Alex Constructions Pty Ltd v Gabriella Fedeli and Domenico Santapadre

[2014] NSWCATCD 217

Civil and Administrative Tribunal

New South Wales

Medium Neutral Citation:	Alex Constructions Pty Ltd v Gabriella Fedeli and Domenico Santapadre [2014] NSWCATCD 217
Hearing dates:	2 October 2014 on the papers
Decision date:	28 October 2014
Jurisdiction:	Consumer and Commercial Division
Before:	D Bluth, Senior Member
Decision:	The rent is increased annually by Method 2 being by increase in accordance with the Consumer Price Index (CPI).
Catchwords:	Renewal of lease, rent review void pursuant to section 18(3)(c) of the Retail Leases Act
Legislation Cited:	Real Property Act 1900 Retail Leases Act 1974
Cases Cited:	Connor Hunter [A Firm] v Keencrest Pty Ltd (2009) QCA 156 Menuko Pty Ltd v Tinine Group Pty Ltd [2007] NSWADT 149
Category:	Principal judgment
Parties:	Alex Constructions Pty Ltd (applicant) Gabriella Fideli and Domenico Santopadre (respondent)
Representation:	Solicitors: ALC Legal (applicant) Giles Payne & Co (respondent)
File Number(s):	COM 14/08480
Publication restriction:	Nil

REASONS FOR DECISION

1. This matter relates to a dispute between a tenant and landlord regarding the application of rent reviews within the lease.

2. The hearing was on the papers with submissions from the parties. ALC Legal appeared on behalf of the landlord Alex Constructions Pty Limited (the lessor) and Giles Payne & Co appeared on behalf of the tenant Gabriella Fedeli and Domenico Santapadre (the Lessee).

History of the matter

3. The Lessor is the owner of a building at 496 Bourke Street, Surry Hills and leased the locked up Shop (the premises) to the Lessee commencing on 1 November 2003 for a five year term with an option to renew for a further five years. That lease was renewed by a further lease of five years commencing on 1 November 2008 with two options of five years [the Lease].

4. The commencing rent under the Lease was $64,680.00 plus GST. The permitted use is a restaurant. It is a retail lease under the Retail Leases Act 1994 (RL Act).

Rent Reviews pursuant to The Lease

5. The Lease is under to the Real Property Act 1900 and utilises the form produced by the Law Society of New South Wales.

6. The commencing rent as noted previously is $64,680.00 plus GST per annum payable by monthly instalments. The rent review is stated at item 15 of the Schedule of Items in Annexure A referencing clause 5.4 of the Lease and states:

Item 15 Rent review

Rent review date Method of rent review If Method 1 applies, increase by November 1, 2009

Method 1 & 2 (the increase should show a Percentage or amount)

Anniversary date increases annually by the

greater of 3% and movements in the CPI.

Method 1 & 2

Method 1 is a fixed amount or percentage

Method 2 is a Consumer Price Index

Method 3 is current market rent

Method 2 applies unless another method is stated.

7. Clauses in the Lease that are relevant are clauses 5.4-5.6 of Annexure B:

When and how is the rent to be reviewed?

5.4   The rent is to be reviewed on the rent review date stated in item 15 of the schedule. If this lease is extended by legislation, the rent review dates include each anniversary of the latest rent review date stated in item 15 in the schedule (or if none is stated each anniversary of the commencement date which falls during the extension.

5.5   The tenant must continue to pay rent at the old rate until the new rate is known. After that, the tenant is to pay the new rent from the next rent day. By that rent day the tenant is also to pay any shortfall between the old and new rate for the period since the rent review date. Alternatively, the landlord is to refund to the tenant any overpayment of rent.

5.6   There are three different methods described here for fixing the new rent on a rent review date. The method agreed by the landlord and the tenant is stated at item 15 in the schedule. The tenant is entitled to a reduction if the method produces a rent lower than the rent current just before the review date.

