Batson Holdings Pty Ltd v Rose

[2002] NSWADT 110

CITATION:	Batson Holdings Pty Ltd v Rose [2002] NSWADT 110
DIVISION:	Retail Leases Division
PARTIES:	APPLICANT Batson Holdings Pty Ltd RESPONDENT John Emmanuel Rose
FILE NUMBER:	025027
HEARING DATES:	10/04/02
SUBMISSIONS CLOSED:	04/10/2002
DATE OF DECISION:	06/28/2002
BEFORE:	Molloy GB - Judicial Member
APPLICATION:	Claim for declaration of rights, obligations and liabilities under a lease
MATTER FOR DECISION:	Principal matter
LEGISLATION CITED:	Retail Leases Act 1994
CASES CITED:	Commissioner of Taxation v Montgomery (1999) HCA 34 Burns Philp Hardware Pty Limited v Howard Chia Pty Limited 1986 8 NSWLR 621 Norwich Union Life Insurance Society v Trustee Savings Bank Central Board (1986) 278 Estates Gazette 162
REPRESENTATION:	APPLICANT R Gye, barrister RESPONDENT G Vardas, solicitor
ORDERS:	1 Leave granted to restore matter to list within 28 days; 2 Absent any such application the orders of the Tribunal will be:; (a) Declare the rights and liabilities of the parties in accordance with this judgment; (b) Declare that the valuations provided by each of the parties are not prepared in accordance with the relevant principles that apply to the calculation of current market rent having regard to the terms of this judgment; (c) Otherwise Application dismissed with no order as to costs.

:

1 The Applicant is the Lessee of part of the land in Folio Identifier 45/867758 being the whole of the ground floor of premises known as 724 Darling Street Rozelle (the premises) pursuant to a registered Lease 0542508. The Respondent is the Lessor.

2 The initial Lease period was for four years commencing 13 March 1995 and terminating 12 March 1999. The Lease contained three option periods, each for three years. The first period commenced 13 March 1999 and terminated 12 March 2002, the second commenced 13 March 2002 and terminates 12 March 2005 and the third commences 13 March 2005 and terminates 12 March 2008. The maximum period of tenancy under the Lease and permitted renewals was therefore 13 years.

3 It appears that the Lessee exercised its option for the first renewal period commencing 13 March 1999 and I assume that no difficulties were occasioned in agreeing or fixing the rent for that first option term. The Lessee then exercised its option for the second option term commencing 13 March 2002 but no agreement has been reached as to the rent payable for that second option term.

4 Relevantly, the Lease contained the standard terms in accordance with the 1994 Law Society Lease. I shall deal with these later in this Judgment. There were also various additional clauses on some of which the parties placed some reliance.

5 Clause 5.4 of the Law Society Lease conditions provided that (relevantly) “The rent is to be reviewed on the rent review dates stated in item 15 in the Schedule”. Item 15 provided (relevantly) that rent review at the “commencement of renewal Lease under Part A, Item 11” was to be the current market rent. Unfortunately, due to what appears to have been an error in drafting, “Part A” in Item 11 was in fact deleted. So also was the letter “B” and instead of “A” and “B” the numbers 1, 2 and 3 were inserted in relation to each renewal term respectively. The parties accepted that reference to Part “A” was intended always to be a reference to the numbers 1, 2 and 3 as specified such that the method of rent review at the commencement of each renewal period was to be current market rent. I think it must follow that there must be consequent alterations to Item 12 because it is plain that both Items A and B have in fact been deleted such that in order to make the whole exercise work consistent with the intent of the parties a reference to “Item 11 A” would be a reference to Item 11.1, a reference to Item 11B would be a reference to Item 11.2 and there being no reference to Item 11C in Item 12 it is consistent with the intent of the parties (so it seems) that the rent for the third option period commencing 13 March 2005 would be calculated in accordance with Item 11.3. such that the method of rent review at the commencement of that term (13 March 2005) would also be current market rent.

6 There are a number of other significant matters. Firstly, the premises are in fact a liquor bottle shop. Clause 6.1 provides that the Lessee (stated in the Law Society Lease as the “tenant”) “must – use the property for the purpose stated in item 16 in the schedule and not for any other purpose” and Item 16 states the permitted use to be “liquor retailing”. The initial draft of the registered Lease shows the permitted use as being “off licence retailing” but the words “off licence” were deleted and the word “liquor” inserted in lieu.

