Australian Leisure and Hospitality Group Ltd v Trust Company Fiduciary Services Ltd
[2009] VSC 574
•16 December 2009
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
List b
No. 2000 of 2008
| AUSTRALIAN LEISURE AND HOSPITALITY GROUP LIMITED ABN 37 067 391 511 | Plaintiff |
| v | |
| TRUST COMPANY FIDUCIARY SERVICES LIMITED ACN 000 000 993 | Defendant |
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JUDGE: | JUDD J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 10, 11 November 2009 | |
DATE OF JUDGMENT: | 16 December 2009 | |
CASE MAY BE CITED AS: | Australian Leisure and Hospitality Group Ltd v Trust Company Fiduciary Services Ltd | |
MEDIUM NEUTRAL CITATION: | [2009] VSC 574 | |
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Lease – Construction of terms – Development rights – requirement to explain and detail proposed use – Whether the development proposal required a response – Valuation methodology – Whether valuer must be agreed between the parties.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr. A. Myers QC Mr. P. Zappia | Gilbert & Tobin |
| For the Defendant | Mr. T. Bathurst QC Mr. N. Kidd | Allens Arthur Robinson |
HIS HONOUR:
In November 2003 Fosters Group Ltd divested its hotel operations. This was achieved by developing two investment proposals. The freehold interests in 105 hotel premises were transferred to the defendant, Trust Company Fiduciary Services Ltd,[1] as trustee of the ALE Direct Property Trust (ALE). The business operations of each hotel was carried on by the plaintiff, Australian Leisure and Hospitality Group Ltd (ALH), a wholly owned subsidiary of Fosters. At about the same time as members of the public were invited to subscribe for interests in the ALE Property Group, Fosters issued a prospectus, inviting investment in ALH shares.
[1]The defendant is trustee of the ALE Direct Property Trust, which is wholly owned by the ALE Property Trust. The defendant is also trustee of the ALE Property Trust. These entities, known as the ALE Property Group were open to subscription by members of the public through a prospectus. Australian Leisure and Entertainment Property Management Ltd is the Responsible Entity of the ALE Property Trust.
ALH had been granted long term leases by Carlton Brewery Hotels Pty Ltd. The initial term of each lease was 25 years with four options to renew for 10 years each. This case concerns the lease of the premises known as the Vale Hotel situated at 2277 Princes Highway, Mulgrave, Victoria. The lease is dated 4 November 2003.
The lease granted to ALH an exclusive right “to cause the Development of the Premises and retain the associated Proceeds… subject to the Landlord, the RE, the ALE Property Trust and the ALE Direct Property Trust being kept whole”.[2] The lease contemplated the preparation of a development proposal by ALH which would be submitted to ALE for approval. Approval or refusal was required within 20 business days. The lease contained mechanisms to arrive at financial adjustments between the parties consequent upon an Approved Development Proposal. The lease also contemplated that a development might involve sub-division of the premises and the transfer of land, defined as the “Balance Lot”, to ALH or its nominee. In such circumstances ALH had the right to purchase the Balance Lot for $1.
[2]Schedule 3, cl 2.1(a).
The consequential financial adjustments to be made between the parties took account of the Market Value of the Premises before and after development. Another adjustment was to the rent payable under the lease, which was varied to Market Rent. ALH might also be required to pay a “Make Whole Payment” in addition to other adjustments.
In late 2007 ALH submitted a development proposal to ALE which involved no more than the subdivision and transfer to ALH of the whole of Lot 2 on a plan of subdivision as a Balance Lot.[3] There were no existing buildings on the Balance Lot and the ALH proposal did not disclose any plans for its future use or development.
[3]The plan of sub-division PS508357B is attached A.
ALE contended that a necessary element of a development proposal which it was required to approve or refuse, was a proposal for development on the land and which identified the future use of the land. ALH submitted that there is no such requirement.
One consequence of the development proposal submitted by ALH, if approved, was a possible rent reduction. ALH had assessed Market Rent after transfer of the Balance Lot at $405,000 per annum, whereas the current rent was $495,269. It was suggested by ALE, through cross-examination, that the proposal was designed to achieve a reduction in rent by initiating an unscheduled adjustment to Market Rent.
Notwithstanding the scope of the pleadings, the parties agreed that the proceeding would yield greatest utility to them if the following four questions were answered. Once those questions were answered and reasons published, the parties agreed that they would seek an opportunity to consider the reasons before any consequential orders were made. The questions as formulated by the parties are as follows:
(1)Does the development right conferred upon [ALH] under cl 2.1(a) of Schedule 3 of the lease permit [ALH] to exercise and retain surplus land (a Balance Lot) without any proposed use or further development of the Balance Lot)?
(2)Does such a development come within cl 2.6 of Schedule 3 of the lease?
(3)What is the appropriate valuation methodology under the lease for determining the valuations referred to in cl 2.3(v)(C)(i) and (ii) of Schedule 3?
(4)Is it a requirement under the lease that the valuation accompanying a Final Development Proposal under cl 2.3(e)(v)(C) of Schedule 3 be provided by a “Valuer” as defined in cl 1 of Schedule 3?
The remaining issues between the parties, which related to the validity of conditions imposed by ALE, the circumstances in which a proposal might be refused and the scope of any “Make Whole Payment” were largely hypothetical in a context where ALE had refused to consider the proposal, contending that it was not a valid proposal under the lease.
The Lease
In order to fully understand the issues and the elaborate submissions of the parties it is necessary to set out at some length the relevant terms of the lease:
1. INTERPRETATION
1.1 Definitions
In this lease:
…
“Approval” means any permit, licence, consent, certificate, authority or other approval obtained or required to be obtained from an Authority in relation to the Premises or the Tenant’s Items but does not include a Liquor Licence or a Gaming Licence.
“Authority” means any government, statutory or other body or authority whether public or private which has authority, jurisdiction or rights over or relating to the Premises or the Tenant’s Items but does not include a Gaming Authority or Licensing Authority.
“Authorisation” means:
(a) all Approvals;
(b) any Liquor Licence held by the Tenant; and
(c) any Gaming Licence held by the Tenant,
…
“Premises” means:
(a) the Land; and
(b) the Building,
But expressly does not include all Authorisations (unless required by Law) or the business conducted by the Tenant from the Promises (including goodwill).
…
“Valuation Methodology” mean the principles for the determination of the Rent and value of assets set out in Schedule 1.
“Valuer” means a person who:
(a)at the time of appointment is a current full valuer member of the API of not less than 5 years’ standing;
(b)has been actively engaged in the commercial property market for the year before the relevant Rent Review Date;
(c)has at least 5 years’ experience in valuing the kind of premises the subject of this Lease;
(d)at all times during the currency of the appointment is not prohibited or restricted from making a determination; and
(e)agrees to accept the terms of appointment under this Lease.
Clause 4 set up the procedure and timing for each rent review and contemplated the appointment of a Valuer to determine the rent. The lease provided for annual rent reviews for the initial term limited to CPI, save that on the 15th anniversary of the commencement date the rent was to be adjusted to Market Rent determined by a Valuer with a cap and collar of 10%. Thereafter, at the commencement of each further term the Market Rent was to be ascertained by a Valuer and adjusted each year thereafter during the term by the CPI.
Under cl 4.11, a Valuer appointed under cl 4.3 was to be provided, confidentially, with the EBITDA figures for the business of the tenant conducted from the premises for the three previous financial years.