The Retail Leases Act, 1994

8. Sections 18(3) and (4) of the RL Act state:

(3)   A provision of a retail shop lease is void to the extent that it:

(a)   reserves or has the effect of reserving to one party a discretion as to which of 2 or more methods of calculating a change to base rent is to apply on a particular occasion of a change to that rent, or

(b)   …, or

(c)   provides for base rent to change on a particular occasion in accordance whichever of 2 or more methods of calculating a change would result in a higher or highest rent.

(4)   If a retail shop lease provides for a change to base rent in a way that has the potential to cause that rent to decrease (such as a provision for the rent to change to current market rent), a provision of the lease is void to the extent that it:

(a)   prevent or enable the lessor or any other person to prevent base rent decreasing pursuant to the change, or

(b)   limit or specify, or allow the limitation or specification of, the amount by which the base rent is to decrease.

9. Section 7 of the RL Act states:

This Act operates despite the provisions of a lease. A provision of a lease is void to the extent that the provision is inconsistent with a provision of this Act. A provision of any agreement or arrangement between the parties to a lease is void to the extent that the provision would be void if it were in the lease.

10. In Menuko Pty Ltd v Tinine Group Pty Ltd [2007] NSWADT 149 Judicial Member Higgins stated at [14]:

Where a retail lease contains provisions that are inconsistent with the provisions of the Retail Leases Act, which includes the above sections, then the provisions of the lease are void to the extent of the inconsistencies: see s7.

11. The dispute between the parties concerns the interpretation of the words in s7 a provision of a lease is void to the extent that the provision is inconsistent with a provision of this Act and how do they apply to this Lease.

Submissions from the parties

12. The submission on behalf of the Lessee is that in accordance with the clear wording of s 18(3)(c) and the terms of the rent review in item 15 as the rent is to increase annually by the greater of 3% and movements in the CPI, this provision is rendered void by s 7 because the Lessor has reserved to itself the higher of two methods of rent review. Therefore, the whole of item 15 must fail and the consequence is that all rent increases under the Lease are invalid and the Lessee seeks a refund of the overpaid rent.

13. The Lessee also submits that it is a requirement of s 18 (4) that the base rent must be capable of decreasing under any rent review clause. According to the Lessee on the clear wording of the clauses in the Lease the base rent is not capable of decreasing but only increasing. This is because by either method, of CPI or fixed increase of 3% the rent will always rise (subject to any negative application of CPI).

14. The contrary submission on behalf of the Lessor is that on its proper construction s 18 operates only to make void the stipulated effects cited in s 18(3)(c) and there is nothing in the language of s 18 to support a construction that the intent of the section is to render those elements of the provision in the Lease which do not offend the stipulated effects void.

15. The submission draws support from the decision in Menuko at [29]

there is no dispute that a retail lease which contains a clause providing for a rent review mechanism, with a ratchet provision, and which is applicable during the currency of the initial term of the Lease, that clause so far as it contains the ratchet provision is void by reason of s18.

16. Further support for the proposition that only certain parts and not the whole of item 15 are struck down, comes from Connor Hunter [A Firm] v Keencrest Pty Ltd & Ors [2009] QCA 156, a decision of the Queensland Court of Appeal. Chesterman JA at [74] stated:

The inconsistency can be removed, in accordance with s20 [NSW s7] if the provisos are avoided. That is the extent necessary to remove the inconsistency. The clauses would be left with one basis only for adjusting rent and would not offend the Act (Retail Shop Leases, Act 1994). The rent reviews that have occurred would be unaffected.

17. Both in Menuko and Connor Hunter reference was made to the policy considerations from the respective New South Wales and Queensland governments supporting the introduction of retail lease legislation. Both cases referred to the Second Reading Speeches respectively. In Menuko at (28):

In this case the purpose and object of the RL Act is to make provision for good leasing practices in the retail industry of New South Wales so that there is more equitable bargaining position between the parties to the lease and to provide for a cost-effective and timely resolution to disputes. See Second Reading Speech of Retail Leases Amendment Bill 1998. Its objective is not to protect tenants from trading difficulties or diminishing the rights of property owners.