7 Secondly, it is a fact that the adjoining premises are the subject of a hotelier’s licence. These premises are situate at 726 Darling Street Rozelle, the hotelier’s licence being held in the name of Trinkaye Pty Limited. Importantly, the evidence shows that by Application 131805.99 the Licensing Court re-defined the licensed premises (applicable to the hotel) to include the “adjoining retail shop” which, on my understanding of the evidence, is in fact the demised premises at 724 Darling Street Rozelle.

8 Thirdly, the Lease provides that the Lessee will pay 50% of the local council rates and charges, water, sewerage and drainage charges, land tax and insurance for the land or the building of which the premises are part.

9 Fourthly, Additional Clause 19 provided firstly, that the initial grant of the Lease was “subject to the granting of authorisation by the Licensing Court (of NSW) in respect of the redefinition of the tenant’s existing adjoining licensed premises under an existing licence to extend to the area comprising the property leased” (to which I have made reference above); secondly, it was the Lessee’s obligation to apply for all necessary approvals and consents and so on; and thirdly, if the approvals were refused or the permitted use was required to be discontinued or the Licensing Court declined to authorise the redefinition of the Lessee’s licensed premises to include to the area of the property leased, the Lessee “shall be entitled to determine this lease by giving fourteen (14) days notice in writing to” the Lessor.

Issues Before the Tribunal:

10 The parties agreed that the issues before the Tribunal were as follows:

A. Identification of the appropriate method as to how current market rent is to be payable by the tenant (Lessee) upon exercise of the option to renew the Lease; and

B. Whether or not the valuations provided by each of the parties is in accordance with the appropriate method of calculation of the current market rent.

11 During the course of argument I raised with the parties the question of whether in fact the Tribunal had appropriate jurisdiction and secondly whether there was any utility in the Tribunal making a determination of the issues as put by the parties. As to jurisdiction it would seem that the Tribunal has appropriate power under Retail Leases Act 1994, Section 72(1)(f)(iii) which provides that in proceedings for a retail tenancy claim the Tribunal is empowered to make an order declaring the rights and liabilities of the parties under law, whether any consequential relief is or could be claimed or not. In Section 70 a “retail tenancy claim” is defined (Section 70(a)(ix)) as, inter alia, a claim for a declaration of the rights, obligations and liabilities of the parties under a Lease. So, it seems, that the Tribunal has appropriate jurisdiction.

12 As to the utility of the whole exercise, clause 5.12 through to clause 5.21 prescribes the method of determining rent when the method of rent review is by reference to current market rent. By these clauses the parties go through a procedure directed firstly to reaching an agreement as to the new rent and then (clause 5.15) if there is no agreement as to the amount of the new rent “30 days before the rent review date” then “the current market rent will be decided by a valuer appointed under clause 5.16 …”. In the course of argument it seemed to me that the Tribunal was being asked to make a determination that had no utility. Both parties had obtained their own valuations, both parties could not agree and it seemed plain to me that clause 5.15 applied such that either party, if they could not agree upon a valuer, could simply ask the President of the Law Society of NSW to nominate a person who is a licensed valuer to decide the current market rent (clause 5.16) . Obviously, in these circumstances, both parties took a calculated (or risky) punt because if the valuer acted properly then he acts as an expert, not an arbitrator, and both parties would be bound by his decision.

13 Neither party seem terribly enamoured with this course of action. No party seemed to want to put their commercial future with regard to these premises in the hands of a valuer appointed pursuant to clause 5.16. Rather, they seemed to want a determination in accordance with the issues put before this Tribunal with a view (as I understood it) to enable them to reach an agreement themselves without recourse to the rather deadly and final clause 5.16 mechanisms.

14 Consequently, it seems to me that the Tribunal not only has jurisdiction but also should determine the issues as placed before it as the parties wish those issues to be determined and as the parties have commercially rationalised their respective positions.

Lease Terms:

15 It is appropriate to set out the relevant additional terms of the Lease. These terms are found in clause 5.15 of the standard Law Society Lease and are relevantly as follows:

5.15.2 the current market rent is the rent that, having regard to the terms and conditions of this lease and such other matters as are relevant to the assessment of current market rent , would be reasonably expected to be paid for the property if it were unoccupied and offered for renting for the use to which the property can be put in accordance with this lease.