Clause 16 of the lease included a call option granted by the tenant to the landlord under which the landlord would elect to purchase the tenant’s plant and equipment, goodwill and current Authorisations. The call option could be exercised at any time during the period commencing 15 months prior to the lease expiry date and ending 12 months before that date, thus providing a three month window within which to exercise the options. In the absence of agreement any dispute over the consideration to be paid to ALH was to be determined by a Valuer appointed as an expert under cl 31.
Clause 22 of the lease required the tenant to hold a liquor licence. The landlord was expressly prohibited from doing anything to prejudice the licence. Under cl 23 a tenant may hold a gaming licence. Onerous obligations were imposed on the tenant in respect of any gaming licence and the landlord was prohibited from doing anything to prejudice the licence. In the event of termination of the lease the tenant was required to transfer the liquor and any gaming licence to ALE.
Schedule 1 of the lease prescribes the valuation methodology to be applied by a Valuer appointed under cl 4.3. The future development rights of ALH are regulated by Schedule 3, the relevant parts of which are set out in Attachment B.
Background Facts
On 22 December 2006 ALH submitted a development proposal to ALE. The proposal purported to be an Indicative Development Proposal for the landlord’s approval. The landlord might have approved or rejected such a proposal or imposed conditions. Mr Blair-Holt, director and chief operating officer of ALH, made it clear in his covering letter that the purpose of the proposal was the subdivision and works necessary to give effect to the subdivision. He expressed the view that “we believe that the proposal falls within the terms of cl 2.6 of Schedule 3”. Thus, from its very first formal communication, ALH disclosed the proposal’s characteristic which ALE now alleges makes it invalid.
On 8 January 2007 ALE sought additional time within which to respond and further information. It is apparent from the response that similar proposals had been advanced in respect of other hotel premises. ALE inquired of the proposed use of each Balance Lot. From that and other correspondence it appeared that at least for a time ALE misunderstood the letter of 22 December or perhaps formed the view that there was an undisclosed purpose.
On 9 January 2007 Mr Blair-Holt, responding to email communications from ALE said,
there are no current use proposals finalised for any of the Balance Lots and ALE have previously informed us that no requirement for the development on a Balanced Lot is necessary. However, any use will need (to) comply with the necessary requirements of the relevant authorities.
On 14 February 2007 ALE gave in principle approval for the proposal, subject to a number of conditions. The relevant conditions were details of proposed use, an agreement on the appointment of a Valuer and a satisfactory Final Development Proposal in accordance with cl 2.3 of Schedule 3. ALE required that the Final Development Proposal include details of the proposed use of the Balance Lots following subdivision and transfer to ALH and that the use be reasonably acceptable to it. ALE also required restrictive covenants to prohibit competing use or disposal to a competitor.
On 24 July 2007 ALH sent what it described as a Final Development Proposal to ALE under cover of a letter from Mr Blair-Holt. The proposal, purportedly made pursuant to cl 2.3 of Schedule 3, made it clear that there was no current proposal for development following subdivision and transfer of the Balance Lot. The proposal also dealt with financial adjustments, calculating the amount to be paid pursuant to cl 2.7(b)(i) at $1.4m, representing the difference in Market Value before and after development. There was also an adjustment in rent under cl 2.7(b)(ii).
The proposal included a copy of a valuation report by Lunney Watts & Associates dated 19 July 2007. The valuer, Mr Lunney, had not been appointed by agreement between the parties.
On 31 July 2007 ALE responded, complaining that the proposal did not comply with cl 2.3 of Schedule 3. The “most obvious issue” identified by ALE was that the valuation required as part of a Final Development Proposal must be prepared by a Valuer appointed by agreement between the parties. Accordingly, ALE advised, the 20 business day period for its response had not commenced.
ALH rejected the contention that its proposal did not comply with cl 2.3 of Schedule 3, asserting that the 20 business days for a response under cl 2.4 had commenced from the date of lodgement.
In addition to ALE’s objection to the unilateral appointment of Mr Lunney to undertake valuations for the purpose of the proposal, they took issue with his methodology. His methodology proceeded on the following basis:
(a)The valuation required by cl 2.3(e)(v)(C) of Schedule 3 of the lease did not require a Valuation as defined in Schedule 3 by a Valuer.
(b)When undertaking his valuation of the Premises Mr Lunney excluded the value attaching to all Authorisations, being the liquor licence, and the gaming licence from the business conducted by ALH from the premises.
(c)Having excluded the licences, Mr Lunney concluded that the premises could only be valued, on the basis of its “highest and best” use, as a “potential hotel”, not as a going concern.
Adopting his methodology, Mr Lunney arrived at a Market Value of the premises before subdivision of $7.6m by applying a capitalisation rate of 6.5% to the existing rent. Having assessed Market Rent after the subdivision at $405,000 per annum, he applied the same capitalisation rate to achieve a valuation of the premises after subdivision of $6.2m. Mr Lunney gave evidence on behalf of ALH.
ALE engaged its own valuer, Mr Close, who also gave evidence. He assessed the pre-development Market Value of the premises at $10m; the Market Rent after development at $738,396 per annum and the Market Value of the premises after development at $12,300,000. There was a material difference in methodology. Mr Close assessed the market rental for the hotel based upon the business as a going concern, thus capturing income attributable to the exploitation of the liquor and gaming licences.
Questions 1 and 2 - Development and Use
ALE submitted that on a proper construction of Schedule 3 a mere subdivision of the land to create a Balance Lot followed by a transfer to ALH was not a “Development” for the purpose of the lease. The parties called in aid extrinsic material to explain the background to the lease. The material included the ALE Notes Prospectus, under which investors were invited to participate in the ALE Property Trust (which was to acquire the hotel freeholds from Fosters through the sub-trust, ALE Direct Property Trust); the Relationship Deed;[4] the Fosters Group Prospectus, inviting investment in shares in ALH; and the Implementation Deed.[5] These documents were used to provide evidence of surrounding circumstances known to the parties to form a proper understanding of the purpose and object of the transaction between them.
[4]Made between ALH, ALE and the Responsible Entity, dated 5 November 2003.
[5]Made between Fosters Group Ltd, ALH and the Responsible Entity, dated September 2003.
The Relationship Deed forms part of the agreement between the parties to be read with the lease. The prospectuses and the Implementation Deed, while providing some background were of limited assistance. The Implementation Deed recorded the agreement of the parties to implement a series of transactions designed to achieve the divestment, including the grant of leases to ALH. It was concerned with the obligation of the parties to procure that certain steps to be undertaken. It does not assist the interpretation of the lease.
The prospectuses are, by their nature, regulated marketing documents. They are designed for a purpose other than recording the agreement between the parties which is fully reflected in the Lease and the Relationship Deed. Insofar as a prospectus purports to explain the operation of a lease or the Relationship Deed it is no more than the author’s attempt to interpret the effect of the documents.
The purpose and object of the transaction is discernable from the lease and Relationship Deed. The prospectuses do, however, provide information concerning the scale of the divestment and the anticipated economic consequence of the different investment opportunities offered by Fosters Group in the freehold interests and businesses. The general terms of the lease for the Vale Hotel are said to be common to all leases.
