Bevendale Pty Ltd v Lucky Eights Pty Ltd
[2020] VSCA 312
•4 December 2020
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S EAPCI 2020 0014
| BEVENDALE PTY LTD (ACN 006 392 267) | Applicant |
| v | |
| LUCKY EIGHTS PTY LTD (ACN 056 500 022) | Respondent |
---
| JUDGES: | KYROU, McLEISH and NIALL JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 15, 16 October 2020 |
| DATE OF JUDGMENT: | 4 December 2020 |
| MEDIUM NEUTRAL CITATION: | [2020] VSCA 312 |
JUDGMENT APPEALED FROM: | [2019] VCAT 1668 (Judge Macnamara) |
---
RETAIL PREMISES LEASE – Hotel with gaming machines – Premises approved as suitable for gaming – Market rent review – Whether valuer erred in treating premises approval as being available to hypothetical tenant willing to lease premises – Victorian Civil and Administrative Tribunal erred in setting aside valuation – Gaming Machine Control Act 1991 pt 2A, s 163(5); Gambling Regulation Act 2003 ch 3 pt 3 – Appeal allowed.
RETAIL PREMISES LEASE – Valuation – Principles for determination of market rent – Retail Leases Act 2003 ss 37, 94.
RETAIL PREMISES LEASE – Valuation – Principles for determination of market rent – Attributes of ‘hypothetical tenant’ – Whether hypothetical tenant assumed to have necessary approvals for uses permitted by lease – Approval of premises as suitable for gaming – Gaming machine entitlements.
RETAIL PREMISES LEASE – Valuation – Principles for determination of market rent – Existing tenant’s goodwill – ‘Profits method’ – No error by Tribunal – Serene Hotels Pty Ltd v Epping Hotels Pty Ltd [2015] VSCA 228 followed.
RETAIL PREMISES LEASE – Valuation – Circumstances in which valuation of market rent for retail premises can be set aside – Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 applied.
WORDS AND PHRASES – ‘Free and open market’ – ‘Willing landlord and willing tenant’ – ‘Arm’s length transaction’ – ‘For the same, or a substantially similar, use’ – ‘Take into account the value of goodwill created by the tenant’s occupation’ – Retail Leases Act 2003 s 37(2).
WORDS AND PHRASES – Lease of retail premises – Valuation – Market rent – ‘Market rental values for comparable premises in the vicinity of the [leased premises]’.
---
| APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr S R Morris QC with Mr S Hopper | MinterEllison |
| For the Respondent | Mr A J Myers QC with Mr B Holmes | Gilbert + Tobin |
TABLE OF CONTENTS
KYROU AND McLEISH JJA
1
Introduction and summary
1
Factual and regulatory background to leases and use of Premises for gaming
2
Entering into and renewal of the leases
2
Regulatory approvals under the Gaming Machine Control Act 1991
4
Regulatory framework under the Gambling Regulation Act 2003
8
Transitional provisions in the Gambling Regulation Act 2003
12
LE’s current VOL
14
Broad outline of the Valuer’s Determination
15
Broad outline of VCAT’s decision
16
Grounds of appeal and notice of contention
17
Ground 1 and Contention 1 — Who can utilise the Premises Approval?
19
Valuer’s Determination relevant to Ground 1 and Contention 1
19
VCAT’s decision relevant to Ground 1 and Contention 1
19
Parties’ submissions on Ground 1 and Contention 1
21
Decision on Ground 1 and Contention 1
25
Rent review provisions/principles relevant to Ground 2 and Contentions 2–4
33
Relevant provisions of the RLA and the 2006 deed of renewal
33
Principles relevant to the valuation task under s 37(2) of the RLA
35
(a) Free and open market
36
(b) Willing landlord and willing tenant in an arm’s length transaction
36
(c) Premises … unoccupied
38
(d) Same, or a substantially similar, use
39
(e) Goodwill created by the tenant’s occupation
40
(f) Summary of relevant principles
40
Ground 2 and Contention 2 — Availability of Premises Approval and GMEs
41
Valuer’s Determination and VCAT’s decision relevant to Ground 2 and Contention 2
42
Parties’ submissions on Ground 2 and Contention 2
43
Decision on Ground 2 and Contention 2
48
Contentions 3 and 4 — Comparable premises in the vicinity; goodwill
51
(a) Meaning of ‘comparable premises in the vicinity of the Premises’
52
(b) Meaning of ‘goodwill created by the tenant’s occupation’ in s 37(2) of the RLA
54
(c) The profits method of rental valuation endorsed in Serene Hotels
55
Valuer’s Determination relevant to Contentions 3 and 4
62
VCAT’s decision in relation to Contentions 3 and 4
68
Parties’ submissions on Contentions 3 and 4
70
Decision on Contentions 3 and 4
75
Ground 3 and Contention 5 — Principles in Legal & General
80
Principles regarding setting aside valuations
81
VCAT’s decision relevant to Ground 3 and Contention 5
82
Parties’ submissions on Ground 3 and Contention 5
83
Decision on Ground 3 and Contention 5
86
Conclusion
86
NIALL JA
86
Introduction and summary
87
Ground 1 and Contention 1
88
The construction of s 37 of the RLA
98
The role of the valuer
102
The role of VCAT
103
The jurisdiction of the Court
103
Ground 2
103
Contention 2
106
Contention 3
108
Contention 4
109
Ground 3 and Contention 5
111
Conclusion
112
KYROU JA
McLEISH JA:
Introduction and summary
The applicant, Bevendale Pty Ltd (‘Bevendale’), is the lessor and the respondent, Lucky Eights Pty Ltd (‘LE’), is the lessee of shops 28 and 28A of the Epping Plaza Shopping Centre (‘Centre’). The Centre is very large and includes a variety of retail premises, including a Target store, three supermarkets, banks, restaurants and cinemas.
Shops 28 and 28A (collectively, ‘the Premises’) are subject to separate leases. LE operates the Epping Plaza Hotel from shop 28. The hotel’s business comprises a gaming room with 100 electronic gaming machines, a bistro-style restaurant with a bar and a separate sports bar with TAB and Keno betting facilities. Revenue from the 100 gaming machines contributes in the order of 80 per cent of LE’s revenue. Shop 28A adjoins shop 28 and comprises an administrative office and goods storage area. The Premises have a street frontage and are not accessible from any area inside the Centre. There is no other gaming venue at the Centre.
The Premises have been approved as suitable for gaming and constitute ‘retail premises’ within the meaning of the Retail Leases Act 2003 (‘RLA’).
The leases, as renewed, provided for a market review of the rent. As the parties were unable to agree on the market rent for the period commencing 12 July 2016,[1] a valuer, Peter Grieve (‘Valuer’), was appointed to determine the market rent. On 23 March 2018, he determined that the market rent was $1,602,043 per annum for shop 28 and $213,957 per annum for shop 28A (‘Determination’).[2] The rent for the year commencing July 2015 was $401,145.91 for shop 28 and $55,181.45 for shop 28A.
[1]This is the relevant date for shop 28. The relevant date for shop 28A is 16 July 2016. As this difference is not presently relevant, we will refer only to 12 July 2016.
[2]All rental amounts in these reasons are exclusive of GST.
On 6 July 2018, LE commenced a proceeding in the Victorian Civil and Administrative Tribunal (‘VCAT’) seeking an order setting aside the Determination. On 19 December 2019, a Vice President of VCAT made such an order.[3]
[3]See Lucky Eights Pty Ltd v Bevendale Pty Ltd [2019] VCAT 1668 (‘Reasons’).
Bevendale has sought leave to appeal against VCAT’s decision on the three proposed grounds set out at [63] below. Those grounds seek to impugn VCAT’s findings that the Valuer erred in holding that the hypothetical tenant who was willing to lease the Premises should not be regarded as able to utilise the approval of the Premises as suitable for gaming and that this error vitiated the Determination.
LE has filed a notice of contention by which it has sought to support VCAT’s order on the five grounds set out at [65] below. In broad terms, those grounds seek to impugn the methodology and some of the assumptions the Valuer had adopted in arriving at the Determination.
For the reasons that follow, the application for leave to appeal will be granted and the appeal will be allowed.
Factual and regulatory background to leases and use of Premises for gaming
We set out below a summary of the factual background to the execution of the leases and their renewal, and the regulatory approvals obtained by LE to enable it to use the Premises for gaming. An understanding of how the regulatory framework for an approval of premises as suitable for gaming evolved and the history of the conferral of that status upon the Premises is critical to the outcome of the application for leave to appeal.
