Epping Hotels Pty Ltd v Serene Hotels Pty Ltd [2015] VSC 104, when his Honour concluded (at [59]):

As the authorities make clear, the Tribunal’s task was to consider whether the Rental Determination answered the contractual description of what the valuer was required to do. For present purposes, it is sufficient to note that, by virtue of s 37(1) of the Act, sub-s (2) is taken to be a term of the lease, that is, a term of the contract between the parties. Therefore, the valuer was required to make a determination that accorded with the requirements of that sub-section.

12.  Member Kincaid then proceeded to analyse whether the rental determination failed to comply with the provisions of section 37(2)(a) and (b) of the Act.

13.  At paragraph 67 and following, the Member found:

I consider that in order for the valuer to have satisfied himself that he has had regard to “the rent that would be reasonably expected to be paid for premises if they were unoccupied and offered for lease for the same, or a substantially similar, use to which the premises may be put under the lease”, he need only look to the essential use of the premises under consideration. I find, doing as best I can from the valuer’s descriptions given in his table, that the essential use of each of the various premises described in the valuer’s table at numbers 16, 21 and 24-27 on pages 15-17 of the rental determination is that of a “restaurant, not being part of a chain of restaurants”.

I therefore find that the premises described in premises numbers 16, 21 and 24-27 on pages 15-17 of the rental determination are offered for lease for:

a.    the “same” use (to the extent that any of them may have a general liquor license, like the tenant, or even a licence in modified form); or

b.    “substantially similar” use (to the extent that any of them may not have a liquor license)

to which the premises may be put under the lease, within the meaning of section 37(2)(b) of the Act.

14.  Having found that some of the premises referred to by the valuer were within the requirements of section 37, the Member then considered (at paragraph 69 and following) whether  

… the reasons contained in the rental determination are such as to indicate, when read as whole, that when determining the current market rent, the valuer had regard to “the rent that would reasonably be expected to be paid for premises having the same, or substantially similar, use to which the premises may be put under the lease”.

The giving of reasons by an expert serves generally as a means by which a reviewing Court or Tribunal is able to be satisfied that he or she took into account matters required to be taken into account. Section 37(6) of the Act expressly makes it clear that, in the case of a specialist rental valuer appointed under the provisions of the Act, the reasons given by the valuer must not only be “detailed”, but they must “specify the matters to which the valuer had regard in making the determination”. These are, at least, I consider, the matters set out in section 37(2)(a)-(d) of the Act.

15.  Member Kincaid concluded (at paragraph 71) that he could not be satisfied that this was so, and as a result he found that the determination did not comply with section 37. At paragraph 72, he noted that the extent to which the valuer had regard to the requirement set out in section 37(2)(b) of the Act could only gathered from the text of the rental determination. Then, at paragraphs 73 – 75, he noted:

The above extract from the reasons show, in substance, that the valuer first identified a “rental range” between a “low” of $385pm² per annum (as to which particular premises referred to in the tables contained in the rental determination, it is not clear) and a “high” of $937pm² per annum. The valuer goes on to state that, in his view, “the most relevant data is in the range of $500 to $570 [psm] per annum net”. It is impossible to determine from this statement the extent to which the valuer considered, if at all, premises having the same, or a substantially similar, use to which the premises may be put under the lease. In particular it is not clear, other than perhaps by supposition, that the valuer had regard to premises 16, 21 and 24-27, being premises that I have found have the same, or substantially similar use as that to which the premises may be put under the lease.

Further, having identified “the most relevant data range of $500 to $570 [psm] per annum net”, there are no particulars provided by the valuer of how he then arrives at a current market rental of $525 per square metre. Having expressly informed the reader about his use of the Direct Comparison Technique which, he states, involves the making of “inevitable adjustments for all factors which influence market rental value”, no particulars are provided as to the adjustments that were presumably applied to the rents payable for other relevant premises to take into account factors applicable to the premises that may “influence the market rental value” of the premises, even at a very general level of description.

Section 37(6)(b) of the Act requires the valuer to give “detailed reasons”. Section 37(6)(c) of the Act requires the valuer to “specify the matters to which the valuer had regard in making the determination” including, I consider, the matters to which the valuer is required to have regard in section 37(2) of the Act. For the reasons set out above, one is largely left to speculate as to how the valuer formed his opinion. This does not, in my view, sufficiently comply with section 37(6) of the Act.