By reference to the Fosters Group prospectus, there can be no doubt that Fosters contemplated that there was potential for further site utilisation and development by ALH to the exclusion of ALE. The terms of the lease make that clear. Nor can it be doubted that the relationship between the parties to the lease was unusual if viewed in isolation from the grand scheme. By way of example, ALH, as lessee, was permitted under the Relationship Deed to “transfer Gaming Rights for use among the Properties with the Portfolio”. This power indicates an intention that such rights may, at the option of ALH, be redeployed, if permitted by law, from one premises to another. The consequence to any one hotel business and income may be significant, although the overall benefit to ALE and ALH may not be diminished or may even be enhanced. The consequence of such an unusual feature goes to emphasise the importance attaching to the separation of the freehold from the ownership of gaming rights which, with liquor licences, were emphatically expressed to be owned by ALH.
The applicable principles of construction are well understood. The agreement must be construed as a whole. The lease forms part of a complex relationship between ALE and ALH involving 104 similar leases and the Relationship Deed. When construing the terms of the lease the court should consider what a reasonable person would understand by the language of the lease, having regard to the text of the document as a whole, the surrounding circumstances known to the parties and the purpose and object of the transaction.[6] The court should have regard to all the words used in the agreement “so as to render them all harmonious with one another”[7] and to ensure the “congruent operation of the various components as a whole”.[8] Commercial agreements should be given a commercially sensible construction.[9] A common sense non-technical approach is to be adopted in the construction of commercial contracts. There is a presumption that the parties do not intend the agreement to achieve an unreasonable outcome.
[6]Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 462; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 179;
[7]Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, Gibbs J at 109; Allstate Exploration NL v QBE [2008] VSCA 148 at [7]
[8]Wilkie v Gordian Runoff Ltd, supra; Allstate Exploration NL v QBE, supra.
[9]MLW Technology Pty Ltd v May [2005] VSCA 29 at [76] – [81]; Idya Pty Ltd v Anastasiou [2008] NSWCA 102 at [45]-[49]; Wilkie v Gordian Runoff Ltd & Anor (2005) 221 CLR 522, 528-9
ALH submitted that the scheme of the lease was to confer exclusive development rights on the tenant and to ensure that, subject to stipulated compensatory payments, the tenant retained the benefit of any development. In order to give effect to that intention, the widest possible meaning should be attributed to the word “Development” so as to include a subdivision without any enhancement of the land. ALH submitted that the compensation scheme worked just as well when there was a bare subdivision as when further enhancement was involved.
In addition to invoking the broader commercial context (which was said to recognise an overarching intention to confer upon ALH the exclusive right to benefit from subdivision and even sale of excess land) ALH submitted that cl 2.3 of Schedule 3 acknowledged that there may be circumstances in which a Balance Lot may be the subject of a Proposed Development in the absence of any details of proposed use.
Clause 2.3 of Schedule 3 provides that a Final Development Proposal must provide specified information and address specified issues. Paragraphs (g), (h) and (i) mention the Balance Lot. They provide,
(g) If applicable, identify the Balance Lot.
(h)If applicable, provide details of the proposed use of the proposed development on the Balance Lot following subdivision and transfer to the Tenant or its nominee.
(i)If applicable, identify restrictive covenants, easements and other rights which will burden and benefit the Balance Lot and the Premises following the subdivision of the relevant Premises.
ALH submitted that those paragraphs should be read as if to acknowledge that a proposed use need only be described if it exists. That is, if applicable. ALE submitted that (h) should be read as follows,
If there is proposed to be a Balance Lot, provide details of the proposed use of the proposed development on the Balanced Lot following the subdivision and transfer to the tenant or its nominee.
ALE contends for a similar construction in relation to paragraph (i).
There was a time when ALE shared ALH’s interpretation of its right to submit a development proposal that “sees a Balance Lot carved off and resets the future rent to a Market”. ALE no longer holds that view and submitted that the lease, in terms, makes it plain that what is contemplated by a Development is more than a mere subdivision. If ALE is correct, the proposal submitted by ALH on 24 July 2007 is not one to which ALE is obliged to respond under clause 2.4 of Schedule 3.
The criteria set out in cl 2.3 of Schedule 3 for a Final Development Proposal provide the framework within which a proposal is to be prepared and submitted to the landlord for its response. Some criteria assume enhancement of land beyond subdivision. Paragraph (b) specifies the identification of airspace required, although that may be minimal if the proposed development was, for example, a car park. Paragraph (c) requires a description of the scope of the proposed Works, which means the construction and any other works undertaken pursuant to a Development. Paragraph (d) requires a description of approvals required for the Proposed Development. Approvals includes the plan of subdivision or any associated documents. Paragraph (e) requires a feasibility study which includes the estimated value of the building and improvements, plans, an estimation of construction costs, a report by a quantity surveyor and an indicative timetable for the Works.
An important feature of any proposal involving the subdivision of the land and the transfer of a Balance Lot is the opportunity the landlord has to consider what “covenants, easements and other rights which will burden and benefit the Balance Lot and the Premises following subdivision of the relevant Premises”. This is apparent from cl 2.3(i) and 2.6(d).
An issue arose on the pleadings as to whether the covenants proposed by ALE as a condition in response to the Indicative Development Proposal were reasonable. I am not now asked to decide that issue. Covenants remain a significant issue, however, because in the absence of an identified future use of the land, ALE is deprived of an informed and meaningful opportunity to decide what, if any, covenants are appropriate to protect its legitimate interests.
ALE submitted that cl 2.6 in Schedule 3, an overriding provision in relation to certain types of development, presupposed the existence of an Approved Development Proposal involving development on the Balance Lot which was to occur after subdivision, thus distinguishing between development and subdivision. In the absence of a post-subdivision development proposal cl 2.6 would not apply with the consequence that ALH would be required to comply with cl 2.5. Clause 2.5 of Schedule 3 presupposes Practical Completion of the Works and the performance of the Tenant Duties referred to in cl 3.2.[10]
[10]That clause imposes duties in relation to Practical Completion of the Works, delivery of the Works in accordance with the relevant Development Agreement.
Clause 2.5(c) requires the tenant to enter into a development agreement with a developer with the experience, expertise and financial and physical resources to undertake the Works. The agreement with the developer must be consistent with industry standards for contracts for development and construction of Works to be undertaken pursuant to the Approved Development Proposal and provide for a range of matters consistent only with the carrying out of construction works.
ALH submitted that its proposal fell squarely within the overriding provisions of cl 2.6, excluding the operation of cl 2 and cl 3 of Schedule 3 in favour of compliance only with cll 2.7–2.10 and 2.12–2.16. Consequently, so ALH argued, the requirements for an Indicative Development Proposal (cl 2.2), Final Development Proposals (cl 2.3), Landlord’s Response (cl 2.4), Approved Development Proposals (cl 2.5) and Tenant’s Duties (cl 3) had no application.
ALH submitted that cl 2.6(b) did not require a future development to be specified or even known at the time of the subdivision. It was enough that it was an event to occur at some later time. It also submitted that the words, “Approved Development Proposal”, apparently qualifying the application of the overriding provisions, was unfortunate drafting and should be read as descriptive of a tenant’s proposal of precisely the kind made by ALH in this case. ALH submitted that such a construction did not subvert or hamper the fulfilment of the basic objectives of the parties and that there was no disadvantage to the landlord.