18. Chesterman JA in Connor Hunter also sought assistance from the policy considerations at [53]:

If one looks at the Explanatory Note and/or the Ministerial speech to discern the legislative purpose for which the Act was passed, one discovers only that it intended to redress the 'inbalance in market power' between lessors and lessees and to prohibit 'ratchet' and 'multiple rent review' clauses. An examination of the extrinsic materials will not reveal what a 'ratchet' clause is, or how the provisions of the Bill (or the Act) were meant to invalidate them. The learned judge appears to have thought that the statement that the Bill aims to prohibit such clauses 'indicates that an unqualified prohibition of clauses which allow rent to rise but not fall was intended'.

19. However, notwithstanding the similarities in the policy considerations of both NSW and Queensland, the subsequent legislation passed by each State produced diametrically opposite results. In Menuko the Tribunal found that a clause to the effect that:

'The rent for the first year of the lease for a further term should not be less than the rent in the last year of the initial term increased by the fraction contained…..

was void pursuant to s 18(4) of the RL Act and therefore should be excised from the Lease.

20. Sections 36(d) and (e) of the Retail Shop Leases Act 1994 (Qld) mirrors s 18(3) of the RL Act NSW.

Section 36: Certain rent review provisions of leases void

A provision of a retail shop lease is void to the extent that it -

(d)   reserves or has the effect of reserving, to a party a discretion to apply 1 of 2 or more methods of calculating the rent of the leased shop on a particular review of the rent; or

(e)   provides for the rent of the leased shop to change on a particular review of the rent in accordance with whichever of 2 or more methods of calculating the change would result in the higher rent.

21. There is no equivalent section in the Queensland Act to s 18 (4) of RL Act. Consequently, the Court struggled with interpreting the Queensland Act in light of the policy endeavours to prohibit ratchet clauses as identified by Chesterman JA in paragraph 18 of these Reasons The Court of Appeal held that a clause 'provided always that the yearly rental determined as aforesaid may in no case be less than 100% of the yearly rental payable for the preceding Rental Year was not invalid, because there was no specific prohibition within the Queensland Act to prohibit a clause preventing the rent on a rent review falling, such as a ratchet clause.

22. It is worth noting that after the decision in Connor Hunter, the Retail Shop Leases Act (Qld) 1994 was amended to include a new clause, s 36A specifically mentioning ratchet provisions.

Section 36A Ratchet rent provision void

1   Subsection (2) applies if a retail shop lease provides a basis for rent review under which the rent may be varied, including by a decrease, but the lease includes a ratchet rent provision.

2.   The ratchet rent provision is void.

3.   In this section-

ratchet rent provision means any provision of a retail shop lease to the extent that it-

(a)   prevents, or enables the lessor or another person to prevent, the rent decreasing under a rent review; or

(b)   limits or specifies, or allows the limitation or specification of, the amount by which the rent may decrease under a rent review; or

(c)   prevents, or allows the avoidance of, the rent review by the lessor or another person for a purpose mentioned in paragraph (a) or (b).

Analysis of the submissions

23. The Lessor in accordance with the decision in Menuko and the consideration in Connor Hunter submits that the offending words to be removed from item 15 are the following words by the greater of 3%. Consequently, the remaining words in Item 15 leave rent reviews by CPI. The position the Lessor wishes this Tribunal to arrive at is that the rent review is undertaken in accordance with the movement in CPI and to ignore the alternate method of a fixed review at 3%.

