122 Pitt Street Pty Ltd v Universal 1919 Pty Ltd

Case •

[2015] NSWCA 390

•

08 December 2015

No judgment structure available for this case.

Court of Appeal


Supreme Court


New South Wales

  • Amendment notes
Medium Neutral Citation: 122 Pitt Street Pty Ltd v Universal 1919 Pty Ltd [2015] NSWCA 390
Hearing dates:18 November 2015
Decision date: 08 December 2015
Before: Bathurst CJ at [1];
Macfarlan JA at [2];
Meagher JA at [44]
Decision:

(1) Appeal dismissed.
(2) Cross-appeal dismissed.
(3) Order that the appellant pay the respondent’s costs of the appeal and cross-appeal.

Catchwords: CONTRACT – commercial lease – rent review – whether determination by valuer made in accordance with contract – lease provided that the lessee must spend a minimum of $1,000,000 on “Fitout Work” – whether the lease’s requirement that the valuer disregard the value of the tenant’s “fitout” required the valuer to disregard the value of the work to be done by the lessee in the future under the minimum spend obligation – whether the valuer did in fact disregard the value of that work
Cases Cited: Legal & General Life of Australia Ltd v A Hudson Pty Ltd [1985] 1 NSWLR 314
Serene Hotels Pty Ltd v Epping Hotels Pty Ltd [2015] VSCA 228
Vesco Nominees Pty Ltd v Stefan Hair Fashions Pty Ltd [2001] QSC 169; Q Conv R 54-555
Category:Principal judgment
Parties: 122 Pitt Street Pty Ltd (Appellant)
Universal 1919 Pty Ltd (Respondent)
Representation:

Counsel:
B Walker SC/S J Stanton/ M Holmes (Appellant)
C Birch SC/J A C Potts (Respondent)

    Solicitors:
Barraket Stanton Lawyers (Appellant)
George Xylas Solicitor (Respondent)
File Number(s):CA 2015/106548
 Decision under appeal 
Court or tribunal:
Supreme Court
Jurisdiction:
Equity Division – Commercial List
Citation:
[2015] NSWSC 234
Date of Decision:
17 March 2015
Before:
Kunc J
File Number(s):
SC 2014/294047

HEADNOTE

[This headnote is not to be read as part of the judgment]

In 2006 the appellant (the “Lessor”) acquired the property at 122 Pitt Street, Sydney, subject to a registered lease dated 1 June 2004 granted to the respondent (the “Lessee”) in respect of four levels of the building, including the basement. The Lessee conducts the business of a licensed hotel on the premises. The lease was for an initial term of 10 years with an option to renew for a further 10 years. On 21 February 2014 the Lessee exercised that option, entitling it to a further lease.

Prior to the exercise of the option, the Lessor gave to the Lessee a Rent Review Notice advising that the “Base Rent” payable under the lease would increase. The Base Rent for which the lease provided was effectively the current market rent for the demised premises calculated in accordance with certain specified criteria. As a result of a dispute between the parties concerning the increase, an independent valuer was appointed to determine the Base Rent for the premises as at the “Market Review Date” stated in the lease, namely 1 June 2014. The Lessor contended that the valuer’s determination did not comply with the terms of the lease and that therefore, in accordance with the reasoning of McHugh JA in Legal & General Life of Australia Ltd v A Hudson Pty Ltd [1985] 1 NSWLR 314 at 335-6, it was not binding on the parties.

The alleged non-compliance was that the valuer, contrary to the valuation criteria stated in the lease (Clause 5.9), took into account the “value of the Tenant’s Fixtures or fitout” by having regard to the value of the fitout work that the Lessee was required to do after 1 June 2014 in order to fulfil its obligation to spend a minimum of $1 million on fitting out the premises. The Lessee contended that that future work did not fall within the relevant valuation criterion and, in any event, its value was not taken into account by the valuer.

The Lessor brought proceedings in the Commercial List of the Equity Division of the Supreme Court challenging the determination. By judgment of 17 March 2015 Kunc J rejected the challenge and dismissed the proceedings.