5.15.3 rent concessions and other benefits that are frequently or generally offer to prospective tenants of unoccupied retail shops, where the property is a retail shop, and otherwise of unoccupied comparable premises, are relevant matters; and

5.15.4 the value of goodwill created by the tenant’s occupation and the value of the tenant’s fixtures and fittings are to be ignored.

6.1.1 (the tenant must -) use the property for the purpose stated in item 16 in the schedule and not for any other purpose.

16 Relevantly, for the purposes of the determination of current market rent, the Act makes provision in Section 31 as follows:

“31(1) A retail shop lease that provides an option to renew or extend the lease at current market rent is taken to include provision to the following effect:

a) the current market rent is the rent that would reasonably be expected to be paid for the shop, determined on an effective rent basis, having regard to the following matters:


i) the provisions of the lease,

ii) the rent that would reasonably be expected to be paid for the shop if it were unoccupied and offered for renting for the same or for a substantially similar use to which the shop may be put under the lease,

iii) the gross rent, less the lessor’s outgoings payable by the lessee

iv) rent concessions and other benefits that are frequently or generally offered to prospective lessees of unoccupied retail shops.


The current market rent is not to take into account the value of goodwill created by the lessee’s occupation or the value of the lessee’s fixtures and fittings on the retail shop premises”.

17 It seems to me that there are some slight but perhaps significant differences between clause 5.15.2 and section 31(1)(a). For example, firstly clause 5.15.2 refers to “the use to which the property can be put in accordance with this lease” whereas Section 31(1)(a) (ii) refers to “for the same or for a substantially similar use to which the shop may be put under the lease”. Also section 31(1)(a) requires the current market rent to be “determined on an effective rent basis” - those words do not appear in clause 5.15. Furthermore, clause 5.15.3 refers to rent concessions and other benefits with reference to unoccupied retail shops “and otherwise of unoccupied comparable premises” whereas section 31(1)(a)(iv) does not refer to “unoccupied comparable premises”.

18 I do not understand why the Law Society Lease differs from the phraseology used in section 31. The Applicant submitted that section 31(1)(a) is not an exclusive finite limited code. The parties might agree to other matters provided there agreement is not inconsistent with the Act. I do not think that the Applicant conceded that Section 31(1)(a) was wider than 5.15. However, whatever be the submissions of either party it seems to me that the Act must be read as an overlay to the Lease itself such that where there is a difference between the Act and the Lease then the Act prevails. In my view it is not helpful to further attempt to dissect clause 5.15. Rather the identification of the appropriate method of calculation of market rent is best served by an analysis of Section 31(1)(a) and then building from that point. I agree with the Applicant’s submission that this section is not an exclusive finite limited code in that the parties may agree to other matters.

19 One analysis of section 31(1)(a) may permit one to override the provisions of the Act by the valuer taking into account “the provisions of the lease” in sub-section 1(a)(i). If, for example, the provisions of the Lease required a determination by taking into account matters outside of or contrary to the provisions of this Section 31(1)(a), on the basis that the valuer would not have regard to the matters set out in sub-sections (ii) – (iv) inclusive, then it seems to me that interpretation would do too much violence to the section itself. In my view the proper interpretation of the words “the provisions of the lease” means that one takes into account or has regard to provisions of the lease that are not in conflict with Section 31(1)(a) .

Analysis:

20 It is my view that one takes as the starting point the words of the Act itself and Section 31(1).

21 The next step is to look at the shop “if it were unoccupied”.

22 The next step is to look at the unoccupied shop and ask: “What is “the same or a substantially similar use to which the shop may be put under the lease?” In order to answer this question one then looks at the provisions of the lease to determine if there is any provision for use to which the shop may be put. In the event that there is no provision under the Lease (which does not apply in this case) then it may be necessary to look at zoning issues including perhaps existing use rights. There is no need for me to further examine that issue because in this case the use to which the premises may be put are clearly set out in this Lease, namely (by clause 6.1 and Item 16) “liquor retailing”.

23 The next step is for the valuer to work out the effective rent that would reasonably be expected to be paid for the shop having regard to the two matters to which I have just made reference.