In my opinion, the scheme for redevelopment or further development of the Premises found in the lease, when read as a whole, conveys a clear intention that the “Development” to be proposed by the tenant to the landlord as part of an Indicative Development Proposal or Final Development Proposal involving the subdivision of a Balance Lot, requires a proposal for development on the Balance Lot. If the development is to take place in the future – after subdivision – it must be approved in advance by the landlord. The definition of that which is approved is to be found in the Approved Development Proposal. The landlord need not, of course, insist upon the process in cll 2.3, 2.4 and 2.5. But the landlord is entitled to require compliance with those provisions before giving approval for the subdivision. ALE requires compliance.
Further, cl 2.6 presupposes the existence of an Approved Development Proposal, which is defined to mean a Final Development Proposal approved by the landlord under cl 2.4. Thus, a precondition to the operation of the overriding provisions in cl 2.6 is compliance with cl 2.3 and 2.4. In my view there is no reason to ignore the requirement of an Approved Development Proposal and good reason for its inclusion as a precondition to the operation of the overriding provisions in cl 2.6.
Compliance with cl 2.3 will ensure that, where a Balance Lot is concerned, the landlord will have an informed opportunity to consider restrictive covenants, easements and other rights which will burden and benefit the Balance Lot and the Premises following the subdivision of the relevant premises. Consistently with that approach, cl 2.3(h) should not be interpreted as ALH contends but as advanced by ALE - “if there is proposed to be a Balance Lot, provide …”. Such a construction takes its lead from the requirement in cl 2.3(g), that the tenant first identify the Balance Lot if there is to be one, and then cascades through additional requirements (if there is to be a Balance Lot) requiring details of proposed use and covenants.
Unless a development proposal involving a Balance Lot informs the landlord of the future use of the land, the landlord is denied any real opportunity to consider and approve covenants to achieve the legitimate and contemplated protection afforded under the scheme. Such a construction requires no more than to give the words “Approved Development Proposal” in cl 2.6 their defined meaning.
The words, in cl 2.6, “Despite anything in cl 2 or cl 3 …” are, in my view, intended to give paramountcy to the terms of the Approved Development Proposal over the requirements of cl 2.5 and the tenant’s duties set out in cl 3. Those words do not purport to eliminate the process under which the landlord approves a Development Proposal.
Accordingly, I would answer question (1), no. In the absence of agreement to waive the requirements of cl 2.3, a Final Development Proposal involving the subdivision of a Balance Lot must provide details of the development on and the use or proposed use of the Balanced Lot following subdivision and transfer to the tenant or nominee.
It follows that I would answer question (2), no. The overriding provisions of cl 2.6 require there to be an Approved Development Proposal which is a Final Development Proposal approved by the landlord under cl 2.4 of Schedule 3.
Valuer and Valuation
Clause 2.3 of Schedule 3 requires a valuation of the Market Value of the Premises before and after the Development and of the Market Rent to be paid by the tenant after the proposed Development, based on the Market Value of the part of the Premises which the landlord will own after the Development. ALH submitted that it was not required to comply with this requirement, or indeed any of the requirements of cl 2.3 because of the overriding provisions in cl 2.6. ALH also submitted that, even if cl 2.3 did apply, the valuation that was required was not one which invoked the valuation methodology in part A of Schedule 1 because it did not require a “Valuation” as defined in cl 1 of Schedule 3. It argued that while a “Valuation” was to be made by a “Valuer” the valuation contemplated under cl 2.3 did not require a Valuer appointed by agreement between the parties.
The valuations required under cl 2.3(e)(v)(C) are valuations showing the then current “Market Value” and the “Market Rent”. Both terms are defined. Market Rent “means the current market Rent for the Premises determined having regard to the matters set out in Part A of Schedule 1 (Valuation Methodology).” Market Value “means the current market value of the Premises being the amount for which the Premises should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing, where the parties had each acted knowledgeably, prudently and without compulsion.”
Part A of Schedule 1 (Valuation Methodology) provides,
The instructions to a Valuer appointed under clause 4.3 of the Lease must require the Valuer to assess the Current Rent taking into account the following matters.
·The terms and conditions of the Lease and assume that all covenant’s on the part of the Landlord and the Tenant under the Lease have been fully performed and observed on time.
·Assume a total term of lease commensurate with the initial Term plus all Further Terms of the Lease.
·The use conducted on the Premises as at the relevant Rent Review Date and any use for which the Premises may be used in accordance with this Lease and all relevant Laws.
·The rent shall be a fair rent for the Premises only and shall disregard:
oAny value attributable to licences, goodwill, Tenant’s Items, the development rights granted to the Tenant as set out in Schedule 3 and Structural Works undertaken by the Tenant (“excluded items”). All the excluded items remain and are deemed to remain in the ownership of the Tenant;
o…
othe existence of any rent-free period, financial contribution, allowance or inducement, whether in cash or kind, or other concession:
o…
·Rents for comparable premises in similar locations ascribed on a per square metre basis taking account of the size and configuration, operating areas, storage areas and areas of surplus or non-utilised area of the Premises and, if the Tenant has undertaken an Alteration under this Lease which has affected the physical dimensions of the Building assume that the Building Area is the same as the Building Area as at the Commencement Date of the initial Term.
·…
·The information provided to the Valuer by the Tenant under clause 4.11 of the Lease.
·…
The requirements for a valuation under cl 2.3 are employed under cl 2.7 to make adjustments between the parties depending on whether the Approved Development Proposal results in a “Value up” or a “Value down”. The valuations are not intended as a unilateral position advanced by a party for the purpose of a negotiation. They are intended to be binding valuations resulting in the adjustments under cl 2.7. There is nothing to stop a party from obtaining its own valuation in order to inform itself if it so chooses. The assessment of Market Rent under cl 2.3 requires the application of the Valuation Methodology. That methodology assumes an assessment by a Valuer. It requires the valuer to take into account, amongst other things, submissions provided by the landlord and tenant. It is not a unilateral process.
The purpose of assessing Market Value and Market Rent under cl 2.3 is to provide the basis for adjustments under the lease. That purpose is best served by a valuer appointed by both parties. Under Schedule 3 a Valuer means “a person who … is appointed by agreement between the parties…” It is consistent with the purpose of the assessments that they be made by a Valuer appointed by agreement. It would lead to absurd consequences if they were not. In my opinion the valuations referred to in cl 2.3(e)(v)(C) are assessments made by a Valuer. I would answer question (4), yes.
Accordingly, the valuation prepared by Mr Lunney, purporting to assess the Market Rent after the proposed development and the Market Value of the Premises before and after development is not a valuation for the purpose of cl 2.3(e)(v)(C) and does not provide a basis for the adjustment mechanisms in cl 2.7.
Valuation Methodology
ALH submitted that the Valuation Methodology in Part A of Schedule 1 was inapplicable, but if it was, it required the valuer to assess a “fair rent for the Premises only and shall disregard any value attributable to licences, goodwill…” and take into account “Rents for comparable premises in similar locations ascribed on a per square metre basis…” ALH further submitted that the assessment of the Market Value of the Premises must be confined by the definition of Premises which meant the land and fixed improvements,
but expressly does not include all Authorisations (unless required by law) or the business conducted by the Tenant from the Premises (including goodwill).
Thus, the valuation should not be undertaken as if a going concern in which a business is conducted on the premises employing liquor and gaming licences, but as a start up opportunity best valued by reference to “rents for comparable premises in similar locations ascribed on a per square metre basis …”
Mr Lunney’s valuation methodology commenced with an assessment of Market Rent from which he derived a Market Value. He set out to avoid capturing, within the Market Rent, any rental premium or value which was attributable to the liquor and gaming licences. He said he adopted that approach because the licences are expressly excluded from the definition of Premises in the lease. He said that the focus of a valuation of Market Rent should be on land and buildings. The licences “are essentially out of view for the purpose of assessing the market rent”. He proceeded on the basis that the highest and best use of the premises was as a hotel and therefore considered the potential use of the premises.