Held (per Macfarlan JA, Bathurst CJ and Meagher JA agreeing) dismissing the appeal and therefore the cross-appeal:

(1) There is nothing in Clause 5.9, or elsewhere in the lease, to suggest that the reference to “the Tenant’s Fixtures or fitout” included a reference not only to the condition of the premises at the relevant date but also to work to be carried out in the future under the minimum spend obligation ([32]-[34]).

Vesco Nominees Pty Ltd v Stefan Hair Fashions Pty Ltd [2001] QSC 169 referred to.

(2)   In any event, the Lessor did not establish that the valuer in fact took the value of the future work into account.

Judgment

  1. BATHURST CJ: I agree with Macfarlan JA.

  2. MACFARLAN JA: In 2006 the appellant (the “Lessor”) acquired the property at 122 Pitt Street, Sydney, subject to a registered lease dated 1 June 2004 granted to the respondent (the “Lessee”) in respect of four levels of the building, including the basement. The Lessee conducts the business of a licensed hotel on the premises. The lease was for an initial term of 10 years with an option to renew for a further 10 years. On 21 February 2014 the Lessee exercised that option, entitling it to a further lease.

  3. Prior to the exercise of the option, the Lessor gave to the Lessee a Rent Review Notice advising that the “Base Rent” payable under the lease would increase. The Base Rent for which the lease provided was effectively the current market rent for the demised premises calculated in accordance with certain specified criteria. As a result of a dispute between the parties concerning the increase, an independent valuer was appointed to determine the Base Rent for the premises as at the “Market Review Date” stated in the lease, namely 1 June 2014. The Lessor contends that the valuer’s determination did not comply with the terms of the lease and that therefore, in accordance with the reasoning of McHugh JA in Legal & General Life of Australia Ltd v A Hudson Pty Ltd [1985] 1 NSWLR 314 at 335-6, it is not binding on the parties.

  4. The alleged non-compliance is that the valuer, contrary to the valuation criteria stated in the lease, took into account the “value of the Tenant’s Fixtures or fitout” by having regard to the value of the fitout work that the Lessee was required to do after 1 June 2014 in order to fulfil its obligation to spend a minimum of $1 million on fitting out the premises. The Lessee contends that that future work did not fall within the relevant valuation criterion and, in any event, its value was not taken into account by the valuer.

  5. The Lessor brought proceedings in the Commercial List of the Equity Division of the Supreme Court challenging the determination. By judgment of 17 March 2015 Kunc J rejected the challenge and dismissed the proceedings.

  6. For the reasons that appear below, I consider that the Lessor’s appeal from his Honour’s decision should be dismissed. Likewise, the Lessee’s cross-appeal, which it said would only be pursued in the event that the Lessor’s appeal succeeded, should also be dismissed.

The lease

  1. The lease to which the Lessee is entitled following its exercise of the option to renew the 2004 lease was not in evidence but its terms can be discerned from the 2004 lease because that lease provided that upon renewal the terms of the lease would remain the same, save for the option to renew for a further term and a limited rent holiday granted at the beginning of the 2004 lease being omitted. No distinction is made in the discussion below between the 2004 and new leases as their terms are relevantly the same and they specify only a single Market Review Date of 1 June 2014.

  2. The relevant provisions of the lease are as follows:

“1   Definitions and Interpretation

1.1   …

Building means the improvements on the Land including the Landlord’s Fixtures, the Facilities, the Services, the Common Areas and the Premises and, where appropriate, includes the Land.

…

Landlord’s Fixtures means the plant, equipment, fixtures, furniture, furnishings, light fittings, blinds, awnings or other window coverings, and floor coverings in or on the Premises from time to time supplied by the Landlord.

…

Market Review Date means each of the dates in item 9.

…

Permitted Use means the use in item 12.

…

Premises means the whole of the premises described in item 1 and includes the Landlord’s Fixtures.