24 Having made that analysis the valuer is to have regard to the gross rent actually being paid under the Lease less the Lessor’s outgoings payable by the Lessee. Those factors were not before me in evidentiary form and are indeed not relevant to the determination of the issues.

25 The next step is for the valuer to find out whether there are any “rent concessions and other benefits that are frequently or generally offered to prospective lessees of unoccupied retail shops”. What does that mean? Does it mean “unoccupied retail shops", confined to the particular development, or confined to a defined area, or confined to a suburb or town, or to a city or to the whole state? The answer in my view is not assisted by taking the words “retail shops” at large, at least in the context of this section which deals peculiarly with the determination of current market rent with respect to a particular retail shop. In my view the words “retail shops” in the context of Section 31(1)(a)(iv) is to be limited by reference to the type of shop and the location of the shop. To take a simple example, if the shop was situate in an arcade or a retail shopping centre then one would look at rent concessions and other benefits in relation to that arcade, or perhaps nearby arcades, in relation to the retail shopping centre or perhaps nearby retail shopping centres.

26 In my view it is of no assistance for a valuer to examine rent concessions and other benefits that may be offered to a retail shopping centre tenant in Miranda compared to those offered in a retail shopping centre at Gordon. Each area depends upon its own peculiarities, its commercial sub-set and perhaps other factors as well. It is important to remember that Section 31(1)(a)(ii) and (iv) both refer to “unoccupied” shops. So, when looking at “rent concessions and other benefits” they are predicated on the fact that the particular shop is unoccupied – however, in my view that does not preclude a specialist retail valuer from taking into account the other factors to which I have just made reference.

27 It is trite to then observe that the valuer must not “take into account the value of goodwill created by the lessee’s occupation or the value of the lessee’s fixtures and fittings on the retail shop premises”. Not only does the section say that the valuer should not take those matters into account but if he/she did then that itself would do violence to the clear provision that the basis of the valuation is that the shop is unoccupied.

28 Having taken all the above matters into account the specialist retail valuer must take into account “the provisions of the lease”. Although this is specified firstly in sub-section (a) of 31(1), having regard to my observations above that the provisions of the Lease cannot vary, amend or overrule the other provisions of section 31(1) such that the provisions cannot be inconsistent with the Act, in my view the valuer should take into account those provisions lastly, save that he would have taken the use provisions into account pursuant to sub-section (ii). Subject to that observation the valuer then looks at the provisions of the Lease to determine what other matters he would need to have regard to determine the effective rent of the premises.

The Particular Facts:

29 On the basis of the above analysis the specialist retail valuer then needs to examine the provisions of the Lease. There are, it seems to me, a number of peculiarities that a valuer would need to have regard to. Firstly, he would need to have regard to the term of the Lease period, not the whole term inclusive of permitted renewals (options) but the term and the commencement date of the option period which is in dispute. In this case it is a three year term commencing 13 March 2002. Consequently, a valuer would need to have regard to those facts and determine the current market rent “on an effective rent basis” as at 13 March 2002.

30 Secondly, the Lease provides that the Consumer Price Index method of rent review applies to each anniversary of commencement of each renewed Lease. In my view that would not be a matter to which a valuer would have regard simply because that is an agreement between the parties that does not impinge upon the assessment of the current market rent at the commencement of a term.

31 Thirdly, the valuer would have regard to the fact that these are peculiar premises. They are peculiar in that there is not only a permitted use, and not only is the Lessee absolutely required (clause 6.1.1) to use the property only for the permitted use (liquor retailing) but in addition Additional Clause 19 makes quite specific provision for re-definition of the Lessee’s existing adjoining licensed premises held under an existing hoteliers licence to extend to the property leased that licence. Not only is that a peculiarity to this particular premises which is a peculiarity that would not apply to most retail shops, but furthermore Additional Clause 19.3 provides that if the local Council “or any other relevant authority having the requisite power notifies the tenant in writing that the permitted use of the property is required to be discontinued … the tenant shall be entitled to determine the lease …” . There is no argument (as I understood it) that the Licensing Court had in fact re-defined the licensed premises situate at 726 Darling Street Rozelle to include the premises the subject of this Lease. The point is that should a relevant authority legally discontinue that use then the Lessee is entitled to determine the Lease.