24. However, the submission does not explain why it is specifically these words that should be removed as offending s 18(3)(c). Why not perhaps the words the greater of and movements in the CPI that should be removed and leave rent reviews at 3% annually? The submission deals with severability as supported by Menuko and Connor Hunter but does not say as to why one part of item 15 should be severed instead of the other part? The movement in the CPI may in fact be greater than 3%, so why should that method be chosen to remain and the fixed review be the offending part and the excised out? A mathematical calculation over the period whether CPI was less or more than 3% annually should not be determinative of the issue as to which words are to be excised. The submission from the Lessor, when closely examined is that the word "greater" be changed to the word "lesser" assuming CPI is less than 3% annually. Although the submission was not phrased this way, in essence that is the submission. Such submission invites rectification of the Lease. However as will be discussed, it is not necessary to deal with that aspect.

25. The submission from the Lessee is that the rent review terms in item 15 are void and therefore the words in item 15 as a whole must be deleted because the whole offends not only s 18(3) but also s 18(4) because rent will never fall. The submission from the Lessor is that only the actual words are to be excised and the balance of the words remain. The curious aspect of the submission from the lessor is that it is based on a choice, that is which words are to be excised is in fact a choice, bearing in mind choice is what is prohibited by ss 18(3)(a) and (c).

26. The Tribunal having considered the submissions is of the view that the offending words are Method 1 & 2 and increases annually by the greater of 3% and movements in the CPI Method 1 & 2. Whichever way the words are viewed, there appears to be a choice between the methods of rent review which is specifically prohibited by ss 18(3) and (c) and subsequently void. The words increases annually could remain but they are meaningless by themselves.

Resolution

27. Having excised these words then no rent review is mentioned in item 15. However, both submissions overlook the latter words in item 15 . These words are:

Method 1 is a fixed amount of percentage

Method 2 is Consumer Price Index

Method 3 is current market rent

Method 2 applies unless another method is stated.

None of these words offend s 18(3) nor s 18(4) and therefore do not need to be removed. The Tribunal notes Clause 5.6 of the Lease which states that in respect of a rent review the method agreed by the landlord and the tenant is stated at item 15 of the schedule.

28. As a result of the operation of ss s 7 and 18(3)(c) certain offending words are excised from item 15 being the words referring to rent increase and the choice of two methods. Consequently, having removed Method 1 & 2 from item 15, then no method is stated. Therefore, in accordance with the latter words in item 15, Method 2 applies. When no method of rent review is mentioned, which is the position here because of the operation of s 18(3)(c) and s 7 requiring the nominated method of rent review to be excised as void, then by default, Method 2 is the appropriate rent review method as agreed by the parties in accordance with clause 5.6 of the Lease.

29. The submission from the Lessor that s 18(4) requires the rent on a rent review not to decrease is incorrect. In any event, the terms of s 18(4) are not relevant here. There is no ratchet provision in the Lease to offend s 18(4) and call upon s 7 to excise any words. A CPI change may be an increase or decrease. As a result of clause 5.6 of the Lease and the default provisions in item 15, Method 2 applies without qualification.

30. The Tribunal following the line of submission from the Lessor and Chesterman JA in Connor Hunter could have been more precise in finding void only the offending words in item 15. That would mean retaining the words under Method of rent review being Method 1 & 2. Strictly, pursuant to s 18(3) these words do not offend because the rent review is the accumulation of both methods not a choice of methods. The ampersand joining Method 1 and Method 2 means an addition of the two methods. There is no choice in selecting the higher of these two methods but rather the addition of a fixed increase of 3% plus CPI. Both methods are used together to achieve the rent review, for example a fixed review of 3% plus 1.1% CPI increase equating to a 4.1% rent increase for the first year Then each subsequent year would be calculated similarly depending of course on the CPI. However, this was not put in any submissions and consequently the Tribunal will not comment further on such an outcome.

Summary

31. The Tribunal finds that Method 2 being annual CPI increases in rent applies as no other method is stated in item 15 of the Lease, the current words having seen excised as they are void pursuant to s 18 (3) (c) of the RL Act.

D Bluth

Senior Member

Civil and Administrative Tribunal of New South Wales

28 October 2014

I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales.

Registrar

Decision last updated: 05 February 2015