…

Services means all services supplied to or in the Premises including airconditioning, gas, water, drainage, electricity, lifts (if any), fire sprinklers and other fire safety equipment, exhaust systems, heating, lighting, toilets and also includes the Landlord’s Fixtures.

…

Tenant’s Fixtures means all fixtures, fittings, plant and equipment on the Premises and the Building which are not Landlord’s Fixtures and which are owned by the Tenant.

…

5   Market Review of Base Rent

Market Review of Base Rent

5.1   If the Landlord chooses to review the Base Rent at any Market Review Date then this clause 5 applies. The Landlord is not obliged to give a notice under clause 5.2.

5.2   During each Review Period the Landlord may give a Rent Review Notice to the Tenant in respect of the Market Review Date to which the Review Period relates.

5.3   The Base Rent from and including the relevant Market Review Date is the amount stated in the Rent Review Notice unless the Tenant gives the Landlord a notice within 21 days after the Rent Review Notice is given, disagreeing with that amount.

5.4   If the Landlord does not give the Tenant a Rent Review Notice in respect of a Market Review Date during that Review Period, then as from that Market Review Date until the next Market Review Date the Tenant must continue to pay Base Rent at the rate payable before that Market Review Date.

Dispute as to Base Rent

5.5   If the parties do not agree on the reviewed Base Rent on the relevant Market Review Date within 42 days after the notice under clause 5.2 is given, then it must be decided by a valuer who:

5.5.1   is appointed by the parties but if they do not agree on whom to appoint within 52 days after the notice under clause 5.2 is given, that valuer is to be nominated at either party’s request by the president of the New South Wales division of the Australian Property Institute Inc; and

5.5.2   is a full member of at least five years’ standing of that institute; and

5.5.3   at the time of appointment is both experienced and actively engaged in valuing similar licensed premises; and

5.5.4   must be instructed to:

(a)   decide what is the current annual market rent that would be reasonably expected to be paid for the Premises on the relevant Market Review Date if they were unoccupied and offered for renting for the Permitted Use having regard to the terms of this lease and all matters specified in clause 5.9; and

(b)   give a written valuation setting out what was taken into account, what was disregarded, their respective weightings and any other adjustments within one month after being appointed; and

5.5.5   acts as an expert and not as an arbitrator and whose decision is final and binding

The amount determined by the valuer is the Base Rent from and including the relevant Market Review Date.

…

Base Rent criteria

5.9   In determining the Base Rent, the parties and the valuer must determine the current market rent for the Premises as at the particular Market Review Date having regard to the provisions of this lease and must:

(a)   disregard the value of any goodwill attributable to the Tenant’s Business and the value of the Tenant’s Fixtures or fitout;

(b)   disregard any rent or other money payable under any sub-lease or other tenancy which has not been approved by the Landlord under clause 13;

(c)   have regard to the Term and disregard the fact that part of the Term has elapsed at the Market Review Date;

(d)   have regard to the rental value of comparable premises but in doing so must make no reduction on account of any incentive;

(e)   consider the Premises as used for the Permitted Use but must have regard also to any other use to which the Premises may be lawfully put;

(f)   regard the Premises on a floor by floor basis without a discount where the Base Rent is to be determined for more than one floor;

(g)   have regard to the terms and conditions of this lease and assume that all obligations of the Tenant and the Landlord in this lease have been performed and observed;

(h)   make no reduction on account of any incentive paid, provided or allowed to the Tenant or which would be likely to be paid, provided or allowed to a tenant in relation to a new tenancy in respect of the Premises were they vacant;

(i)   assume that the Premises have been reinstated in accordance with clause 12 if the Premises have been damaged or destroyed; and

(j)   have regard to any written submissions made by the Landlord or the Tenant.

…

Alterations to the Premises

10.6   Subject to clause 28, the Tenant must not:

(a)   make any alterations or additions to the Premises or the Building; or

(b)   interfere with, alter or make any connections to the Services or the Facilities

without the Landlord’s prior written consent.