32 It seems to me therefore that those particular provisions are matters that a specialist retail valuer should have regard to in determining the current market rent. May I say that it is not for me to determine how a specialist retail valuer should have regard to those matters – that is a matter peculiarly within the expertise of the valuer, who is an expert in his field, and subject to the various principles that apply to the binding nature of the determination of an expert, and provided the expert takes those matters into account in a proper fashion, then that issue is so decided.

33 Having regard to those Additional Clauses it seems to me that a specialist retail valuer would also have regard to the fact that the Lessee operates the next door hotel. The licensee is Ronald John Baldwin who is also (with Wendy Elizabeth Baldwin) the guarantor under the Lease. It is unchallenged that he is a director and shareholder of the Lessee. His hotelier’s licence enables him to operate the retail sale of liquor in the demised premises. The premises are used for the retail sale of liquor and are (and I understand this is not challenged) part of the hotel business operated by Trinkaye Pty Limited, the owner of the hotel business under the hotelier’s licence.

34 The real issue in dispute between the parties appears to condense itself into this: the Respondent submits that one should take into account the fact that there is a bottle shop operating on the premises. Section 31 requires a valuer to establish the real or effective rent under the existing Lease by reference to the rent payable on a hypothetical letting of the premises but at the same time the valuer must assume that the property is unoccupied and offered for renting for the use to which the property can be put in accordance with the Lease. Although one takes no account of the Lessee’s goodwill one should take into account the terms and conditions of the actual lease itself. The Applicant on the other hand says that one has to take into account the fact that there is a hotelier’s licence with respect to the demised premises.

It is without doubt that the parties, when entering into this Lease, stated clearly that the permitted use was that of “liquor retailing”. The words “liquor retailing” do not appear in the Liquor Act 1982. In the original draft of the Lease the permitted use was stated to be “off licence retailing” but the words “off licence” were (it was submitted, deliberately) deleted and the word “liquor” inserted in lieu. “Off-licence” is a technical term defined under section 4 of the Liquor Act that means a licence that authorises the licensee to sell liquor on the licensed premises but only for consumption otherwise than on the premises. On the other hand, a “Hotelier’s Licence” means a licence that authorises the licensee to sell liquor by retail on the licensed premises, whether or not for consumption of those premises. It was submitted by the deliberate deletion of the words “off licence” the distinction was clearly identified by the parties such that a distinction is to be made between liquor retailing and “off licence” retailing. It was submitted that under the Liquor Act Section 18 there are five types of licence only one of which uses the words “by retail”.

35 As I understood the argument there is a significant value difference. If one takes into account that the property is in fact a bottle shop then the effective rent, or the real rent, is much higher. The Respondent submitted that to ignore the actual use to which the property is actually used results in an abstract exercise by the valuer carried out in a vacuum. The particular use should not be excluded. It was further submitted on behalf of the Respondent that I could draw no inference from the deletion of the words “off licence” and the substitution of the word “liquor”. There was, indeed, no evidence as to how the words came to be deleted. Furthermore, it was submitted that section 31(1)(a)(iv) was relevant when a tenant comes in cold as a new tenant, but in this case it was submitted it was not relevant because the particular actual use should not be excluded from consideration. The Respondent put reliance on the words “or a substantially similar use” when used in section 31(1)(a)(ii) and submitted that section 31 and clause 5.15 were both directed to obtaining realistic valuation of the premises.

36 There is little doubt that the words “effective rent” when used in section 31(1)(a) mean the real rent as opposed to a nominal or face rent. In Commissioner of Taxation v. Montgomery (1999) HCA 34 (5 August 1999) Gleeson CJ, McHugh and Callinan JJ said at paragraph 11: “So widespread was the use of leasing incentives that, in the valuation of commercial leases, some informed people in the industry referred to the “face” rent as being the rental specified in the Lease and the “effective” rent as being the rental discounted for incentives”. In that particular case “(t)here was no question of (the Lessee) being offered a choice of paying a higher rent and receiving an inducement payment on the one hand, and paying a lower rent and receiving no inducement payment, on the other.”

37 It was further submitted that I could also rely upon Burns Philp Hardware Pty Limited v. Howard Chia Pty Limited 1986 8 NSWLR 621 where Powell J said at 636 that the phrase “market rent” meant “what the property in question would fetch in the market under the state of things for the time being in question.” Relevantly, also Young J at 635 noted that parties usually depend upon the valuer’s expertise to come up with a fair result.