Mr Lunney rejected the conventional methodology by which hotels are valued (earnings basis) in favour of a per square metre valuation derived from what he described as comparable premises including shops, supermarkets, bulky goods showrooms and a fast food outlet in order “to avoid the inclusion of any premium which the Liquor and Gaming Licences may attract as part of hotels which are leased on a fully licensed basis”. Mr Lunney’s valuation assessed market rent of $405,000 per annum, a reduction of almost 19% of the current rent of $495,269 per annum.
There is an artificiality about the approach adopted by Mr Lunney. He claimed not to have disregarded the potential to use the premises as a hotel but disregarded its actual use as a hotel. He took into account the obligations of the tenant to maintain the licences and yet excluded the contribution made by those licences to the operation of an ongoing business from consideration.
ALE submitted that the Valuation Methodology in Part A of Schedule 1 did not adopt some artificial construct divorced from reality. The valuer was required to assume that all covenants in the lease were performed. The lease required the tenant to hold a liquor licence at all times during the term of the lease for part or all of the premises. The tenant was required to maintain the licence and not do anything which resulted in its suspension, cancellation, revocation or non-renewal. Where the tenant held a gaming licence it must maintain that licence and not do anything that would prejudice the licence. ALE submitted that the licences were the foundation of the business conducted on the premises. Part A of Schedule 1 required the valuer to take into account “the use conducted on the premises… and any use for which the premises may be used …” It submitted that the existing business in which the licences were employed must be taken into account.
ALE further submitted that cl 4.11 is consistent with such a construction. Clause 4.11 provides,
Within 10 Business Days of appointment of a Valuer under cl 4.3(g) or the commencement of any valuation process under this Lease which requires a determination of market rent, the Tenant must arrange for its auditor to provide to the Valuer copies of the EBITDA figures for the business of the Tenant conducted from the Premises for the previous 3 financial years and provide to the Landlord at the same time a copy of the covering letter of the Valuer enclosing the information which identifies the information provided to the Valuer. This information will be provided to the Valuer on a confidential basis and on the basis that the Valuer must not disclose the information to the Landlord.
This provision adds weight to the interpretation of cl 2.3 of Schedule 3 as requiring an assessment of Market Rent and Market Value by a Valuer agreed between the parties. It also makes earnings of the tenant from its operation of the business conducted on the premises relevant to the assessment of Market Rent undertaken as part of “any valuation process under this Lease which requires a determination of market rent”. There would be no point in providing such information if earnings from the business (ie licences) was to be excluded.
ALE submitted that the words “shall disregard” in Part A Schedule 1, called in aid by ALH to justify its methodology, should be taken to mean that the valuer is to ignore those matters when making an assessment. It does not mean that the valuer must remove or exclude the value attributable to the licence related income or make some deduction or discount.
In Ropart Pty Ltd v Kern Corporation Ltd and anor[11] the New South Wales Court of Appeal considered the meaning of a valuation protocol set up under a lease which included a provision that the valuer, when assessing current annual rental value of premises, was to have regard to specific criteria including “taking no account of” a number of matters including goodwill, any premium or inducement paid or payable to the lessee, relocation cost and other matters. Hope AJA delivered the principal judgment in which he agreed with the approach of the trial judge to construe the words “taking no account of” as requiring the valuer to “ignore or disregard the matters which the clause directed he was not to take into account”. Gleeson CJ agreed with the reasons of Hope AJA, adding the following:
I agree that the appeal should be allowed in part, that is to say, in relation to declaration 1B, but otherwise dismissed. I also agree with the reasons of Mr Justice Hope. The clause with which we are concerned establishes a protocol according to which a valuer is to find the current actual rental value of demised premises for the purpose of a rent review.
The valuer is directed to have regard to all relevant matters. He is also instructed to have regard to what are called certain specific criteria. One of those specific matters is the current annual rental value of other comparable commercial office premises. He is further instructed to take no account of the fact of any premium and/or other inducement then being paid or payable to a lessee in relation to that lessee's taking a lease of any such premises.
The primary issue in this appeal is whether the last mentioned instruction requires him to ignore the fact of the premium or inducement referred to or whether, as the appellant contends, it requires him to note it and make allowance for it.
The former view, which was accepted by Mr Justice Rolfe, is the better view.
It accords with the natural and ordinary meaning of the words of the contract. I do not regard the consequences it produces as anomalous or irrational. As Mr Justice Hope has observed there are good commercial reasons why that result might have been intended; in particular, the investigation and consideration of the true facts that may be relevant to such premium by inducement is often a matter of difficulty and uncertainty. To say that no account should be taken of a fact does not ordinarily mean that that fact should be noted and allowed for. Indeed the appellant seems to argue that, in the present context, a direction not to take a fact into account is the equivalent of a direction to take it into account. That is a paradox that strikes me as unacceptable.
[11][1991] NSWCA 239.
In my opinion much the same reasoning may be applied to the Valuation Methodology in Part A of Schedule 1. The words “shall disregard” mean, in my opinion, “shall ignore” or “put to one side and make no allowance for”. The items to be disregarded fall into the same category as those under consideration in Ropart v Kern Corporation, as items inherently difficult to value and which might involve complex debates and disputes as to their impact if taken into account. Mr Lunney did not ignore the value attributable to licences, or put them to one side or forget about them. He dealt with the licences by excluding from his assessment the income attributable to them. In my opinion Mr Lunney was required to take into account “the use conducted on the premises” but ignore or forget about the value attributable to the licences. Those concepts are not inconsistent. While the valuer is to have regard to the business as a going concern no addition, subtraction or discount is to be made by reference to the value attributable to licences.
ALE recognised that rents for comparable premises in similar locations ascribed on a per square metre basis is a matter to be taken into account. It submitted, however, that the valuer is not required to value on that basis. In any event, the so-called comparable premises taken into account by Mr Lunney were not hotel premises and were not, therefore, comparable.
Comparable premises would include an operating hotel and gaming businesses. The relevance of a calculation on a per square metre basis for comparable premises may, in my view, provide a check or yardstick to ensure that a valuation undertaken on an earnings basis was not unusually high or low. Market Value requires an assessment of “the amount for which the Premises should exchange on the date of valuation between a willing buyer and willing seller…” The protocol established under Part A of Schedule 1 is designed to lead to such a valuation through the assessment of Market Rent.
The Valuation Methodology does not require the valuer to calculate Market Rent on an earnings basis. Nonetheless, the significance attaching to earnings information (cl 4.11 of the lease) and the use conducted on the premises would justify, in most instances, such an approach. Mr Lunney and Mr Close accepted that it is customary to assess Market Rent for a hotel as a percentage of EBITDA and to arrive at a value by capitalising the rent. There was a slight discrepancy between the capitalisation rate and the present case although that discrepancy is immaterial for present purposes.
In my opinion, that cl 2.3(e)(v)(C) in Schedule 3 requires a Valuer of the Premises to assess the Market Rent on the basis of a going concern, ignoring or putting to one side and making no allowance for, any value attributable to licences. It is only by adopting such an approach that a valuer can take into account “the use conducted on the Premises” and at the same time “disregard (any) value attributable to licences …” I would answer question (3) accordingly.