…

17   Lease End Date

Tenant’s obligations on Lease End Date

17.1   On the Lease End Date the Tenant:

17.1.1   must peaceably vacate the Premises;

17.1.2   must leave the Premises clean, free from rubbish and in good and substantial repair;

17.1.3   must give to the Landlord all keys, access cards and similar devices for the Premises held by the Tenant, the Tenant’s Agent and any other person they have given them to; and

17.1.4   must not remove any part of the fitout or any part of the Landlord’s Fixtures or the Tenant’s Fixtures unless required by the Landlord under clause 17.2.1.

17.2   Subject to clause 17.4, on or before the Lease End Date the Tenant must if required by the Landlord:

17.2.1   remove the Tenant’s Fixtures and remove all signs installed or left on the Premises by the Tenant; and

17.2.2   carry out the Services Reinstatement.

…

18   Landlord’s rights

Improvements

18.1   All improvements to the Premises become the property of the Landlord.

…

28   Tenant’s Fitout

28.1   In this clause:

28.1.1   ‘Authorities’ means any competent authority or department (including but not limited to local council) whose consent or approval is required in relation to the Fitout Work and Signage;

28.1.2   ‘Consents’ means all consents and approvals from the Authorities necessary for the carrying out of the Fitout Work and Signage;

28.1.3   ‘Fitout Work’ means the work to be carried out by the Tenant in fitting out the Premises;

28.1.4   ‘Signage’ means any signs, notices or advertisements to be erected by the Tenant in the Premises (including without limit any signs to be erected by the Tenant on any tenant directory board and/or letterboxes).

28.1B   The Landlord acknowledges that the Fitout Work will include the disposal of the existing fitout and replacing it with a new fitout.

28.2   The Tenant must not carry out the Fitout Work or erect the Signage without obtaining the Landlord’s prior written approval and the Consents.

28.3   The Tenant must, prior to obtaining the Consents and prior to commencing the Fitout Work and erecting the Signage, submit to the Landlord for the Landlord’s written approval:

28.3.1   detailed work drawings and specifications for completing the Fitout Work and the Signage including (but without limitation) full details of shop fittings proposed finishes and any alterations or additions to the Premises; and

28.3.2   details of all contractors and subcontractors to be employed in the carrying out of the Fitout Work.

28.4   The Landlord may (at its absolute discretion) require the Tenant to amend the Fitout Work or the Signage prior to giving the Landlord’s approval.

28.5   The Tenant:

28.5.1   will proceed with all expedition to obtain from the Authorities the Consents;

28.5.2   must complete the Fitout Work;

28.5.3   must spend a minimum of $1,000,000.00 on the Fitout Work;

28.5.4   will pay and bear all costs and fees in relation to the Fitout Work and the Signage (including without limit obtaining the Consents);

28.5.5   indemnifies the Landlord from and against all claims and losses arising from the Fitout Work or the completion of the Fitout Work; and

25.5.6   will provide detailed evidence of and copies of invoices of its expenditure on the Fitout Work within three days of the Landlord requesting them.

28.6   The Tenant must after obtaining the Consents and the Landlord’s approval:

28.6.1   carry out the Fitout Work and the Signage in a good and reasonable manner; and

28.6.2   at the expiration or sooner determination of the lease, unless the Landlord otherwise requires, remove the Fitout Work and the Signage from the Premises and promptly make good any damage caused by that removal.”

  1. Item 9 of the lease’s Reference Schedule specified the Market Review Date as “[u]pon exercise of the option to renew (ie on 1 June 2014)”. Item 12 specified the “Permitted Use” as “Licenced Hotel (subject to the conditions of the Liquor Licence)”.

The expert determination

  1. By Rental Determination Report dated 1 June 2014 Mr Scott Robertson of Robertson & Robertson Consulting Valuers, determined that the Base Rent of the subject premises as at 1 June 2014 was $638,000.

  2. The following features of the Report are relevant.

  3. First, Mr Robertson set out the Base Rent criteria listed in Clause 5.9 of the lease, including the directions to “disregard the value of any goodwill attributable to the Tenant’s Business and the value of the Tenant’s Fixtures or fitout” and to have regard to the lease’s terms and conditions.