Entering into and renewal of the leases
On 18 October 1995, Bevendale and LE signed an ‘Agreement for Lease’ (‘AFL’) and a ‘Supplemental Deed’ in respect of the Premises. At that time, the Centre had not yet been constructed. The AFL required LE, at its own expense, to fit out the Premises and apply for a liquor licence and a planning permit to enable it to operate the Epping Plaza Hotel. It provided that, if LE did not obtain such a licence or permit by a particular time, both LE and Bevendale had the option to avoid the AFL. The Supplemental Deed required LE, at its own expense, to make an application under the Gaming Machine Control Act 1991 (‘GMCA’) for a venue operator’s licence (‘VOL’). The Supplemental Deed provided that, if LE did not obtain a VOL for 105 gaming machines by a particular time, both LE and Bevendale had the option of avoiding the AFL. LE succeeded in obtaining the abovementioned regulatory approvals.
The Premises were an ‘empty shell’ when LE took possession in March 1996. Accordingly, the fit-out works that LE undertook, at a cost to it of approximately $1,800,000, included some fixtures — such as external doors and windows, toilets, climate control systems and mechanical ventilation — which are normally provided and paid for by the landlord.
On 23 September 1999, Bevendale and LE signed a lease for shop 28 for a five year term commencing on 12 July 1996 and a separate lease for shop 28A for a five year term commencing on 16 July 1996. In all respects that are relevant to the current proceeding, the leases are identical. Accordingly, for convenience, we will refer only to the lease relating to shop 28 and assume that it covers both shops — that is, the entire Premises — unless it is necessary for us to refer separately to shop 28A or the lease relating to it.
On 6 December 2000, the parties executed a deed of renewal which renewed the lease for a five year term commencing on 12 July 2001. On 6 September 2006, the parties executed a deed of renewal which renewed the lease for another five year term commencing on 12 July 2006 (‘2006 deed of renewal’). On 24 May 2012, the parties executed a deed of renewal which renewed the lease for a further term of five years commencing on 12 July 2011. At the end of that term, LE had options to extend the lease by three five year terms. The lease currently in force is the lease whose term commenced on 12 July 2016.
Item 7 of sch 1 to the lease specifies the ‘Use of [the] Demised Premises’ as ‘Hotel, restaurant and gaming, sportsbook, wagering facility and bottle shop’.[4] Clause 4.1.1 prohibits LE from using the Premises for any other purpose. Clause 4.2.1 requires LE to use the Premises ‘solely for the purpose of conducting the business or businesses permitted under this Lease’. Clause 4.2.6 requires LE, at its own expense, to comply with all laws affecting the Premises ‘or the use thereof’.
[4]The deed of renewal dated 24 May 2012 for shop 28 substituted ‘sportsbet’ for ‘sportsbook’. Item 7 of sch 1 to the lease for shop 28A specifies the ‘Use of [the] Demised Premises’ as: ‘Office for the administration of [LE’s] business conducted from the adjoining premises being Shop 28’. Neither party referred to the substitution in the permitted use for shop 28 or the difference in the permitted uses of the two shops and accordingly we will treat them as being immaterial to the issues in the proceeding.
Regulatory approvals under the Gaming Machine Control Act 1991
Prior to 31 August 1998, s 21(1)(b) of the GMCA required that an applicant for a VOL had to be a suitable person to be concerned with the management and operation of a gaming venue. The GMCA did not require a separate application to be made for approval of premises as suitable for gaming. However, ss 11, 19(1), 21(1)(c) and 25(2) and (5) provided that the VOL had to be granted for particular premises that had a liquor licence and were suitable for the management and operation of gaming machines. Under s 25(2), the VOL also had to specify the number of gaming machines permitted at the approved venue. Section 3(1) of the GMCA defined ‘approved venue’ as ‘premises on which a venue operator is licensed to conduct gaming’.
On 23 April 1996, the Victorian Casino and Gaming Authority (‘VCGA’) granted to LE a five year VOL which stated:
[VCGA] … hereby grants a [VOL] to [LE] in respect of Epping Plaza Hotel … the venue hereby approved for gaming. This licence authorises gaming at the venue … on not more than [100] machines in the Restricted Area … and on not more than [5] machines in the Unrestricted Area specified in the annexed plan(s).[5]
[5]Emphasis added.
On 31 August 1998, the GMCA was relevantly amended by ss 4 and 7 of the Gaming Acts (Miscellaneous Amendment) Act 1997 (‘1997 Act’) to substitute a new definition of ‘approved venue’ in s 3(1) of the GMCA and to provide for the separate approval of premises as suitable for gaming under a new pt 2A (ss 12A to 12L) of the GMCA.
Section 3(1) of the GMCA, as amended by the 1997 Act, defined ‘approved venue’ to mean premises ‘(a) to which the licence of a venue operator applies’ and ‘(b) which are approved under Part 2A as suitable for gaming and the approval is in force’.
Section 12A of the GMCA, as inserted by the 1997 Act, in broad terms, limited approved premises to those which had a liquor licence. Section 12B(1) provided that ‘[t]he owner of premises or a person authorised by the owner may apply to the [VCGA] for the approval of premises as suitable for gaming’. The GMCA did not define the term ‘owner’ for the purposes of pt 2A. Section 12B(3)(a) specified that the application had to contain ‘evidence of the applicant’s interest in the premises or any other relevant authorisation’.
Section 12D(1) of the GMCA, as inserted by the 1997 Act, set out two matters of which the VCGA had to be satisfied before granting an application for approval of premises as suitable for gaming (‘premises approval’). First, that ‘the applicant has authority to make the application in respect of the premises’. Secondly, that ‘the premises are … suitable for the management and operation of gaming machines’. Section 12D(2) made particular reference to ‘the size, layout and facilities of the premises’. On 10 May 2000, the GMCA was further amended by s 20 of the Gambling Legislation (Responsible Gambling) Act 2000 (‘2000 Act’) to add a third matter to s 12D(1), namely, that ‘the net economic and social impact of approval will not be detrimental to the well-being of the community of the municipal district in which the premises are located’ (‘no net local detriment test’).
Section 12I of the GMCA, as inserted by the 1997 Act, provided that, subject to prior cancellation, revocation or surrender, a premises approval remained in force for five years.
Section 12J(1) of the GMCA, as inserted by the 1997 Act, provided that ‘[t]he holder of an approval of premises under [pt 2A] may, not earlier than 9 months before [its] expiration … apply to the [VCGA] for a new approval’.[6] Section 12J(3), as inserted by the 1997 Act and amended by the 2000 Act, provided that, subject to certain exceptions, the provisions of the GMCA applied to an application for a new approval ‘as if the application had been made by a person other than the holder of an approval’. The exceptions were sections dealing with the suitability of the premises for the management and operation of gaming machines and the no net local detriment test.
[6]Emphasis added.
Section 34(3) of the 1997 Act added transitional provisions to the GMCA by inserting a new sub-s (5) in s 163, which relevantly provided as follows:
If, immediately before the commencement of section 7 of the [1997 Act], premises were an approved venue, then on that commencement—
(a)they are deemed to be approved under Part 2A of this Act as suitable for gaming; and
(b)the venue operator at the approved venue immediately before that commencement is deemed to be the holder of the approval under Part 2A; and
(c)the approval is deemed to have been granted on the day on which the [VOL] was granted; and
(d)the premises are deemed to be specified in the [VOL] as premises that the venue operator is authorised to manage and operate under the licence; and
(e)the number of gaming machines permitted in the approved venue immediately before that commencement is deemed to be specified in the [VOL] as the number permitted in those premises; …[7]
[7]Emphasis added.
Accordingly, from 31 August 1998, the Premises were deemed to be approved under pt 2A of the GMCA as suitable for gaming and LE was deemed to be the ‘holder’ of that approval whose term was deemed to be for the period of five years commencing on 23 April 1996 and expiring on 22 April 2001 (‘initial premises approval’).
On 4 September 2000, the VCGA gave a ‘Notice of Approved Venue’ to LE which relevantly stated that:
(a) LE was the ‘holder’ of VOL number V9510064 expiring on 22 April 2001;
(b)the Epping Plaza Hotel had premises approval number P98000432 expiring on 22 April 2001;
(c)the number of gaming machines permitted in the Restricted Area was 100; and
(d)the nominee of the ‘approved venue’ was Euan Gronow, an officer of LE.