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Attachment B
SCHEDULE 3
1. Definitions
Words defined in the Lease have the same meaning in this Schedule 3 and the following definitions also apply (except that where there is any inconsistency between definitions in the Lease and this Schedule 3, definitions in this Schedule 3 apply).
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Approvals means any approval, licence, consent or permit issued or required to be issued by an Authority in connection with the Works, a Development, a plan of subdivision or any associated documents.
Approved Development Proposal means a Final Development Proposal which is approved by the Landlord under clause 2.4.
Authorisation means any permit, licence, consent, certificate, authority or other approval obtained or required to be obtained from an Authority in relation to any activity to be undertaken under this Schedule.
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Balance Lot means that part of the Premises (If any) which is to be sold by the Landlord following subdivisions as set out in an Approved Development Proposal.
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Developer means the developer named under any development or other agreements entered into with respect to Development of the Premises.
Development means the development of the Premises pursuant to this Schedule.
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Final Development Proposal means a development proposal submitted by the Tenant to the Landlord for approval under clause 2.1(c) which satisfies the requirements of clause 2.3, subject to any changes to those requirements agreed by the Landlord and the Tenant from time to time.
Indicative Development Proposal means an indicative proposal for development of the Premises submitted to the Landlord under clause 2.2.
Make Whole Payment means any payment (in addition to those anticipated by clause 2.7(a)(i) and 2.7(b)(i)) necessary to keep the RE, the Landlord, the ALE Property Trust or ALE Direct Property Trust whole in connection with the approval and implementation of a Development proposed by the Tenant including any amounts arising from the application of accounting principles, stamp duty, taxes and changes in Law and:
(a)in the case of clause 2.7(a)(iii) and 2.10(b)(i)(B), including any costs associated with funding the payment due under clause 2.7(a)(i) or 2.10(a)(i) as the case may be (such as line fees, establishment fees and interest); and
(b)in the case of clause 2.7(b)(iii), including all finance holding, swap break and reset and other rearrangement costs of the RE, the Landlord, the ALE Property Trust or the ALE Direct Property Trust and of any other person which provides financial accommodation to or for the benefit of the RE, the Landlord, the ALE Property Trust or the ALE Direct Property Trust and all debt restructuring costs, and all Loss suffered or incurred by any of those persons, some or all of which may also be additional or wasted,
each as notified to the Tenant by the RE or the Landlord, acting reasonably.
Market Rent means the current market rent for the Premises determined having regard to the matters set out in Part A of Schedule 1 (Valuation Methodology).
Market Value means the then current market value of the Premises being the amount for which the Premises should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing, where the parties had each acted knowledgeably, prudently and without compulsion.
Material Adverse Effect means an effect which, on and immediately before and immediately after basis, is likely to result in a decrease of greater than 5% in the Market Value of the Premises.
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Proceeds mean, subject to any adjustment arising under clauses 2.7(a), 2.7(b) or 2.10. the payment from a Developer for the Balance Lot net of:
(a)any contribution by the Landlord towards any Works it will own; and
(b)any other costs with respect to a Development the Tenant agrees to bear.
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Valuer means a person who:
(a)at the time of appointment is a current full valuer member of the API of not less than 5 years’ standing;
(b)has been actively engaged in the commercial property market for the year before appointment under this Schedule;
(c)has at least 5 years’ experience in valuing properties similar to the Premises;
(d)at all times during the currency of the appointment is not prohibited or restricted from making a determination; and
(e)agrees to accept the terms of appointment under this Schedule,
And is appointed by agreement between the parties and failing agreement within 10 Business Days of a request to appoint one, appointed by the President of the API at the request of either party.
Works means construction and any other works undertaken pursuant to a Development.
2. Future Development of Existing Premises
2.1 Term
Until the expiry of the Term:
(a)the Tenant has an exclusive right to cause the Development of the Premises and retain the associated Proceeds in accordance with the clause 2, subject to the landlord, the RC, the ALE Property Trust and the ALE Direct Property Trust being kept whole;
(b)the Landlord must not redevelop or construct any building or other improvements on the Premises unless the Tenant consent to it doing so; and
(c)the Tenant may at its own cost and expense submit to the Landlord, Indicative Development Proposals, Final Development Proposals (and variations to them) for the Premises for approval in accordance with this Schedule.
2.2Indicative Development Proposals
(a)The Tenant can submit to the Landlord Indicative Development Proposals with respect to the Premises which the Landlord must consider and may approve conditionally (subject to receipt of a worked up feasibility study and further details as anticipated by clause 2.3 and this Schedule) or in principle.
(b)The Landlord will:
(i)either approve (with or without conditions) or refuse in writing any request for approval under this clause 2.2 within 20 Business Days;
(ii)where possible (and if applicable), give details of any Make Whole Payment likely to be required because of a Development and/or the way to calculate it where the amount is not yet ascertainable and any performance guarantees likely to be required;
(iii)if it refuses approval or imposes conditions, give reasons in writing including identifying any components of the proposal which are not satisfactory so that the Tenant has guidance on matters to be addressed if it elects to lodge a further Indicative Development Proposal for the Premises; and
(iv)as the owner of the Premises, promptly consent to the lodgement of development applications, provide all information and do all things reasonably necessary to assist the Tenant in working up and finalising its proposals to the stage where the Tenant can provide the Landlord with a Final Development Proposal for its approval.
2.3Criteria for Final Development Proposals
Subject to any matters agreed between the Tenant and the Landlord during the process outlined in clause 2.2. each Final Development Proposal must provide the following information and address the following issues.
(a)Identify the part of the Premises required for the proposed Development.
(b)Identify the air space required for the proposed Development.
(c)Describe the scope of the proposed Works.
(d)Describe the Approvals required for the proposed Development and the steps to achieve those.
(e)Include a worked up feasibility study which includes:
(i)the estimated value of the building and improvements proposed to be constructed under the Final Development Proposal;
(ii)layout and elevation plans, drawings, design brief and a calculation of the estimated design and construction costs;
(iii)a report addressed to both the Tenant and the Landlord concerning the proposed Development from a Quantity Surveyor which:
(A)confirms that the Plans and Specifications are appropriate for the proposed Development;
(B)includes a detailed description of the proposed Works and a listing of the content of the Plans and Specifications; and
(C)confirms that the documentation is sufficient to enable verification of what is built once Practical Completion occurs against the Plans and Specifications the subject of the report;
(iv)an indicative timetable for the Works (including regular meetings with the Landlord);
(v)for the purpose of identifying any proposed payments or rent adjustments as anticipated by clause 2.7:
(A)details of that part of the Premises and the Development which the Landlord will own after the Development is carried out;
(B)details of the promises to be leased by the Tenant after the Development is carried out, including lettable areas (being the same as paragraph (v)(A)).
(C)Valuations Showing:
(1)the then current Market Value of the premises and an estimate of the Market Value of that part of the Premises and the Development which the Landlord will still own once the proposed Development is carried out, including applicable capitalisation rates;
(2)the Market Rent to be paid by the Tenant after the proposed Development is carried out based on the Market Value of that part of the Premises which the Landlord will own after the Development is carried out assessed in sub-paragraph (C)(1);
(3)details of the Capital Rent (if any) which is to apply under the Lease of the relevant part of the Premises following Practical Completion of the proposed Development, calculated in accordance with the formula in Schedule 4 and showing all calculations; and
(D)details of the proposed payments or adjustments under clause 2.7 by or to the Landlord and by or to whom; and
(E)if applicable, details of the Make Whole Payment and how it was calculated, using the information provided by the Landlord to the Tenant under clause 2.2; and
(vi)sufficient details and other documentation which the Landlord may reasonably request to enable the Landlord to make an informed assessment of the merits of the Final Development Proposal, including as to tax, depreciation, building allowance, stamp duty, capital gains tax and GST implications (but accounting, tax or legal advice on this information is not required).