  4. Secondly, in describing the premises, Mr Robertson referred to the renovations under the initial lease being completed in October 2010 at a cost of $1,083,500.

  5. Thirdly, in describing the current uses of the premises’ various sections, Mr Robertson referred to one of the rooms on level one as having “modern partitioning and a staff food preparation area”.

  6. Fourthly, in listing relevant terms of the lease, Mr Robertson referred to the Lessee’s obligation to fit out the premises at a cost of at least $1 million. About this requirement, he commented:

“Clause 28.5.3 relates to Lessee’s fit out. This clause indicates that the Lessee is to spend approximately $1,000,000 on fit out of the premises. This is a critical condition that I have considered in this rent determination, as most leases are not definitive i.e. minimum fit out costs.”

  1. Fifthly, when considering the market rent applicable to the different sections of the premises, Mr Robertson noted that he had taken the fitout expenditure requirement into account in relation to each.

  2. Sixthly, under the heading “Basis of Assessment” Mr Robertson listed a large number of factors that he had taken into account. These included the “[c]haracteristics of the subject premises and common areas” and “[t]he current layout of the premises, potential alternate layout for the premises for use as retail and the impact that the listing as a heritage item has on same”.

  3. Seventhly, Mr Robertson referred to the rents applicable to a number of nearby premises and identified the similarities and differences between those premises and the subject premises, and between the terms of their leases and the subject lease. He did not refer in this context to the fitout of the subject or any other premises, or refer to any minimum spend obligation in the subject or any other lease.

The judgment at first instance

  1. The primary judge identified the relevant issues and made findings as follows:

“7   These proceedings raise two questions:

(1)   In determining the current market rent for the Premises did Mr Robertson comply with the Lease by ‘disregarding … the value of the … fitout’? If he did, the Lessor and Lessee accept that they are bound by the Determination.

(2)   If the answer to question (1) is ‘no’, is it Mr Robertson who is required under the Lease to make a fresh determination of the market rent or does a new valuer have to be nominated to undertake the task?

8   The answers to these questions are:

(1)   Yes.

(2)   Does not arise. If it did arise, the Court would have directed the parties to restart the mechanism under the Lease with the nomination of a valuer by the President of the NSW Division of the Australian Property Institute on the express basis that it was solely a matter for the President whether he or she nominated Mr Robertson again or somebody else.”

  1. His Honour summarised his reasoning as follows:

“31   The parties’ submissions all grappled with the fundamental question of the relationship, if any, between ‘fitout’ and ‘Fitout Work’. The Lessor’s arguments depend upon the Court accepting that ‘fitout’ is at least included within, if not coextensive with, ‘Fitout Work’. The Lessee’s arguments depend upon the Court accepting either that “fitout” is different from the obligation in Cl. 28.5.3 to spend money on the ‘Fitout Work’ or that ‘fitout’ does not become part of ‘Fitout Work’ until it is completed.

32   The answer to what I have just referred to as the fundamental question is to be found by ascertaining what a reasonable business person would have understood those terms to mean (see paragraph [12] above). This requires consideration of the language used by the parties, the surrounding circumstances known to them (not applicable in this case – see paragraph [13] above) and the commercial purpose or objects of the Lease. The answer should produce a commercial result and avoid commercial nonsense or inconvenience.

33   Applying the approach set out in the preceding paragraph and substantially, but not identically, for the reasons advanced on behalf of the Lessee, the Court finds that the Determination complies with the Lease so that the Lessor and Lessee are bound by the Determination. For the reasons which follow, the Court’s conclusions may be summarised as:

(1)   ‘Fitout Work’ is distinct from ‘fitout’ with the latter being the product of the former. To take into account an obligation about ‘Fitout Work’ did not involve taking into account anything about ‘fitout’.