In February 2001, prior to the expiration of its initial premises approval, LE applied under s 12J(1) of the GMCA for a new premises approval for the Epping Plaza Hotel. On 3 May 2001, a new premises approval was granted (albeit with the same number, P98000432) for a five year period expiring on 22 April 2006 (‘Premises Approval’). The VCGA’s ‘Notice of Approved Premises for Gaming’ dated 3 May 2001 stated that the ‘holder’ of the Premises Approval was Mr Gronow. It is not clear why Mr Gronow was named as the ‘holder’. This may have occurred because he signed the application under s 12J(1). If he did, he clearly did so on behalf of LE. Accordingly, nothing turns on Mr Gronow, rather than LE, being named as the ‘holder’ in VCGA’s notice.
On 17 May 2001, the VCGA renewed LE’s VOL number V9510064 for the five year period expiring on 24 April 2006. The VCGA provided to LE a ‘Notice of Approved Venue’ which referred to the VOL and the Premises Approval (number P98000432) and specified Mr Gronow as the nominee of ‘this approved venue’.
Regulatory framework under the Gambling Regulation Act 2003
On 1 July 2004, the GMCA was repealed by the Gambling Regulation Act 2003 (‘GRA’). The Victorian Commission for Gambling Regulation replaced the VCGA as the regulator. The Victorian Commission for Gambling Regulation was subsequently replaced by the Victorian Commission for Gambling and Liquor Regulation (‘VCGLR’) on 6 February 2012. For convenience, we will refer to the regulator under the GRA as the VCGLR.
Under the GRA, from 1 July 2004, in order for a gaming business such as the Epping Plaza Hotel to be conducted, two regulatory approvals had to be in place. First, approval of premises as suitable for gaming — being the approval granted by the VCGLR pursuant to pt 3 of ch 3 (ss 3.3.1 to 3.3.17) of the GRA. Secondly, a VOL — being the licence granted by the VCGLR pursuant to div 2 of pt 4 of ch 3 of the GRA (ss 3.4.8 to 3.4.28). From 24 June 2009, a third regulatory approval was introduced, namely, gaming machine entitlements (GMEs) — being the entitlements granted pursuant to pt 4A of ch 3 of the GRA (ss 3.4A.1 to 3.4A.33).[8]
[8]See s 25 of the Gambling Regulation Amendment (Licensing) Act 2009.
Section 3.2.1 of the GRA provides that the conduct of gaming is lawful when the gaming is conducted in an approved venue in accordance with ch 3. Section 3.4A.1(1) provides that the conduct of gaming in an approved venue is lawful only if the venue operator holds GMEs that authorise the conduct of that gaming, and the gaming is conducted in accordance with any conditions to which the GMEs are subject.
The term ‘gaming’ is defined in s 3.1.2 of the GRA to mean ‘the playing of a gaming machine’. The term ‘approved venue’ is defined in s 1.3(1) to mean premises (a) to which a VOL applies; and (b) in respect of which an approval is in force under pt 3 of ch 3.
The note to s 3.3.1 of the GRA provides that premises cannot operate as an approved venue unless the premises are approved under pt 3 of ch 3 as suitable for gaming. Section 3.3.2(1) provides that a premises approval may be given for any premises which have a pub licence, a club licence or a racing club licence. The effect of the section is that a liquor licence must be in force in respect of the premises.
Section 3.3.4(1) of the GRA provides that an application for a premises approval may be made by ‘the owner of [the] premises or a person authorised by the owner’. The term ‘owner’ is not defined in the GRA for the purposes of pt 3 of ch 3. Section 3.3.4(3) provides that an application must contain ‘evidence of the applicant’s interest in the premises or any other relevant authorisation’ and ‘evidence that the owner or a person authorised by the owner’ has complied with the requirement in s 3.3.5 to give the relevant responsible authority a copy of the application. Under s 3.3.6, the relevant responsible authority may make a submission to the VCGLR on the no net local detriment test.
Section 3.3.7(1) of the GRA provides that a premises approval must not be granted unless the VCGLR is satisfied of three matters. First, that the applicant has authority to make the application in respect of the premises. Secondly, that the premises are suitable for the management and operation of gaming machines. Thirdly, that the no net local detriment test is satisfied. Section 3.3.7(2) makes particular reference to ‘the size, layout and facilities of the premises’.
Premises approvals are granted under s 3.3.8 of the GRA. Section 3.3.8(2)(a) provides that an approval must specify the number of gaming machines permitted at the premises.
Section 3.3.10 of the GRA provides that a premises approval remains in force until it is revoked or surrendered. Section 3.3.11(1) provides that the ‘holder’ of an approval must inform the VCGLR of any changes to the size or layout of the premises. The term ‘holder’ is not defined in the GRA.
Section 3.3.12 of the GRA provides that the VCGLR may revoke a premises approval where the premises are no longer suitable for the conduct of gaming. Under s 3.3.12(1), the VCGLR must give the ‘holder’ of the approval an opportunity to show cause why the approval should not be revoked. Section 3.3.13 provides that a premises approval is immediately revoked if a liquor licence in respect of the premises is ‘cancelled, relocated, surrendered or released’.
Sections 3.3.15 and 3.3.15A of the GRA provide as follows:
3.3.15 Surrender of approval
The holder of an approval under this Part may surrender the approval by giving notice in writing to the [VCGLR].
3.3.15A One venue operator for an approved venue
Only one venue operator may conduct gaming in each approved venue.
Section 3.4.8(1) of the GRA provides that a VOL for a club venue or a hotel venue can only be held by a body corporate.
Section 3.4.11 of the GRA sets out the matters to be considered in determining applications for VOLs. It relevantly provides:
3.4.11 Matters to be considered in determining applications
(1)The [VCGLR] must not grant an application for a [VOL] unless satisfied that—
…
(b)the applicant, and each associate of the applicant, is a suitable person to be concerned in or associated with the management and operation of an approved venue; and
…
(c)in respect of each premises approved under Part 3 that the applicant seeks to manage and operate under the licence, the regional limit or municipal limit will not be exceeded by the grant of the application; and
…
(2)In particular, the [VCGLR] must consider whether—
(a)each applicant and associate of the applicant is of good repute, having regard to character, honesty and integrity;
(ab)the applicant is of sound and stable financial background; …
Section 3.4.12(2) of the GRA provides that a VOL must specify the approved premises that the licensee is authorised to manage and operate, the number of gaming machines permitted in those premises and details that identify each GME held by the venue operator under which gaming may be conducted in those premises.
Section 3.4.13(1) of the GRA requires the VCGLR to establish a Register of Venue Operators and Approved Venues which, under s 3.4.13(2), must contain the following information in relation to every venue operator:
(a) the name and address of the venue operator;
(b) the name and address of every associate of the venue operator;
(ba)details as to whether the venue operator is the holder of a club venue operator’s licence or a hotel venue operator’s licence;
(c) the address of each approved venue;
(d) the number of gaming machines permitted in each approved venue;
(e)the name and address of the nominee, if any, at each approved venue;
…
Section 3.4.14 of the GRA requires holders of VOLs to have a nominee. This requirement does not apply to a premises approval.
Section 3.4.15 of the GRA provides that a VOL ‘is not transferable to any other person or, subject to section 3.4.17, venue’. Section 3.4.17(1)(a) allows for the amendment of the conditions of a VOL by ‘the addition or removal of an approved venue’.
Divisions 2 and 3 of pt 4A of ch 3 of the GRA (ss 3.4A.3 to 3.4A.11C) contain provisions for the creation and allocation of GMEs by the relevant Minister and div 5 (ss 3.4A.15 to 3.4A.20) contains provisions for the transfer of GMEs between venue operators. Under s 3.4A.7, GMEs remain in force for 10 years but this period may be extended once by up to two years. On 25 June 2010, the Minister allocated 100 GMEs to LE. LE paid $49,540 for each GME pursuant to a deferred payment scheme. The GMEs took effect on 16 August 2012 and will remain in force until 15 August 2022. As at July 2016, the market value of GMEs for use in hotel gaming venues was about $100,000 each but none were listed for sale on the VCGLR’s website as at the end of May 2016.
Section 3.4A.5(3) of the GRA provides that the Minister must, from time to time, specify the maximum number of GMEs for Victoria. Under s 3.4A.5(3A), the Minister may also, from time to time, determine the maximum permissible number of GMEs for a region or a municipal district. The Whittlesea A region (in which the Premises are located) is and was at the time of the Determination capped at a maximum of 581 GMEs, all of which had been allocated.