38 There is no doubt that a specialist retail valuer can refer to comparable leases provided that the valuer takes into account the provisions of section 31(1)(a). One of the provisions is “the same or a substantially similar use to which the shop may be put under the lease” . It was submitted that there is “a presumption that the hypotheses upon which the rent should be fixed upon review should bear as close as resemblance to reality as possible” (Norwich Union Life Insurance Society v. Trustee Savings Bank Central Board (1986) 278 Estates Gazette 162) and that one should also have regard to the commercial purpose of the relevant clause, in this case “liquor retailing”.

39 It seems to me that there is an essential difficulty with the Respondent’s submissions. If one looks at the premises as unoccupied, as being situate next to a licensed hotel, as having the only permitted use as “liquor retailing” and having regard to the clear provisions of Additional Clause 19 which clearly connects the demised premises to the neighbouring hotel by way of the re-definition of the hotel (described therein as “the tenant’s licensed premises”) to include the area of the demised premises, the it is plain to me that those are factors which a specialised retail valuer is entitled to have regard and which he should (as a matter of law) have regard. However, the fact that the premises are actually operated as a bottle shop ignores, in my respectful view, the clear provision of section 31 (twice appearing) that the valuer is to assess the effective rent value of the premises as if the premises were unoccupied. .

40 So, and now harking back to the original analysis, once one accepts that an essential basis of assessing the current market rent is that the premises are in fact unoccupied then one must ignore the fact that the premises are actually being operated as a bottle shop. It seems to me that in the circumstances of this case a valuer’s exercise on this aspect should be to have regard to the assumption that the premises are unoccupied, are contiguous to licensed premises effectively operated by the Lessee and are included in the Lessee’s licensed premises by virtue of the successful redefinition of those licensed premises consistent with the terms of Additional Clause 19 and importantly that there is a strict restriction on the use to which the premises may be put, namely “liquor retailing”.

41 I am not prepared to draw any conclusions (as urged upon me by counsel for the Applicant) arising out of the deletion of the words “off license” and the substitution in lieu of the word “liquor”. The plain fact is that the parties agreed to the permitted use being only liquor retailing and that is consistent with Additional Clause 19. In my view there is no particular magic in interpretation simply because whatever follows from the permitted use and the re-definition by the Licensing Court of the licensed premises of the hotel to include the premises the subject of the Lease is a matter to be determined pursuant to the definitional clauses under the Liquor Act. Whatever use the Lessee puts to the demised premises can only be a legal use under the Liquor Act and whether that use incorporates “off license” use or some other use would be a matter for additional argument (if relevant). However, it seems to me that the parties have used the general words “liquor retailing” to suit the convenience of the Lessee, it operating the contiguous licensed premises as a hotel and requiring those premises to be redefined to include the demised premises so that the Lessee could use the demised premises for whatever purposes were legally available to the Lessee as a consequence of that re-definition.

42 It is therefore a matter for the specialist retail valuer to assess those uses and that will assist the valuer in determining, having regard to the provisions of the Lease and the assumption that the premises are unoccupied, the rent that would reasonably be expected to be paid for the demised premises.

43 To avoid Additional Clause 19 is to avoid section 31(1)(a)(i). These premises may have a different rental value had it not been for Additional Clause 19 and the permitted use restrictions. Whether that value be more or less is a matter for expert assessment. But the plain fact of the matter is that the provisions of the Lease are quite explicit, were written in for a particular purpose by the parties as part of their commercial negotiations and must (in my view) be taken into account by the valuer.

44 It was submitted that the valuer should have regard to the fact that the premises cannot be used for liquor retailing by somebody other than the licensee of the contiguous premises. Consequently that severely limits the number of persons who could lease these premises, effectively limiting those persons to one, namely the next door licensee or someone having any (if permitted) relevant connection to that licensee, or someone with a relevant license to trade for the permitted use (if consistent with Additional Clause 19). Whether all of that is relevant is not a matter for me to determine; rather it is a matter for assessment by the specialist retail valuer who will have regard to the provisions of the Lease as he/she is required so to do pursuant to Section 31. And it may be that the contiguous licensee would be permitted to use the demised premises for purposes other than a bottle shop consistent with whatever may be the licensee’s legal entitlements as a consequence of the redefinition of the contiguous licensed premises.