(2)   Even if, contrary to the preceding sub-paragraph, ‘fitout’ falls within ‘Fitout Work’, the ‘value of the … fitout’ means the monetary value of that fitout and is distinct from the obligation under the Lease to expend at least $1,000,000 on the ‘Fitout Work’. To take that obligation into account was not to take into account the ‘value of the … fitout’.

(3)   Mr Robertson was obliged to take into account the provisions of the Lease. This included the obligation to undertake the ‘Fitout Work’ with a minimum expenditure of $1,000,000 and Mr Robertson was correct to have taken that obligation expressly into account on either of the constructions set out in the preceding sub-paragraphs.

(4)   Furthermore, Mr Robertson disregarded (i.e. left out of consideration) the ‘value of the … fitout’ however defined because, while he does not expressly say that he disregarded it, a fair reading of the entire Determination, in particular the absence of reference to any such value in dollar terms or identification of what the fitout comprised, supports the conclusion that he disregarded it.”

  1. The primary judge later gave an alternative reason why he considered that Mr Robertson did not contravene the instruction in the Base Rent criteria to disregard the value of “The Tenant’s Fixtures or fit out”. His Honour said that because the minimum spend requirement related to expenditure, being a different concept to value, Mr Robertson did not contravene the relevant instruction by taking it into account as “value” is the only relevant concern of the Base Rent criteria (Judgment [65]).

  2. His Honour further held that even if the words “fitout” in the Base Rent criteria and the concept of “Fitout Work” in Clause 28 of the lease overlapped, Mr Robertson in fact disregarded the value of that “Fitout Work” (Judgment [67]). His Honour regarded that as evident from a number of matters, principally the absence of a statement by Mr Robertson that he took that value into account and the likelihood of him saying that if he had done so (ibid).

  3. The primary judge then stated that had he concluded that Mr Robertson’s determination was invalid, he would have directed that the parties restart the process under Clause 5.5 for resolution of the dispute concerning the current market rent. His Honour also would have directed that a copy of the Court’s judgment be provided to the President of the NSW Division of the Australian Property Institute at the time that the parties sought his or her nomination of a valuer and that another copy be provided to the valuer once appointed (Judgment [83]).

  4. Mr Robertson in a letter dated 18 August 2014, expressed what the Lessor submitted to the primary judge was “a steadiness of mind and firmness of position” in refusing to amend his valuation of the current market rent. Despite this, his Honour did not consider that there were sufficient reasons to direct that Mr Robertson should not undertake any new valuation. Indeed, his Honour said that had it been necessary he would have gone further and directed that the Lessor not raise the concerns it expressed in relation to Mr Robertson’s position with the President (Judgment [87]).

ISSUES ON APPEAL

  1. The Lessor’s Amended Notice of Appeal asserted that the primary judge erred in finding that “to take into account an obligation about ‘Fitout Work’ [Clause 28] did not involve taking anything into account about ‘fitout’ [Clause 5.9]” and in finding that, in conformity with Clause 5.9(a), Mr Robertson in fact disregarded the value of the “fitout”.

  2. The Lessee’s Notice of Contention sought to support the primary judge’s decision on a basis additional to that upon which his Honour had relied. Further, by its Amended Notice of Cross-Appeal, the Lessee challenged the orders that the primary judge would have made had he found in the Lessor’s favour (see [23] above). The appropriate vehicle for this challenge was however a Notice of Contention rather than a cross-appeal because the proposed orders were not in fact made and accordingly could not be challenged.

  3. The Lessee’s Amended Notice of Cross-Appeal made it clear that the Court would only need to determine the cross-appeal if the appeal succeeded.

DETERMINATION OF THE APPEAL

  1. Oral argument on the appeal considerably simplified and clarified the parties’ positions.

  2. The Lessor confined its complaint to the contention that Mr Robertson did not obey the injunction in Clause 5.9(a) of the Lease to disregard “the Tenant’s Fixtures or fitout”. It did not assert that Mr Robertson was not entitled to have regard, as he did, to the minimum spend requirement in Clause 28. It said however that his doing so suggested, in the absence of a statement by him to the contrary, that to this extent he took into account “the Tenant’s Fixtures or fitout” in contravention of Clause 5.9(a).