(f)Specify whether the proposed Development needs to be funded by the Landlord and to what extent.
(g)If applicable, identify the Balance Lot.
(h)If applicable, identify restrictive covenants, easements and other rights which will burden and benefit the Balance Lot and the Premises following subdivision of the relevant premises.
(j)If required by the Landlord, propose appropriate security for the performance of the Development Agreement with the Development and the delivery of the Development in accordance with the Development Proposal.
(k)Terms sheets with the main commercial terms for and the structure of and parties to the documentation proposed to implement the Final Development Proposal including conditions precedent and a program for completion of them.
Despite any other provision of this Schedule, development proposals which do not satisfy the criteria in this clause 2.3 may be considered by the Landlord in its absolute discretion from time to time.
2.4 Landlord response
(a) the Landlord:
(i)must either approve (with or without conditions) or refuse in writing to a Final Development Proposal within 20 Business Days of receipt of it; and
(ii)if it refuses approval or imposes conditions, must give reasons in writing including identifying any components of the proposal which are not satisfactory so that the Tenant has guidance on matters to be addressed if it elects to lodge a further Indicative Development Proposal or Final Development Proposal (or a variation of either of them) for the Premises.
(b)The Tenant may elect to have the Landlord’s view on components of an Indicative Development Proposal or a Final Development Proposal determined by an Expert in accordance with the dispute provisions set out in clause 3.1 of the Lease, but, despite any other provision of this Lease, clause 3.1 of the Lease does not apply with respect to the actual refusal of or imposition of conditions with respect to an approval of an Indicative Development Proposal or a Final Development Proposal (or any variation of them) by the Landlord.
2.5Approved Development Proposals
If the Landlord approves a Final Development Proposal during the Term, then:
(a)the Tenant must procure Practical Completion of the Works undertaken pursuant to that Development Proposal and perform the Tenant Duties with respect to it;
(b)the Tenant and the Landlord must (and the Tenant must procure the Developer to) promptly enter into the necessary document and do everything reasonably required to give effect to the rights and obligations (including payments) of each party to the other as anticipated by the Approved Development Proposal and this Schedule; and
(c)the Tenant must enter into a development agreement with a Developer:
(i)who the Tenant has satisfied the Landlord (acting reasonably) has the experience and expertise and financial and physical resources to undertake the Works;
(ii)which is consistent with the then current industry standards for contracts for development and construction of works similar to the Works to be undertaken pursuant to the Approved Development Proposal (including in respect of the provision of warranties); and
(iii)which provides for (among other things):
(A)the delivery of the development not materially different to the Approval Development Proposal (including to the quality and standard specified in the Development Proposal);
(B)obtaining and maintaining the necessary Approvals for the development;
(C)construction of the Works in a proper workmanlike manner and in accordance with any Approvals and the Law;
(D)a defects liability period of not less than 12 months or such other period as the Landlord may reasonably require;
(E)reasonable warranties and guarantees from manufacturers or suppliers of any materials or goods incorporated in the Works;
(F)no variations to plans and specifications or the Works without the consent of the Tenant;
(G)where the Works relate to buildings, structures or other improvements which the Landlord owns or will own (other than leasehold improvements), the benefit of depreciation and building allowances to vest in the Landlord and for all materials necessary to enable tax, depreciation, building allowance, capital gains tax, GST and related impacts to be assessed and records to be created and maintained;
(H)appropriate insurances including insurance of the Works for their full replacement value on a replacement and reinstatement basis, public liability insurance, professional indemnity insurance and workers compensation insurance at levels consistent with then current industry standards, such insurances to name the Landlord as co-insured;
(I)where the Landlord is a party to the agreement, the Landlord’s then current limitation of liability provisions; and
(J)any other provision the Landlord and the Tenant each acting reasonably agrees.
2.6Overriding provisions in relation to certain types of development
Despite anything in this clause 2 or clause 3, if any Approval Development Proposal:
(a)does not involve the refurbishment or demolition or redevelopment of the existing improvements on the Premises; and
(b)only involves development on the Balance Lot which is to occur after subdivision of the Premises and the transfer of the Balance Lot to the Tenant or its nominee,
then the Landlord agrees that the Tenant’s only obligations under this clause 2 are to:
(c)procure the subdivision in accordance with the Development Proposal approved by the Landlord;
(d)procure such restrictive covenants, easements and other rights which benefit and burden the Premises and the Balance Lot as are reasonably required by an Authority or the Landlord if directly attributable to the Approval Development Proposal; and
(e)comply with clause 2.7, 2.8, 2.9, 2.10, 2.12, 2.13, 2.14, 2.15 and 2.16.
2.7Adjustment mechanisms
Subject to anything to the contrary the parties may agree in writing (including in the Approval Development Proposal), and to clauses 2.8, 2.9 and 2.10 and without limiting any other compensation or adjustment which may be required to keep the Landlord, the RE, ALE Property Trust and ALE Direct Property Trust whole with respect to a Development, the compensation payable with respect to any Approval Development Proposal (including because of any incremental change in Market Value of the Premises) and the total consideration payable under the Lease following Practical Completion of a Development of the Premises will apply the following fundamental principles.
(a) Value up
If the estimated Market Value set out in the Approval Development Proposal of that part of the Premises and a Development which the Landlord will own after the proposed Development is carried out is greater than the pre Development Market Value of the Premises agreed in the Approval Development Proposal:
(i)the Landlord must, but only with the Tenant’s prior written consent, pay the Developer for that estimated increase in value less (if applicable) any Make Whole Payment required under clause 2.7(a)(iii) within 20 Business Days of the date of Practical Completion of the Development; and
(ii)the total consideration payable by the Tenant under the Lease will be adjusted from the next date for the payment of Rent under the Lease which occurs after the later of the date of Practical Completion of the Development and the date the payment in clause 2.7(a)(i) is made (Adjustment Up Date) by:
(A)varying the Rent to the Market Rent agreed in the Approved Development Proposal to apply after the Development is complete (but disregarding any caps or collars in the Lease); and
(B)if applicable (but only if it is greater than zero), the Tenant will pay the Capital Rent over a 10 year period, commencing on the Adjustment Up Date;
(iii)if applicable, the Tenant must procure the Developer to pay the Make Whole Payment to the Landlord less any amount set off by the Landlord under clause 2.7(a)(i) on the date in clause 2.7(a)(i);
(iv)Rent reviews under the Lease will then continue to apply during the Term in the manner set out in the Lease with respect to the Rent but the Capital Rent shall be a fixed calendar monthly payment; and
(v)where the Lease ends before expiry of the 10 year period, the present value of the unpaid Capital Rent (discounted at the same interest rate as was originally used to calculate the Capital Rent) shall be payable by the Tenant to the Landlord on demand.