Division 4 of pt 4A of ch 3 of the GRA (ss 3.4A.12 to 3.4A.14) contains provisions under which the VCGLR may amend the geographic area condition or venue condition to which GMEs are subject. Subject to applicable caps, such an amendment would allow a venue operator to use its GMEs in a different venue either within the same region or municipal district or in a different region or municipal district.
Transitional provisions in the Gambling Regulation Act 2003
As the GRA repealed the GMCA on 1 July 2004, it was necessary for the GRA to set out transitional provisions with regard to regulatory approvals that had been obtained under the GMCA. It did so in sch 7 (cls 1.1–31.3).
Clause 1.2 of sch 7 to the GRA set out the following general transitional provisions:
1.2 General transitional provisions
(1)Except where the contrary intention appears, this Schedule does not affect or take away from the Interpretation of Legislation Act 1984.
(2)If a provision of a superseded Act continues to apply by force of this Schedule, the following provisions also continue to apply in relation to that provision—
(a) any other provisions of the superseded Act necessary to give effect to that continued provision; and
(b) any regulations made under the superseded Act for the purposes of that continued provision.
Clauses 3.3 and 3.4 of sch 7 to the GRA made specific provision for premises approvals and VOLs, as follows:
3.3 Premises approvals
(1)An approval of premises under Part 2A of the [GMCA] that was in force immediately before the commencement day is taken, on and after that day, to be an approval of premises under Part 3 of Chapter 3 subject to any conditions to which the approval was subject immediately before that day.
(2)An approval of premises referred to in subsection (1) remains in force until the approval is revoked or surrendered under this Act.
…
3.4 Venue operator’s licences
(1)A [VOL] under Division 2 of Part 3 of the [GMCA] that was in force immediately before the commencement day is taken, on and after that day, to be a [VOL] under Division 2 of Part 4 of Chapter 3 subject to any conditions to which the licence was subject immediately before that day.
…
Accordingly, from 1 July 2004, LE’s Premises Approval was to continue in force indefinitely unless revoked by the VCGLR under s 3.3.12 of the GRA or surrendered by the ‘holder’ under s 3.3.15.
Clause 1.2 of sch 7 to the GRA refers to the Interpretation of Legislation Act 1984 (‘ILA’). Section 14 of the ILA relevantly provides as follows:
14 Provision as to effect of repeal etc. of Acts
…
(2) Where an Act or a provision of an Act—
(a)is repealed …; or
…
the repeal … of that Act or provision shall not, unless the contrary intention expressly appears—
…
(e)affect any right, privilege, obligation or liability acquired, accrued or incurred under that Act or provision;
…
(2A)Without limiting subsection (2), if a provision of an Act that is of a savings or transitional nature (whether or not the Act describes it as such) or that validates anything that is or may otherwise be invalid …—
(a) is repealed; or
…
the repeal … of that provision does not, unless the contrary intention expressly appears, affect the operation of the savings or transitional provision or end the validating effect of the provision … as the case requires.
LE’s current VOL
On 8 June 2016, the VCGLR renewed LE’s VOL number V9510064 until 24 April 2026. The VCGLR provided to LE a ‘Notice of Approved Venue’ which referred to the VOL, the Premises Approval and the number of gaming machines (namely, 100) upon which gaming was permitted, and specified Mark Robertson (an officer of LE) as the nominee of ‘this approved venue’. In relation to the Premises Approval, the notice stated the following:
Approved premises details
Premises approval number: P98000432
Premises approval date: 23 April 2001
Broad outline of the Valuer’s Determination
On 26 May 2016, Bevendale sent two letters to LE informing it that the rent for the Premises was subject to a market review effective from 12 July 2016 and that Bevendale had determined that the market rental value of shops 28 and 28A was $1,800,000 and $56,055 per annum, respectively.
On 22 June 2016, LE sent a letter to Bevendale advising that LE did not agree to the proposed rent.
In accordance with the 2006 deed of renewal, the rental dispute was referred to the Valuer for determination.
The Valuer’s task of determining the market rent of the Premises was governed by s 37 of the RLA and cl 4 of the 2006 deed of renewal. These provisions are set out or summarised at [116]–[122] below.
As we have already stated, on 23 March 2018, the Valuer published the Determination, which assessed the market rent for shops 28 and 28A at $1,602,043 and $213,957 per annum, respectively.
The Valuer summarised his reasoning in arriving at the Determination as follows:
aThe current market rental should be assessed assuming the [Premises are] Approved Premises for the operation of gaming;
bIt is reasonable to assume that a hypothetical tenant has 100 [GMEs] to operate in the [Premises];
cThe ‘Profits’ Method is viewed as most appropriate and is in line with industry practice in assessing market rental in that it takes into account the costs associated with the operation of a gaming hotel and provides a means of not taking into account the value of the tenant’s fixtures & fittings and goodwill;
dAnalysis of trading to an EBITDAR level has taken into account the actual trading expenses provided and those submitted within the submissions together with broader market expense benchmark ratios. This process is intended to generate an EBITDAR which a hypothetical tenant would view as reasonable on an average competent management basis.[9]
[9]Determination [8.7.1]. As discussed at [194] below, ‘EBITDAR’ means Earnings Before Interest, Tax, Depreciation, Amortisation and Rent.
The Determination is discussed in greater detail below.
Broad outline of VCAT’s decision
In broad outline, VCAT:
(a)decided that, under the GRA, a premises approval ‘runs with the land’ and is available for the advantage of the owner or occupier of the land for the time being;[10]
(b)decided: that, under the transitional provisions in the 1997 Act and the GRA, the Premises Approval was a right or privilege that LE held for its own benefit; that s 14 of the ILA had the effect of preserving that right or privilege; and that the Valuer erred in valuing the Premises on the basis that the hypothetical tenant could utilise the Premises Approval;[11]
(c)decided that the Valuer’s error in relation to the Premises Approval was, in substance, an error as to the subject matter of the valuation which warranted an order setting the Determination aside;[12]
(d)did not make a decision on whether the Valuer had erred in concluding that the hypothetical tenant would be able to utilise 100 GMEs at the Premises;[13]
(e)did not make a decision on whether the Valuer had infringed cl 4.5(d) of the 2006 deed of renewal by failing to have regard to current market rental values for comparable premises in the vicinity of the Premises;[14] and
(f)decided that the Valuer had not infringed the requirement in s 37(2) of the RLA that the current market rent must not take into account the value of goodwill created by the tenant’s occupation of the premises.[15]
[10]Reasons [73]. See [70] below.
[11]Reasons [76]–[81]. See [70] below.
[12]Reasons [108]. See [258] below.
[13]See [149] below.
[14]See [218] below.
[15]Reasons [95]. See [219] below.
VCAT’s decision is discussed in greater detail below.
Grounds of appeal and notice of contention
Bevendale’s proposed grounds of appeal (‘Grounds’) are in the following terms:
[VCAT] erred in law by:
1holding that the relevant approval of the [Premises] as suitable for gaming is held by [LE] for its own benefit;
2holding that the hypothetical tenant should not be regarded as able to utilise the Premises Approval; and
3holding that the erroneous treatment of the approval of the [Premises] as suitable for gaming by the [Valuer] is in substance the making [of] an error in the subject matter of the [Determination] which is sufficient to invalidate the [Determination].
The three Grounds seek to impugn VCAT’s conclusions summarised at [61(b) and (c)] above.
The grounds upon which LE relies in its notice of contention (‘Contentions’) are in the following terms:
The [Determination] ought to have been set aside by [VCAT] on the following grounds.
1[VCAT] erred in holding that the effect of the [GRA] is that an approval of premises as suitable for gaming ‘pertains to the land’ and ‘runs with the land’ and is available for the advantage of the owner or occupier of the land for the time being.
2[VCAT] should have held that the [Valuer] was in error in concluding that a hypothetical tenant would be able to obtain 100 [GMEs], and would be permitted to operate the GMEs at the [Premises].
3[VCAT] should have held that in determining the current market rent, the [Valuer] was required by the lease to have fundamental regard to market rental values for comparable premises in the vicinity of the [Premises], and the [Valuer] failed to do so.
4[VCAT] should have held that the [Valuer’s] purported determination of the current market rent took into account the value of the goodwill created by the tenant’s occupation, in contravention of s 37(2) of the [RLA].