Josephine Ung Pty Ltd v Jagjit Associates Pty Ltd

16.  In Josephine Ung Pty Ltd v Jagjit Associates Pty Ltd [2017] VCAT 2111, Rob Hay QC appeared for the respondent tenant, and Sam Hopper appeared for the applicant landlord.

17.  In that case, Member Edquist concluded that the rental determination undertaken by the valuer was vitiated by error, and was of no effect. The case concerned a rental determination made in relation to a cafe in South Yarra. The applicant landlord, Josephine Ung Pty Ltd (ACN 158 852 487) owned two shops in Claremont Street which it leased to the respondent tenant Jagjit Associates Pty Ltd (ACN 164 331 480) for a term of 10 years commencing 3 February 2012.

18.  The lease provided that the rent should be reviewed on the fourth anniversary of the commencement date. A specialist retail valuer conducted a market review of the rent under the lease for the year commencing 3 February 2016. The Valuer also issued a determination (“the Determination”) on 14 October 2016 and issued a letter supplementing his written reasons in the Determination on 29 November 2016. 

19.  The landlord claimed that the Determination was vitiated by error, and alternatively that the Valuer failed to provide detailed reasons. The tenant denied this.

20.  The landlord’s claim was that there were three related errors:

1. The Valuer failed to have regard to concessions as required by s 37 (2)(d) of the RLA, or failed to adequately disclose that consideration;

2. The Valuer did not have regard to the provision by the landlord of certain installations and, in so doing, failed to have regard to the terms of the lease as required by s 37 (2)(a) of the RLA and valued the wrong premises, or his reasons do not adequately disclose the regard given by him to those items; and

100. The Valuer failed to have regard to the term implied into the lease by s 52(2) of the RLA.

21.  The member discussed several authorities, and then quoted from the decision in Commonwealth v Wawbe Pty Ltd [1998] VSC 82 noted above, where Gillard J agreed with McHugh JA’s statement of the law, and went on to add:

In my opinion it follows that the court should answer three questions-

(i) What did the parties agree to remit to the expert?
(ii) Did the Valuer make a mistake and if so what was the nature of the mistake?
(iii) Is the mistake of such a kind which demonstrates that the valuation was not in made in accordance with the terms of the contract and accordingly does not bind the parties?

22.  The Member noted that his task was to identify the terms of the contract made between the parties, as this will identify the parameters within which the rental determination was to be conducted. In other words I must identify what Croft J described in Epping Hotels as the Valuer’s “charter”. 

23.  With respect to the requirement contained in s 37(6) of the RLA that the Valuer provide “detailed reasons”, both parties referred to the decision of Croft J in Higgins Nine Group Pty Ltd v Ladro Greville St Pty Ltd [2016] VSC 244. Relevantly, his Honour said at paragraph 40:

It is clear that it is not sufficient for a Valuer to “leap to a judgement.” The valuation must disclose the steps of reasoning.

24.  The Member also noted that Croft J went on to note that the position is reinforced by the provisions of s 37(6)(c) of the RLA, which requires the Valuer “to specify the matters to which the Valuer had regard in making the determination”.

25.  The member accepted the landlord’s argument about the first alleged error. The Tribunal noted in paragraph 24:

Although the Valuer expressly confirmed in his Determination that he had had regard to rent concessions and other benefits offered to prospective tenants of unoccupied retail premises in undertaking his task, this is contradicted by the subsequent correspondence. In particular, in his letter of 29 November 2016 the Valuer stated:

My deliberations in this regard have not extended to incorporating a rent free period into my Determination.

Is the mistake a vitiating error?

26.  The Member then noted that this conclusion opened up a new issue: if the Valuer made a mistake, is there a basis for the Tribunal to find that the mistake was of the kind referred to by McHugh JA in Legal & General or Nettle JA in AGL Victoria that would entitle the Tribunal to set the Determination aside?

27.  At paragraph 32, the Tribunal concluded that the Valuer’s error in failing to take into account rent concessions available to prospective tenants in determining current market rent is an error of such magnitude that the Determination has been made outside the Valuer’s charter. The error is of such a nature that it vitiates the Determination.