(b)Value down
If the estimated Market Value set out in the Approval Development Proposal of that part of the Premises and the Development which the Landlord will own after the proposed Development is carried out is less than the pre Development Market Value of the Premises agreed in the Approval Development Proposal:
(i)the Tenant must or must cause the Developer to pay (as the case may be) the Landlord for that estimated decrease in value within 20 Business Days of the date of Practical Completion of the Development;
(ii)the total consideration payable by the Tenant under the Lease will be adjusted from the next date for the payment of Rent under the Lease which occurs after the later of date of Practical Completion of the Development and the date the payment in clause 2.7(b)(i) is made (Adjustment Down Date) by:
(A)varying the Rent to the Market Rent agreed in the Approved Development Proposal to apply after the Development is complete (but disregarding any caps and collars in the Lease);
(B)if applicable (but only if it is greater than zero), the Tenant will pay Capital Rent over a 10 year period, commencing on the Adjustment Down Date;
(iii)if applicable, the Tenant must or must procure the Developer to pay (as the case may be) the Make Whole Payment to the Landlord on the date in clause 2.7(b)(i);
(iv)Rent reviews under the Lease will then continue to apply during the Term in the manner act out in the Lease with respect to the Rent but the Capital Rent shall be a fixed calendar monthly payment); and
(v)where the Lease ends before expiry of the 10 year period, the present value of the unpaid Capital Rent (discounted at the same interest rate as was originally used to calculate the Capital Rent) shall be payable by the Tenant to the Landlord on demand.
(c)Both the Tenant and Landlord will act in good faith in procuring funding for or dealing with the financial consequences of any payments or adjustments due or to be received under this Schedule having regard to the market at the time or otherwise when incurring costs in relation to anything anticipated by this Schedule.
2.8Quantity Surveyor
(a)On Practical Completion of Works undertaken pursuant to an Approval Development Proposal, the parties will arrange for a Quantity Surveyor to inspect and certify whether the Works have been carried out substantially in accordance with the Plans and Specifications approved by the Landlord and the relevant Authorities and, if not, the nature and extent of any variation from the approved Plans and Specifications.
2.9Valuer
(a)If a notice is given under clause 2.8(c) and the parties do not within 10 Business Days of the date of service of the notice under that clause agree on any necessary payment, Rent adjustment or other arrangement to compensate for the incremental change in Market Value of that part of the Premises and the Development which the Landlord will own arising from the conduct of the Development, the parties shall jointly appoint a Valuer to determine the Market Value of that part of the Premises and the Development which the Landlord will own and the Market Rent having regard to that Market Value.
(b)The Valuer must be instructed to provide its assessment of the Market Value in writing and with reasons within 20 Business Days of being appointed.
2.10Adjustment
(a)If the Market Value determined under clause 2.9 is lower than the Market Value of that part of the Premises and the Development which the Landlord will own after Practical Completion of the Development as estimated under the Approval Development Proposal:
(i)(A) the Landlord’s obligation to pay anything to the Developer with respect to the Development shall be reduced to the extent; or
(B)within 20 Business Days after the Valuation is given, the Tenant: must or must procure the Developer to pay (as the case may be) to the Landlord an amount,
Required to compensate the Landlord for the incremental loss in Market Value and any further Make Whole Payment for which the Landlord has not yet been compensated, as notified to the Tenant and the Developer by the Landlord, acting reasonably; and
(ii)the total consideration to be payable under the Lease pursuant to clause 2.7(b) will be recalculated using the Market Value of that part of the Premises and the Development which the Landlord will own determined under this clause 2.9.
(b)If the Market Value determined under clause 2.9 is higher than the Market Value of that part of the Premises and the Development which the Landlord will own after Practical Completion of the Development as estimated under the Approved Development Proposal (other than through default of the Tenant or the Developer under this Schedule, the relevant Development Agreement or any other arrangement):
(i)(A) the Landlord’s obligation to pay anything to the Developer with respect to the Development shall be increased to the extent required to compensate for the incremental increase in Market Value less any further Make Whole Payment for which the Landlord has not yet been compensated as notified to the Tenant and the Developer by the Landlord, acting reasonably; and
(B)within 20 Business Days after the Valuation is given, the Tenant must or must procure the Developer to pay (as the case may be) to the Landlord an amount,
required to compensate the Landlord for the incremental loss in Market Value and any further Make Whole Payment for which the Landlord has not yet been compensated, as notified to the Tenant and the Developer by the Landlord, acting reasonably;
(ii)the total consideration to be payable under the Lease pursuant to clause 2.7(b) will be recalculated using the Market Value of that part of the Premises and the Development which the Landlord will own determined under clause 2.9.
(b)If the Market Value determined under clause 2.9 is higher than the Market Value of that part of the Premises and the Development which the Landlord will own after Practical Completion of the Development as estimated under the Approval Development Proposal (other than through default of the Tenant or the Developer under this Schedule, the relevant Development Agreement or any other arrangement):
(i)(A) the Landlord’s obligation to pay anything to the Developer with respect to the Development shall be increased to the extent required to compensate for the incremental increase in Market Value less any further Make Whole Payment for which the Landlord has not yet been compensated as notified to the Tenant and the Developer by the Landlord, acting reasonably; and
(B)the Tenant must within 20 Business Days after the Valuation is given procure the Developer to pay to the Landlord any further Make Whole Payment required less any amount set off by the Landlord under clause 2.10(b)(i)(A); and
(ii)the total consideration to be payable under the Lease pursuant to clause 2.7(a) will be recalculated using the Market Value of that part of the Premises and the Development which the Landlord will own determined under clause 2.9.
(c)The parties will enter into all necessary documents to reflect the outcomes under clauses 2.7, 2.10 and 2.13 and to ensure those outcomes bind subsequent landlords and assignees of the Lease.
2.11Balance Lot
If an Approval Development Proposal contemplates the transfer of a Balance Lot to the Tenant or its nominee, then (subject to the terms of any document entered into under clause 2.5(b) and anything else the parties may agree in writing) the Landlord agrees to make an offer for the Tenant or its nominee to purchase the Balance Lot for $1.00, which offer shall remain open until the date of expiry of the Term with respect to the relevant Premises.
2.16 Other covenants
The parties to this Schedule agree that:
(a)they will act reasonably to achieve commercial outcomes which are acceptable to all parties (whether set out in this Schedule or otherwise) when considering proposals for Development under this Schedule and the compensation and adjustments which follow;
(b)at the date of this Schedule, it is anticipated that the key consideration for the calculation of the Make Whole Payments will be net returns and/or cash distributions to unitholders (including having regard to tax impacts), but this does not limit what the make Whole Payments may comprise;
(c)despite anything in this Schedule, the amounts payable to the Landlord to compensate it under this Schedule with respect to any Development will not exceed the amount required to keep the RE, the Landlord, the ALE Property Trust and the ALE Direct property Trust whole. To the extent there is a Make Whole Payment in excess of what is required to keep the RE, the Landlord, the ALE Property Trust and the ALE Direct Property Trust whole; the parties will cooperate in good faith to ensure an appropriate adjustment is promptly made.
3. Tenant’s Duties
3.2 The Tenant Duties
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(d)It will not without the prior consent in writing of the Landlord:
(i)request, consent to or allow anything to be done in relation to the Plans and Specifications, the Works, the Balance Lot or a Development which will or is likely to have, whether measured alone or in aggregate with any other changes, a Material Adverse Effect; or
(ii)terminate or rescind or materially amend or materially vary any of the provisions of a Development Agreement.
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