5[VCAT] ought to have held that each of the errors of the [Valuer] referred to in grounds 1–4 above involved a fundamental departure from the contractual stipulation of the [Valuer’s] task of determining the current market rental value of the [Premises], and accordingly [VCAT] ought to have made orders:
(a)declaring that the … Determination is not binding on the parties;
(b) setting aside the … Determination; and
(c)requiring [Bevendale] to repay all amounts of excess rent (plus interest) that it had required [LE] to pay since July 2016 pursuant to clause 4.7 of the lease.[16]
[16]Italics in original.
The Contentions seek to impugn VCAT’s conclusions set out at [61(a) and (f)] above and VCAT’s failure to make a decision on the issues set out at [61(d) and (e)] above.
We will consider the Grounds and the Contentions in the following order: first, Ground 1 and Contention 1; secondly, Ground 2 and Contention 2; thirdly, Contentions 3 and 4; and finally, Ground 3 and Contention 5.
It is not necessary for us to consider para (c) of Contention 5 because the parties agreed that submissions on that paragraph should be deferred until the Court publishes its judgment on the Grounds and the other Contentions. Accordingly, all references below to Contention 5 assume that para (c) does not form part of the contention.
Ground 1 and Contention 1 — Who can utilise the Premises Approval?
Valuer’s Determination relevant to Ground 1 and Contention 1
The Valuer reached three presently relevant conclusions in relation to the Premises Approval. First, the Premises Approval is not a personal right of LE. Secondly, the process of approving premises as suitable for gaming can be undertaken without reference to a VOL and, so long as the premises remain suitable for gaming, the approval will remain in place unless revoked or surrendered. Thirdly, as neither the RLA nor the lease requires a valuer to assume the Premises Approval has been revoked or surrendered, it must be assumed to be in place.
VCAT’s decision relevant to Ground 1 and Contention 1
As appears from [61] above, VCAT reached three presently relevant conclusions in relation to the Premises Approval. First, if the Premises Approval had been granted under the GRA, it would ‘run with the land’ and be available for the advantage of the owner or occupier of the land for the time being. Secondly, by virtue of the transitional provisions in the 1997 Act and the GRA, s 14 of the ILA had the effect that LE was the holder of the Premises Approval for its own benefit. Thirdly, the hypothetical tenant should not be regarded as being able to utilise the Premises Approval. VCAT gave the following reasons for these conclusions:
The considerations for the [VCGLR] upon granting a [premises approval] under the [GRA] and the contrast between those and the considerations stated as relevant in other parts of Chapter 3 relative to the grant of [VOLs], make good Bevendale’s contention that the [premises approval] ‘pertains’ to the land rather than to the person who made the application, whether that person be the freehold owner or, as in the present case, someone acting with the authority of the freehold owner. The analogy between the [premises approval] and planning permits granted under the Town and Country Planning Act 1961 or the Planning and Environment Act 1987 is compelling. There would seem to be no reason why the Premises Approval ought not to be regarded as running with the land and available for the advantage of the owner or occupier of the land for the time being.
…
Had the Premises Approval in this case been granted on or after 2004 under the terms of the [GRA], the arguments of Bevendale as to the Premises Approval would have to be accepted.
Do the transitional provisions enacted in 1997 and 2003 affect this conclusion?
I agree with the contention on behalf of Bevendale that, since the effect of the transitional provisions relative to the Premises Approval is that such approval is deemed to have been granted under the [GRA], in general terms it is that statute which must guide the characterisation of the Approval. Section 14 of the [ILA] is however also relevant. The [GRA] repealed the [GMCA]. Section 14(2)(e) of the [ILA] provides that the amendment ‘shall not, unless the contrary intention expressly appears … affect any right, privilege, obligation or liability acquired, accrued or incurred under that Act [viz the repealed Act] or provision …’.
The Premises Approval may be classified as a right or a privilege. [LE] also relied on sub-section (2A) [of s 14 of the ILA] which provides, generally, that the repeal of an Act ‘unless the contrary intention expressly appears, [does not] affect the operation of the savings or transitional provisions or end the validating effect of the provision …’. The contention therefore is that first, no contrary intention appears and secondly, that the effect of this sub-section is to preserve the original regime in which [LE] held the Premises Approval on its own behalf legally and beneficially to the exclusion of any right on behalf of Bevendale.
[LE], by virtue of [s 163(5)] of the [GMCA] as amended is deemed to be the holder of the Premises Approval. This approval was deemed to have been given under Part 2A of the [GMCA] as amended. This was a right or privilege enjoyed by [LE] at the time of the [GRA’s] repeal of the [GMCA]. As such, it was a right or privilege preserved by section 14 of the [ILA].
The structure of the [GRA] might be thought to be an implicit manifestation of an intention to the contrary of preserving the Premises Approval as a right or privilege accruing to [LE], but ‘contrary intention’ required by [ss 14(2)(e) and 14(2A) of the ILA] requires it to be manifested expressly. The implicit inconsistency of the regime established by the [GRA] is therefore insufficient to exclude the preserving effect of section 14.
It follows that the contention on behalf of [LE] that it is the holder of the Premises Approval, despite what might have been the situation had the approval actually been granted under the [GRA] as distinct from merely being taken to have been granted under its term, must be accepted. It follows, therefore, that the hypothetical tenant should not be regarded as able to utilise the existing Premises Approval, first, because it could be surrendered by [LE] under the statutory right in that respect granted by the [GRA] without reference to Bevendale, and secondly, by virtue of the transitional provisions, [LE] is the holder for its own benefit and not on behalf of Bevendale of the relevant Premises Approval.[17]
[17]Reasons [73], [75]–[81]. It was not in dispute before us that, in para 73 of its reasons, VCAT inadvertently referred to ‘the venue operator’s licence “pertains” to the land’ rather than ‘the premises approval “pertains” to the land’. We have corrected the error in the above quotation.
As discussed under Ground 3 below, VCAT went on to hold that the Valuer erred in assessing the market rent of the Premises on the basis that the hypothetical tenant could utilise the Premises Approval, and that this error vitiated the Determination.[18]
[18]See [258] below.
Parties’ submissions on Ground 1 and Contention 1
Bevendale submitted that VCAT correctly held that, when regard is had only to the GRA, the Premises Approval runs with the land. Bevendale contended that s 3.3.7, which sets out the ‘[m]atters to be considered in determining applications’, focuses upon the characteristics of the premises rather than any person who might be an applicant. According to Bevendale, the description of a premises approval, the persons who can apply for one and the indefinite duration (unless surrendered or revoked) are all further indicia that a premises approval granted under the GRA attaches to the premises. Therefore, Bevendale argued, the approval ‘appertains to the land’.
Bevendale submitted that VCAT was correct to state that a premises approval under the GRA was analogous to a planning permit. Like a planning permit, so it was said, the Premises Approval ought to be regarded as running with the land and available for the advantage of the owner or occupier of the Premises for the time being.
Bevendale observed that there is no provision in pt 3 of ch 3 of the GRA for the assignment or transfer of a premises approval. This was said to be in contrast to a VOL which may be transferred to another venue pursuant to s 3.4.17. Bevendale argued that the lack of transferability of a premises approval was an additional indication that it attaches to the land.
Bevendale noted that applications for approval of premises by virtue of s 3.3.4 of the GRA could be made only by ‘the owner of [the] premises or a person authorised by the owner’. Bevendale submitted that the word ‘owner’ should be treated as the equivalent of ‘freehold owner’. Bevendale further submitted that a person who applies for a premises approval with the authority of the owner is in effect acting as the agent of the owner. Bevendale argued that, as the freehold owner’s authorisation was required to apply for an approval, his or her authorisation would likewise be required for the effective surrender of the approval.
Bevendale contended that the ‘holder’ of a premises approval is a person who can take advantage of it, namely, the freehold owner or the tenant from time to time.
Bevendale submitted that VCAT erred by incorrectly characterising the Premises Approval as being held by LE and not running with the land. According to Bevendale, the transitional provisions in the 1997 Act and the GRA effected a ‘statutory fiction’ by the words ‘deemed’ and ‘taken … to be’, respectively, which created new rights under those Acts as opposed to extending or altering the rights created by the preceding Acts. It was said that construing the transitional provisions as each creating two species of approval (that is, approval pre-dating each Act and approval post-dating each Act) created a bifurcation that was not supported by the text of the 1997 Act or the GRA.