28.  For the sake of completeness, and in case the Tribunal was wrong in the conclusion about alleged error 1, the Member proceeded to examine the other alleged errors.

29.  The landlord’s principal contention was that the Landlord’s Installations formed part of the leased premises, and yet, in making his Determination, the Valuer did not have regard to those items. Although the Valuer referred to the landlord’s installations in his Determination, the Determination did not identify how the provision of this fitout is taken into account. The Tribunal also accepted these arguments. It found at paragraph 51:

a. In circumstances where the Valuer merely makes the statement that he has had regard to the “Landlord’s provision of installations” but has not given any indication of how he has done this, I think there is a break in his chain of reasoning. It is not apparent that the Valuer has fully appreciated the particular nature of the premises in the present case, that is to say premises already substantially fitted out by the landlord as a commercial kitchen, with associated preparation and service equipment.

b. The landlord’s installation … clearly had value. The fact that a value for the installation was not precisely established did not mean that the landlord’s argument that the installation had to be taken into account was “misconceived”.

c. The landlord’s complaint is that the Valuer did not really base his Determination on comparable values appears to be made out because he did not identify any other restaurant/cafe in his table of comparable properties which had a substantial landlord’s fit out.

30.  The Tribunal specifically found that the Valuer had not demonstrably taken into account the landlord’s installations. In this respect, the Valuer fell into error. By failing to explain  adequately how he had taken the landlord’s installation into account, the Valuer breached s 37(6)(b) and also (c) of the RLA. This error vitiated the Determination as the Valuer had not performed the contract he made with the parties.

31.  Finally, the landlord contended that the Valuer failed to have regard to s 52(2) of RLA, and erroneously had regard to a different repair and maintenance obligation expressed in the lease. The central proposition underpinning the landlord’s complaint is that clause 4.2.1 of the lease is inconsistent with s 52(2) of RLA.

32.  The landlord contended that it was unclear what value had been attributed to the tenant’s (non-existent) obligation to maintain the property.

33.  The landlord also articulated a separate argument arising out of the particular circumstances of this lease, under which the landlord had provided a substantial amount of the fit out, including refrigerators, and ice maker, dishwashers, and extraction system, all floor coverings and certain light globes. The argument was that because sub-sections 52(2)(b) and 52(2)(c) of the RLA respectively extended the landlord’s maintenance obligations to “plant and equipment at the retail premises” and “the appliances, fittings and fixtures provided under the lease by the landlord ...” the hypothetical tenant had been relieved of the cost of maintaining those items. This represented an unusually significant saving to the hypothetical tenant, which would further inflate the rent that he or she would be willing to pay. Accordingly, the landlord argued, either the Valuer did not have regard to the true terms of the lease (as amended by s 52 of the RLA) or his reasons do not disclose the regard to that section that he did have. Either way, it said the Determination is invalid and should be set aside. The Tribunal accepted the landlord’s arguments.

34.  The Tribunal applied the test articulated by Croft J in Higgins Nine Group Pty Ltd v Ladro Greville St Pty Ltd [2016] VSC 244 and noted that the Valuer must disclose the steps of his reasoning. The Tribunal found that there was a failure by the Valuer to give “sufficient” reasons in respect of his consideration of the tenant’s and the landlord’s repair and maintenance obligations. The nature of these errors was such that the Tribunal was satisfied that the Valuer did not discharge the contract he had made with the parties to apply the terms of the lease, including all the terms implied by the RLA. Accordingly, applying the law as set out by McHugh J in Legal and General (1985) 1 NSWLR 314 at 335-336, the Tribunal concluded that the rental determination was vitiated.

Conclusion
35. Both of these cases demonstrate that a valuer, in making a rental determination under section 37 of the RTA, cannot simply open his filing cabinet and review the leases of several premises with which he is familiar and then make his determination based upon that information. The task of a valuer in making a rental determination under section 37 is onerous. The failure by the valuer to provide detailed reasons for the determination, or the failure to consider the specific terms of the lease in question, can lead the valuer into error in making the determination. Once the determination is shown to be in error, it can be set aside by VCAT. 

WG Stark
Hayden Starke Chambers