Second Issue:

45 Having identified the appropriate method as above, the parties have asked “whether or not the valuations as provided by each of the parties is in accordance with the appropriate method of calculation of the current market rent?”

46 Each party had prepared a valuation for which they each contended. The Respondent’s valuation is based upon the fact that it is a licensed bottle shop and the Respondent’s valuer states: “a commonly accepted method of accepting the rental value of a licensed bottle shop is based on affordability with reference to revenue”. The valuer then goes on to rely upon a letter by the solicitors for the Respondent which states inter alia, that the Respondent “is entitled to the rent being calculated on the basis that the highest and best use to which the property can be put having regard to the terms of the lease. That use is a bottle shop.” The letter then goes on to say: “as a valuer you are entitled to arrive at a “current market rent” by reference to comparable rentals and/or by reliance on a set percentage rental return calculated by reference to the average gross turn over of a bottleshop business if that is a valuation criteria which is accepted in the market place and is consistent with the provisions of the lease”.

47 Although couched in that fashion it would seem that the valuer has in fact relied upon the letter as a formal advice – the valuer says “… we are advised (by the solicitor’s letter) that the valuer is entitled to arrive at a current market rent by reference to comparable rentals and/or gross turn over of the bottle shop business if that is a valuation criterion which is accepted in the marketplace and is consistent with the provisions of the lease. Accordingly, in the absence of directly comparable rental evidence, we have adopted the affordability approach as the preferred method of assessing rental value for the premises based on the permitted use”.

48 It seems to me that, firstly, the valuer has not used his own expertise to determine what is the highest and best use to which the property can be put having regard to the terms of the Lease – he seems to have relied entirely upon the expression of opinion by the Lessor’s solicitors. As I have stated above, in my view one needs to look at the terms of the Liquor Act and to what use or uses the demised premises can be put, assuming that they were unoccupied, as a result of the re-definition of the contiguous licensed premises. There was no evidence before me that would indicate what use or uses the demised premises could be so put. Whether the highest and best use was a bottle shop would be a matter for evidence and submissions.

49 In any event, this valuer seems to ignore entirely the fact that the premises are to be assessed as if they were unoccupied. Although it is true that clause 4.6 provides that in circumstances where the new rent (ie the rent to be paid for the Lease to be entered into pursuant to the exercise of the option) is to be the current market rent it will be decided “assuming that this lease and the new lease where one continuous lease and the commencement date of the new lease was a rent review date”, that (it seems to me) does not alter the absolute requirement under Section 31 that one of the matters that the specialist retail valuer must have regard to “is the rent that would reasonably be expected to be paid for the shop if it were unoccupied and offered for renting for the same or a substantially similar use to which the shop may be put under the lease”. It seems to me that whatever may be the proper interpretation to the words quoted in clause 4.6 the fact is that when one looks at the whole intent of Section 31(1)(a)(ii), (iv) (both of which refer to the premises being “unoccupied”) and the closing words of sub-section (a) to the effect that the “current market rent is not to take into account the value of goodwill … or the value of the Lessee’s fixtures and fittings …” the combined effect seems to me to make it plain that the valuer has to look at the premises as if they were unoccupied. Indeed, it is only in that way that one can properly base an estimate of current market rent. What this valuer has done, in my view, is based his value on the premises as “a licensed bottle shop”. He then compounds (in my respectful view) the error by stating: “we are not privy to the trading figures of the business though we are advised by the Lessor that the turnover is averaging approximately $30,000.00 per week”. The evidence in support of that statement is sadly lacking and in any event it appears to be irrelevant having regard to the principles that I have set out above. The valuer then takes that figure, multiplies by what he says is the “accepted industry criterion (of) 4% to 5% of sales (curiously also not supported) dependent on sales mix”, multiplies $30,000.00 by 4.5% and ends up with a calculation.

50 The valuer then goes on to refer to what he describes as “market evidence” by reference to “bottle shop revenue amounts in metropolitan Sydney”. He then takes these figures drawn from bottle shops in Rozelle, Balmain, Camperdown, Darling Harbour, Wentworthville, Greenacre, Bonnyrigg, Colyton, and Bossley Park. An analysis of those figures (described by the valuer as “estimated turnover”) indicates a range of figures at the highest $60,000.00 per week and at lowest $17,000.00 per week. The basis of those figures seems to me to be merely estimated turnover, in each case there is a stated range and in any event the geographical locations and monetary variations are so wide that one may have considerable doubt as to how one would reasonably calculate, from those figures, a market rental valuation of unoccupied premises at Rozelle.