Bevendale submitted that any inference under the GMCA (prior to its amendment by the 1997 Act) that LE was the holder of a premises approval in respect of the Premises was dispelled by the insertion of s 12J(1) and (3) in the GMCA by the 1997 Act. According to Bevendale, under s 12J(1) and (3), the Premises Approval that LE was granted on 3 May 2001 was not an extension of the initial premises approval, but a new approval. Consequently, Bevendale argued that the Premises Approval was granted under pt 2A of the GMCA and did not have effect under the transitional provisions inserted into the GMCA by the 1997 Act.
Bevendale noted that cl 3.3(2) of sch 7 to the GRA deemed an existing approval of premises to remain in force until revoked or surrendered under the GRA. Bevendale submitted that, if the Premises Approval dated 3 May 2001 did survive the legislative changes in its original form, any right conferred by the GMCA expired on 22 April 2006, when the five year term of the Premises Approval expired. According to Bevendale, the Premises Approval continued beyond 22 April 2006 only by virtue of the GRA.
Bevendale contended that s 14 of the ILA did not apply to the transitional provisions in the 1997 Act and the GRA because a premises approval under each repealed statute remained in existence under the successive statute.
Bevendale submitted that s 14(2A) of the ILA did not apply to the interpretation of the GRA because s 14(2A) concerns only the preservation of savings or transitional provisions and the GMCA had been entirely repealed. Bevendale contended that s 14(2)(e) did not apply either because there was no right or privilege of LE that had been acquired or accrued under the GMCA. It was said that, whilst LE had an ability to take advantage of the Premises Approval, it was not a right or privilege acquired or accrued by LE.
Bevendale argued that cl 3.3 of sch 7 to the GRA implicitly manifested an intention to oust s 14(2) of the ILA. Bevendale acknowledged that s 14(2) requires an express intention to be ousted and referred to cl 1.2(1) of sch 7 to the GRA, which only requires ‘the contrary intention’. According to Bevendale, the implied intention in cl 3.3 of sch 7 to the GRA was sufficient to preclude the application of s 14(2) of the ILA. Bevendale submitted that VCAT should have looked solely to the text of the GRA to characterise the Premises Approval.
LE submitted that VCAT erred in holding that, if regard is had only to the GRA, the Premises Approval ‘pertains to the land’ and ‘runs with the land’. LE argued that analogising a premises approval to a planning permit was simply without merit. It was said that the characterisation of a premises approval was to be found in the relevant legislation itself. LE contended that the provisions of the amended GMCA and the GRA had the effect of attaching a premises approval to the holder rather than the land.[19]
[19]LE relied on the English cases of Daejan Investments Ltd v Cornwall Coast Country Club (1985) 50 P & CR 157 (‘Daejan’) and Parkside Clubs (Nottingham) Ltd v Armgrade Ltd [1995] 2 EGLR 96 (‘Parkside’).
LE submitted that a person ‘authorised by the owner’ to apply for a premises approval is not acting as agent on behalf of the owner. According to LE, the omission of the words ‘on behalf of’ is critical to the interpretation of s 3.3.4(1) of the GRA. LE further contended that attributing agency principles to being ‘authorised by the owner’ did not reflect the commercial relationship of LE and Bevendale and the history of applications by LE for regulatory approvals without Bevendale’s involvement.
LE submitted that it was the holder of the VOL when it was first granted in 1996. LE contended that, when the GMCA was amended in 1997, LE was deemed by s 163(5) of the amended GMCA to be the holder of a premises approval under pt 2A. LE argued that the effect of cl 3.3 of sch 7 to the GRA was that the Premises Approval granted under the GMCA continued in force indefinitely until revoked by the VCGLR or surrendered by LE. Consequently, so it was said, the Premises Approval could only be utilised by LE and therefore the Valuer’s conclusion that the hypothetical tenant could utilise it was wrong.
LE submitted that Bevendale’s contentions as to the meaning of the words ‘deemed’ and ‘taken … to be’ in the transitional provisions lacked coherence, were not raised at the VCAT hearing and were without merit. LE contended that VCAT was correct in holding that the Premises Approval was a right or privilege held by LE by virtue of s 163(5) of the amended GMCA and preserved by s 14 of the ILA when the GMCA was repealed in 2004.
LE argued that the deeming provisions in the transitional provisions of the amended GMCA and the GRA did not create new statutory rights by way of a statutory fiction. Rather, so it was said, the transitional provisions preserved existing statutory rights independently of s 14 of the ILA. LE submitted, in the alternative, that if the transitional provisions were insufficient on their own to preserve LE’s statutory rights, then s 14 had the effect of preserving them. On this basis, so LE contended, by virtue of s 14 of the ILA, the rights and privileges accrued under the GMCA and the 1997 Act continued to exist in their original form because there was no express intention to the contrary in the GRA.
According to LE, as it applied for and was granted the Premises Approval, it is the ‘holder’ of the Premises Approval.[20] Further, so it was said, the GRA does not allow a person other than the ‘holder’ to utilise the Premises Approval, even if the Premises were unoccupied.[21]
[20]LE referred to GRA ss 3.3.11, 3.3.12.
[21]See [160] below.
Decision on Ground 1 and Contention 1
We will first consider the status of the Premises Approval under the GRA and then discuss whether that status is affected by the transitional provisions in the 1997 Act and the GRA or by s 14 of the ILA.
In our opinion, the provisions of the GRA dealing with approval of premises as suitable for gaming clearly indicate that such an approval confers a legal status on premises rather than a right or privilege on any person. That legal status is one of the preconditions for the lawful conduct of gaming upon those premises. As such, although the holder of a VOL connected to those premises can take advantage of the approval, the approval is not a personal right or privilege of that holder.
The focus of pt 3 of ch 3 of the GRA is the attributes of the premises rather than the attributes of any person. Thus, the preconditions in s 3.3.7(1) and (2) for the granting of a premises approval relate to the physical attributes of the premises — including their size, layout and facilities — and their geographical location. Under s 3.3.12, a premises approval may be revoked by the VCGLR where the premises are no longer suitable for the conduct of gaming. The suitability of a person to conduct gaming in the premises is not a relevant consideration in the granting or revocation of a premises approval. The fact that the GRA does not make any provision for the transfer of a premises approval supports our conclusion that the approval is tied to the relevant premises and is not anyone’s personal right or privilege.
However, we disagree with VCAT’s statement that a premises approval is analogous to a planning permit. Any owner of the land the subject of a planning permit is able to take advantage of the permit, irrespective of the personal attributes of the owner. However, only a person who is the holder of a VOL can take advantage of a premises approval. Moreover, unlike a planning permit, an approval can be surrendered.
VCAT’s statement that a premises approval ‘runs with the land’ is also unhelpful in the light of the provisions of the GRA relating to revocation and surrender. A premises approval should be seen as a particular legal status conferred on premises under the GRA which has the attributes and limitations set out in the GRA. It is not necessary to find labels from property, planning, or other laws to describe a premises approval.[22]
[22]Similarly, little, if any, assistance can be obtained from cases from other jurisdictions — such as the English cases of Daejan and Parkside upon which LE relied — that deal with different legislation and rent review clauses.
The initial ‘holder’ of a premises approval is the person who successfully applies for the grant of the approval. Sections 3.3.4(1), 3.3.4(3) and 3.3.7(1) of the GRA make it clear that only the owner of the premises or a person authorised by the owner can apply for a premises approval and thus be the initial ‘holder’ of the approval.
Although the term ‘owner’ is not defined in the GRA, the natural meaning of that term is the owner of the freehold and there is no contextual indication that a different meaning is intended. On the contrary, as gaming is a heavily regulated use of premises and some sections of the community are opposed to it, it makes sense that the term should be given this meaning so that an approval of the premises for that use cannot be given unless the freehold owner applies for it or authorises the application.
In our opinion, the expression ‘a person authorised by the owner’ in s 3.3.4(1) of the GRA must be given its natural meaning, namely, a person who has authority from the owner. We reject Bevendale’s submission that the expression necessarily means a person acting on behalf of the owner as the owner’s agent. Whether a person who is authorised by the owner to make an application for a premises approval is acting as the agent of the owner or in his or her own right with the owner’s authority will depend on the nature of the authority conferred by the owner.
By way of example, the applicant might be a solicitor who is instructed by the owner to apply for a premises approval so that the owner may use the premises for gaming. By way of further example, the applicant might be a tenant who is given authority by a landlord — in the form of a written consent under a lease — to apply for a premises approval so that the tenant may use the premises for gaming. In the first example, the solicitor would be acting as agent for the owner whereas, in the second example, the tenant would not be acting as the owner’s agent.
