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:
- 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;
- 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
- 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