  3. The Lessee sought to support the primary judge’s decision on the following alternative bases:

  1. Mr Robertson’s taking into account of the minimum spend requirement under Clause 28 did not indicate that he contravened Clause 5.9(a) by failing to disregard the value of “the Tenant’s Fixtures or fitout”. That expression referred to fixtures and fittings existing at the Market Review Date (1 June 2014) whereas Clause 28 referred to “Fitout Work” to be performed in the future, after the commencement of the new lease, that is, after the Market Review Date.

  2. Even if Clause 5.9(a) extended to the value of future “Tenant’s fixtures or fitout”, Mr Robertson’s taking account of the minimum spend in Clause 28 did not indicate that he must have taken account of the value of the fixtures or fitout that would exist when that requirement was fulfilled, as distinct from the Lessee’s obligation to spend at least $1 million on fitout.

  1. For the following reasons, I consider that both of these arguments are correct and that the Lessor’s contention that Mr Robertson contravened the injunction in Clause 5.9(a) should be rejected and that the appeal be dismissed.

  2. As to the first argument, there is nothing in the terms of Clause 5.9(a), or elsewhere, to suggest that the reference to “the Tenant’s Fixtures or fitout” includes a reference not only to the condition of the premises at the relevant date (1 June 2014) but also to work that was likely to be carried out in the future pursuant to Clause 28. Clause 5.9 expressly refers to the premises’ market rent at a particular point in time and the language of the phrase “the Tenant’s Fixtures or fitout” plainly refers to the property’s physical condition at that time. There is nothing to indicate the contrary. Moreover, the different language used in Clause 28 concerning work to be performed in the future (“Fitout Work”) supports the view that it is not within the different term “fitout” used in Clause 5.9(a).

  3. In light of this clear language, it is unnecessary to speculate as to why the parties provided in the lease as they did. Nevertheless, the presence of Clause 5.9(a), as I have construed it, is consistent with the following description of the purpose of provisions of this type given by Muir J in Vesco Nominees Pty Ltd v Stefan Hair Fashions Pty Ltd [2001] QSC 169; Q Conv R 54-555 (cited with approval in Serene Hotels Pty Ltd v Epping Hotels Pty Ltd [2015] VSCA 228 at [9]-[11]):

“46   The purpose of s 29(b) in excluding ‘the lessee’s fixtures and fittings’ from consideration in the determination of market rent is to prevent perceived unfairness which could flow from the rent being increased to take into account the enhanced value of the demised premises and the benefit to the lessee resulting from the lessee’s own expenditure on items for the improvement of its business.”

  1. In this case, the lease provided for only one review of market rent, to be calculated on the first day of the new lease (1 June 2014). The initial lease provided, in respect of the period between 2004 and 2014, for the Lessee to spend a minimum of $1 million on fitout and Mr Robertson’s Report referred to the requirement in the initial lease having been fulfilled (see [13] above). Accordingly, when the terms of the initial lease (and therefore also the terms of the renewed lease to be applicable if that option was exercised) were formulated, the parties would have expected the Lessee to have spent at least $1 million on fitout by the Market Review Date. As a result, there was the potential for “perceived unfairness”, for the reason given by Muir J, unless the lease included a direction to disregard the value of any fitout when assessing market rent. The direction thus had a sensible operation in relation to the value of the “Tenant’s Fixtures or fitout” as it existed as at the Market Review Date. The existence of that objectively ascertainable and sensible purpose is fatal to any attempt to have the Court depart from the clear words of Clause 5.9.

  2. This acceptance of the Lessee’s first argument is sufficient to warrant dismissal of the appeal. I nevertheless turn now to consider its alternative argument.