Section 3.3.15 of the GRA provides that the ‘holder’ of a premises approval may surrender it by giving written notice to the VCGLR. Where a freehold owner has applied for and been granted a premises approval, the owner is the initial ‘holder’ of the approval. Where a tenant has applied for a premises approval with the freehold owner’s authority and the approval is granted, the tenant is the initial ‘holder’ of the approval.
In the latter case, the GRA is silent on whether the tenant can surrender the premises approval without the landlord’s authority. As the premises approval confers a legal status upon the premises which the VCGLR could not have granted without evidence that the landlord authorised the application, it would make sense for the landlord’s authority to be a precondition of a valid surrender of that status. Further, as the premises approval is tied to — and is an attribute of — the landlord’s premises rather than a personal right or privilege of the tenant, it would make sense for the tenant not to have the ability to surrender the approval without the landlord’s authority once the tenant is no longer able to take advantage of it. On the other hand, the fact that the GRA provides for the landlord’s authorisation for an application for a premises approval but makes no such provision for a surrender of the premises approval suggests that the landlord’s authorisation is not required.
It is not necessary for us to resolve this issue. That is because the outcome of the appeal would be the same whether or not LE could surrender the Premises Approval without Bevendale’s authority.[23] Accordingly, we will assume, without deciding, that LE could do so.
[23]As there may be other cases where this issue may be significant, it is desirable that Parliament amend the GRA to make the position clear.
It remains necessary to consider what the GRA intends in designating a person as the ‘holder’ of a premises approval. In our view, the fact that the approval confers a legal status upon premises means that the ‘holder’ of the approval is merely the person designated as the point of contact with whom the regulatory authorities deal from time to time in respect of the premises and the approval. Where this person is not the owner of the premises, we have assumed, without deciding, that he or she may surrender the premises approval without the authority of the owner. We likewise assume that the holder can give and receive notices and other communications under the GRA without the authority of the owner. It is not necessary to decide what effect a transfer of the land, or an assignment or termination of lease, may have on the identity or statutory powers of the holder of a premises approval. VCAT held that a premises approval is available for the advantage of an owner and occupier of the land for the time being, an advantage which is taken by applying for and obtaining a VOL and sufficient GMEs and does not depend on having the status of ‘holder’ of the premises approval. Subject, necessarily, to the possibility of surrender or revocation, that proposition is correct irrespective of whether the owner or occupier is treated by the GRA as the holder of the premises approval.[24]
[24]It is desirable that the GRA be amended to clarify these issues.
Accordingly, Contention 1 must be rejected.
We now turn to Ground 1. This requires consideration of whether VCAT erred in concluding that, prior to the commencement of the GRA, the Premises Approval was a personal right or privilege of LE which subsists due to the transitional provision in the 1997 Act and the GRA, and s 14 of the ILA.
At [18]–[22] above, we summarised the provisions of the GMCA, as amended by the 1997 Act and the 2000 Act, which deal with approvals of premises as suitable for gaming. A comparison of those provisions with the equivalent provisions of the GRA — which are set out at [32]–[38] above — indicates that they are very similar. The only substantive difference is that a premises approval granted under pt 2A of the amended GMCA has a five year term (but can be continued in the form of a new approval) whereas an approval granted under pt 3 of ch 3 of the GRA does not have a specific term but continues until it is surrendered or revoked. It follows that, as in the case of a premises approval granted under the GRA, an approval granted under the amended GMCA is not a personal right or privilege of any person.
In the present case, the Premises have had the status of being approved as suitable for gaming by virtue of s 163(5) of the amended GMCA. As appears from [23]–[24] above, under that new sub-section, LE, as the venue operator of the Epping Plaza Hotel, was deemed to be the holder of a premises approval under pt 2A of the amended GMCA from the day it was granted its VOL, namely, 23 April 1996.
The deemed status of being the holder of a premises approval was conferred on LE by force of s 163(5) of the amended GMCA without any authorisation or other input by Bevendale. We are prepared to assume, without deciding, that under s 163(5) this initial deemed premises approval was a personal right or privilege of LE. However, the initial deemed approval had a term of five years which expired on 22 April 2001. As discussed at [26] above, in February 2001, LE applied to the VCGA for a new premises approval and was granted the Premises Approval on 3 May 2001 for a term of five years expiring on 22 April 2006.[25]
[25]See [26] above in relation to VCGA’s ‘Notice of Approved Premises for Gaming’ naming Mr Gronow as the ‘holder’ of the approval.
It follows that, whilst the deeming provisions in s 163(5) of the amended GMCA applied to the initial premises approval, they never applied to the Premises Approval granted on 3 May 2001. The legal foundation for the Premises Approval was pt 2A of the amended GMCA and that approval took its attributes exclusively from the provisions of that part. As we have already seen, those provisions are very similar to the provisions of pt 3 of ch 3 of the GRA. Accordingly, for the reasons we have already outlined, even if it is accepted that the initial premises approval was a personal right or privilege of LE, the Premises Approval was never a personal right or privilege of LE. As we have explained, the fact that LE is the ‘holder’ of the Premises Approval does not affect this conclusion. Under s 12B(1) of the amended GMCA, LE could not have applied for, or been granted, the Premises Approval without being authorised to do so by Bevendale.
As we have stated, the Premises Approval, when granted on 3 May 2001, was for a term of five years expiring on 22 April 2006. Prior to the latter date, the GMCA was replaced by the GRA with effect from 1 July 2004. In accordance with cl 3.3(1) of sch 7 to the GRA, the Premises Approval ‘is taken, on and after [1 July 2004], to be an approval of premises under Part 3 of Chapter 3 [of the GRA] subject to any conditions to which the approval was subject immediately before that day’. By virtue of cl 3.3(2), the Premises Approval did not expire on 22 April 2006 but will remain in force until it is revoked or surrendered under the GRA. It is noteworthy that, unlike s 163(5) of the amended GMCA, cl 3.3 of sch 7 to the GRA does not deem any person to be the ‘holder’ of a premises approval.
In our opinion, the effect of cl 3.3 of sch 7 to the GRA is to give the Premises Approval legal effect as an approval under pt 3 of ch 3 of the GRA subject to the continuing application of any conditions which were imposed upon it when granted under pt 2A of the GMCA. We are not aware of any such conditions. The fact that the VCGLR continues to identify the Premises Approval by number P98000432 — which the VCGA allocated to the initial premises approval in 2000 under the amended GMCA[26] — does not mean that any provisions of the GMCA continue to be relevant to the Premises Approval. The number is a mere administrative device.
[26]See [25], [53] above.
As cl 3.3 of sch 7 to the GRA clearly and authoritatively determines the legal foundation and attributes of the Premises Approval on and from 1 July 2004, there is no occasion for any resort to s 14 of the ILA. In any event, s 14(2)(e) is incapable of applying because the Premises Approval does not constitute ‘any right [or] privilege … acquired [or] accrued [by LE] under [the GMCA]’. Section 14(2A) cannot apply to the repealed savings or transitional provisions in s 163(5) of the amended GMCA because, for the reasons set out at [107] above, those provisions ceased to be relevant on 3 May 2001. Section 14(2A) also cannot apply to the savings or transitional provisions in sch 7 to the GRA because they have not been repealed.
Even if, contrary to our analysis, it is assumed that the Premises Approval constitutes a right or privilege of LE, s 14(2)(e) of the ILA would be displaced by the provisions of cl 3.3(1) of sch 7 and pt 3 of ch 3 of the GRA which evince a contrary intention. Those provisions do so because, for the reasons we have already discussed, they make it clear that a premises approval is not anyone’s personal right or privilege. Although s 14(2)(e) of the ILA requires that the contrary intention must ‘expressly’ appear, that requirement is itself expressly modified because cl 1.2 of sch 7 to the GRA provides that the ILA can be excluded ‘where the contrary intention appears’ in sch 7.[27] Clause 1.2 does not require that the intention to displace the ILA ‘expressly’ appear. For the reasons we have already discussed, pt 3 of ch 3 of the GRA makes exclusive provision for the legal status and operation of the Premises Approval. There is no room for the application of any provisions of the GMCA to the Premises Approval other than any conditions which applied to it under the GMCA which are preserved by cl 3.3(1) of sch 7 to the GRA.
[27]See [49] above.
In summary:
(a)there is nothing in the transitional provisions in cl 3.3 of sch 7 to the GRA which constitutes the Premises Approval as a personal right or privilege of LE;
(b)the transitional provisions in s 163(5) of the amended GMCA applied only to LE’s initial premises approval which expired on 22 April 2001; and
(c)the ILA does not assist LE.