51 In my opinion the valuation tendered by the Respondent does not comply with the appropriate method of calculation of current market rent as I have specified above.

52 I next turn to the valuation provided by the Applicant. It goes without saying that the Applicant’s valuation is considerably different in quantum from that of the Respondent – the difference is $21,000.00 gross exclusive of GST compared to $70,200.00 per annum also exclusive of GST.

53 In his preamble this valuer states (page 1) that “the hotelier’s license applies to the adjoining hotel and has been extended to include the subject premises. For the purposes of this report the rental for the subject premises are to be reviewed disregarding the hotelier’s licence because to do so would mean that we would be deeming it to be an off-license bottle shop which it is not therefore in adopting this approach we have disregarded the use as liquor retailing.” If that is the correct basis of this valuation then it also fails because that statement simply disregards “the provisions of the lease” (Section 31(1)(a)(i)). He then compounds this error on page 2 by stating: “We have adopted an unoccupied situation for the purposes of this valuation because to consider the use referred to in clause 5.15.2 in the Lease would deem the hotelier’s license covering both the premises and 726 Darling Street to be an off-license which it is not. The hotelier’s license is owned by Ronald John Bladwin and not the lessee nor the lessor. Therefore the hotelier’s license does not apply and retail rents are to be considered.” In my view that ignores the terms of the Lease and in particular gives no validity or use to the permitted use nor to the provisions of Additional Clause 19. In my view a proper valuation would have nothing to do with “retail rents”, rather it has all to do with the provisions of Section 31.

54 If a valuer ignores the provisions of the Lease then not only is that a failure to observe Section 31 but it also allows the valuer to fall into error. A careful study of the Lease itself is always of assistance. In particular in this case where there is a restricted permitted use, quite specific provisions in Additional Clause 19 and, equally as importantly, Additional Condition 21.2 provides that the Lessee is “required to maintain and repair as required the cool room which is acknowledged to be a landlord’s fixture …”. Unfortunately there is nothing in the documentation or the evidence that permits me to draw any conclusions relating to the cool room itself but it would be not unreasonable, absent inspection, to deduce from the documentation that the cool room would have something to do with the permitted use as “liquor retailing”. It may well be able to be used for other purposes as well, but this Lease is limited to “liquor retailing”.

55 The valuer then provides details of gross rental for various nearby retail shops. None of the shops are used for liquor retailing. It is well known that the sale of liquor is regulated under the Liquor Act by the Licensing Court. That factor does not seem to have been taken into account by any valuer. The Applicant’s valuer refers to the leased premises as being “located towards the southern fringe of the Rozelle retail trading area (and) … that such an area lacks strong retailing strength” and presumably that had some effect upon the assessment. Its relevance however to premises situate next to a hotel and forming part of the “licensed premises” is not entirely clear and its relevance to premises for which the only permitted use is “liquor retailing” is unexplained.

56 In my opinion neither valuation report complies with the relevant principles to be applied in calculating the current market rent having regard to these discrete premises and this discrete Lease.

Conclusion:

56 I have set out what I regard as the relevant principles to be applied in the assessment of current market rent. I have expressed the clear view that neither valuation complies with those principles. I have done what the parties have asked of me by declaring their rights as part of the above Judgment.

57 However, the parties may wish to agitate other relief. Annexure “B” to the Application made to this Tribunal seeks a number or orders. None of those have been agitated thus far and consequently I grant liberty to either party to apply to restore the matter to the list before me should they be so advised. I direct that the party seeking so to restore this matter give notice to the Tribunal and to the other party of precisely what additional or other relief the party wishes to obtain from the Tribunal. Any such application must be made within 28 days; absent any such application the formal order of the Tribunal will be:

1. Declare the rights and liabilities of the parties in accordance with this Judgment.

2. Declare that the valuations provided by each of the parties are not prepared in accordance with the relevant principles that apply to the calculation of current market rent having regard to the terms of this Judgment.

3. Otherwise Application dismissed with no order as to costs.