  3. On appeal, the Lessor accepted that Mr Robertson was required to have regard to the terms and conditions of the lease as expressly provided for by Clause 5.9(g). As Clause 28 contained terms and conditions of the lease, the Lessor had to accept, on appeal, that Mr Robertson was entitled to take Clause 28 into account. The Lessor however submitted that, in the absence of an express statement to the contrary, the Court should infer that Mr Robertson took into account not only the minimum fitout spend obligation but also, contrary to the terms of Clause 5.9(a), the value of the work that the fulfilment of that obligation would produce. The Lessor thus submitted that it should be inferred that Mr Robertson referred to the minimum spend obligation for the purpose of identifying the value of future fitout work to be taken into account in determining the current market rent.

  4. As it is the Lessor that is asserting that Mr Robertson’s determination did not conform with the lease, the onus is on it to establish that fact by demonstrating that Mr Robertson failed to disregard “the value of the Tenant’s Fixtures or fitout”. In these circumstances, the inference that the Lessor advances should not be drawn if there is an at least equally open inference available as to Mr Robertson’s purpose in referring to the minimum spend obligation. Senior counsel for the Lessee submitted that it could be inferred that Mr Robertson had such a purpose, namely, to take account of the real possibility that a hypothetical prospective tenant might consider that a minimum spend requirement of $1 million could adversely restrict its commercial discretion as to how much to spend on fitting out the premises and, consequently, how much rent it was prepared to pay for the premises in light of that requirement in the lease.

  5. Both common sense and Mr Robertson’s reference to Clause 28.5.3 being “a critical condition that I have considered in this rent determination, as most leases are not definitive i.e. minimum fitout costs” (see [15] above) support this submission. Mr Robertson’s comment seems to suggest that he saw the relevance of the requirement as that identified by the Lessee’s senior counsel. The comment does not sit comfortably with the Lessor’s contention that Mr Robertson referred to the requirement for the purpose of identifying the value of the future fitout work which he intended to take into account in assessing the market rent of the premises as at 1 June 2014.

  6. For these reasons, even if, contrary to my view, the Lessee’s first argument is not correct, its second argument is and for that reason the appeal should be dismissed.

  7. In these circumstances, it is unnecessary to deal in any detail with the orders that would have been made if the appeal had succeeded, particularly because both parties agreed that in that event the process under Clause 5.5 for appointing an expert to determine the current annual market rent would have to be restarted. The parties disagreed as to whether the Court should, or indeed could, in these circumstances give directions as to whether Mr Robertson could be reappointed as the valuer and what material should or could be provided to the Institute President and the valuer.

  8. There is little doubt that the lease contains an implied term that any valuer appointed under it will be an impartial person who is able to conduct the market rent valuation with an open mind. Whether Mr Robertson meets this criterion is a matter for the relevant President to consider when deciding who to appoint, and possibly a matter for a court to consider thereafter in the event that the President reappoints Mr Robertson and his reappointment is challenged.

  9. Furthermore, I do not see it as this Court’s function to decide in the present proceedings what material should or should not be submitted to the President and, after appointment, to the valuer. Those are matters to be determined by the terms of the lease. So far as the President is concerned, the lease does not in terms impose any limit on what can be submitted but there may be an implied term that could restrict the extent of the parties’ communications with him or her. On the other hand, the lease gives greater guidance in relation to the valuer. In the valuer’s case, the material that the parties may submit is arguably limited to the written submissions referred to in Clause 5.9(j).

ORDERS

  1. For the reasons I have given, the appeal should be dismissed with costs. The Amended Notice of Cross-Appeal was in reality, or at least should have been, a Notice of Contention rather than an Amended Notice of Cross-Appeal. Neither this Notice nor the Notice of Contention that was in fact filed was the subject of significant attention in these proceedings and neither provides a basis for depriving the Lessee of any of its costs of the proceedings. Accordingly, I propose that the Court make the following orders:

  1. Appeal dismissed.

  2. Cross-appeal dismissed.

  3. Order that the appellant pay the respondent’s costs of the appeal and cross-appeal.

  1. MEAGHER JA: I agree with Macfarlan JA.

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Amendments

09 December 2015 - Corrections to [29] and [32]

09 December 2015 - corrected numbering of paragraphs from [7] to [44]

Decision last updated: 09 December 2015

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