It follows that VCAT erred in concluding that, prior to 1 July 2004, the Premises Approval was a personal right or privilege of LE whose status as such was preserved by s 14 of the ILA and therefore a new tenant of the Premises could not utilise it. For the reasons we have discussed, although LE is the ‘holder’ of the Premises Approval, if LE vacated the Premises without surrendering the Premises Approval, a new tenant who satisfied the regulatory requirements in the GRA for the conduct of gaming at the Premises could utilise the Premises Approval.
It follows that Ground 1 is made out.
Rent review provisions/principles relevant to Ground 2 and Contentions 2–4
The statutory and contractual provisions that govern the market rent review undertaken by the Valuer are s 37 of the RLA, read in conjunction with ss 3 and 94, and cl 4 of the 2006 deed of renewal. Those provisions are central to the outcome of Ground 2 and Contentions 2–4. Accordingly, it is convenient to set them out, together with a summary of the relevant legal principles, prior to considering that ground and those contentions.
Relevant provisions of the RLA and the 2006 deed of renewal
Section 37 of the RLA relevantly provides as follows:
37 Rent reviews based on current market rent
(1)A retail premises lease that provides for a rent review to be made on the basis of the current market rent of the premises is taken to provide as set out in subsections (2) to (6).
(2)The current market rent is taken to be the rent obtainable at the time of the review in a free and open market between a willing landlord and willing tenant in an arm’s length transaction having regard to these matters—
(a) the provisions of the lease;
(b)the rent that would reasonably be expected to be paid for the premises if they were unoccupied and offered for lease for the same, or a substantially similar, use to which the premises may be put under the lease;
(c)the landlord’s outgoings to the extent to which the tenant is liable to contribute to those outgoings;
(d)rent concessions and other benefits offered to prospective tenants of unoccupied retail premises—
but the current market rent is not to take into account the value of goodwill created by the tenant’s occupation or the value of the tenant’s fixtures and fittings.
(3)If the landlord and tenant do not agree on what the amount of that rent is to be, it is to be determined by a valuation carried out by a specialist retail valuer appointed by—
(a) agreement between the landlord and tenant; or
(b)if there is no agreement, the Small Business Commission—
and the landlord and tenant are to pay the costs of the valuation in equal shares.
(4)The landlord must, within 14 days after a request by the specialist retail valuer, supply the valuer with relevant information about leases for retail premises located in the same building or retail shopping centre to assist the valuer to determine the current market rent.
Penalty: 50 penalty units.
(5)In determining the amount of the rent, the specialist retail valuer must take into account the matters set out in subsection (2).
…
Section 3 of the RLA states that, for the purposes of a valuation relating to retail premises in a retail shopping centre, ‘specialist retail valuer’ means ‘a valuer having not less than 5 years’ experience in valuing retail premises located in regional or sub-regional shopping centres’.
Section 94(1) of the RLA states that a provision of a retail premises lease is void to the extent that it is inconsistent with anything in the RLA. Accordingly, s 37 of the RLA prevails to the extent that it is inconsistent with any provision of the lease or the 2006 deed of renewal.
The 2006 deed of renewal governs the market rent review for the period commencing 12 July 2016 that is the subject of the present proceeding.
Clause 4.2 of the 2006 deed of renewal allows Bevendale to serve a notice on LE fixing the Revised Base Rent at each Market Review Date at an amount which in the opinion of Bevendale is the current market rental value of the Premises as at the relevant Market Review Date based on the terms and conditions of the lease.
Clause 4.4 of the 2006 deed of renewal provides for the appointment of a valuer to fix the Revised Base Rent if LE disputes the amount in Bevendale’s notice. The valuer to be appointed must be a specialist retail valuer who is a practising estate agent, is a member of the relevant professional association and has not less than five years’ experience ‘in the determination of the market rental value of comparable premises in large regional retail shopping centres’.
Clause 4.5 of the 2006 deed of renewal provides that, subject to the RLA, the valuer must:
(a)determine the current market rental value of the Premises in accordance with the principles set out in Section 37(2) of the [RLA];
(b)fix the Revised Base Rent of the Premises at the current market rental value of the Premises on the basis of the terms and conditions of this Lease (or such of them as are applicable) including the Permitted Use;
(c)call for and if submitted consider submissions made by the parties within 21 days of their being informed of the valuer’s appointment;
(d)in addition to any other relevant matters have regard to current market rental values for comparable premises in the vicinity of the Premises (whether such rentals are initial or reviewed rentals);
(e)assume that [LE] has met all of its obligations under this Lease;
(f)ignore [LE’s] installations and all improvements made by [LE] to the Premises without obligation to do so;
(g)ignore the goodwill of [LE’s] business conducted from the Premises;
(h)ignore any rent free periods or incentives available for new lettings of comparable premises in the vicinity of the Premises; and
(i)act as an expert and not as an arbitrator and his determination will be final and binding on the parties.
Principles relevant to the valuation task under s 37(2) of the RLA
Relevantly, for present purposes, the task to be performed by the Valuer under s 37(2) of the RLA was to assess the current market rent of the Premises by reference to the rent that was obtainable at the time of the review — namely, 12 July 2016 — ‘in a free and open market’ between ‘a willing landlord and willing tenant’ in an ‘arm’s length transaction’ having regard to:
(a) the provisions of the lease;
(b) the rent that would reasonably be expected to be paid for the Premises ‘if they were unoccupied’ and offered for lease ‘for the same, or a substantially similar, use to which the [Premises] may be put under the lease’;
but such rent must not ‘take into account the value of goodwill created by [LE’s] occupation’.
The quoted phrases from s 37(2) of the RLA which we have italicised contain key concepts which are critical to identifying the framework within which the Valuer was required to undertake his task. We discuss each of those phrases and their key words below.
(a) Free and open market
A free market is one in which prices are not controlled or regulated, but determined through supply and demand.[28]
[28]Commonwealth v Arklay (1952) 87 CLR 159, 169–70; [1952] HCA 76.
In Sterling Land Office Developments Ltd v Lloyds Bank plc, Harman J said the following about the phrases ‘market rent’ and ‘open market rent’:
I do not believe there is any difference between an ‘open market rent’ and a ‘market rent’. I am convinced that the words ‘market rent’ are not by themselves apt to refer to a rent fixed within a closed or circumscribed market to which only certain bidders are admitted.[29]
[29][1984] 2 EGLR 135, 137.
(b) Willing landlord and willing tenant in an arm’s length transaction
The willing landlord and willing tenant are both hypothetical parties who are willing to enter into a lease, but neither of them is so anxious to do so that he or she would overlook any ordinary business consideration.[30]
[30]Spencer v Commonwealth (1907) 5 CLR 418, 436–7, 441; [1907] HCA 82.
In FR Evans (Leeds) Ltd v English Electric Co Ltd, Donaldson J described the willing landlord and willing tenant as follows in the context of a lease of industrial premises:
In a sense, the willing lessor must be the [existing] landlords because only they can dispose of the premises, but for the purposes of the [rent review] clause the landlord is an abstraction — a hypothetical person with the right to dispose of the premises … As such, he is not afflicted by personal ills such as a cash-flow crisis or importunate mortgagees. Nor is he in the happy position of someone to whom it is largely a matter of indifference whether he lets [at the relevant date] or waits for the market to improve. He is, in short, a willing lessor. He wants to let the premises at a rent which is appropriate to all the factors which affect the marketability of these premises as industrial premises — for example, geographical location, the extent of the local labour market, the level of local rates and the market rent of competitive premises, that is to say, premises which are directly comparable or which, if not directly comparable, would be considered as viable alternatives by a potential tenant.
Similarly … the willing lessee is an abstraction — a hypothetical person actively seeking premises to fulfil needs which these premises could fulfil. He will take account of similar factors, but he too will be unaffected by liquidity problems, governmental or other pressures to boost or maintain employment in the area and so on. In a word, his profile may or may not fit that of the [sitting tenant], but he is not that [tenant].[31]
[31](1977) 36 P & CR 185, 189–90 (‘Evans’).
In the present case, Bevendale submitted that, for the purposes of s 37(2) of the RLA, the sitting tenant is ‘within the array of hypothetical tenants’.[32] LE submitted that the sitting tenant cannot be treated as falling within the class of hypothetical tenants. Neither party referred to any direct authority on this issue. As the issue is not determinative in the present case, we will not decide it. We will proceed on the basis that the hypothetical tenant is a statutory construct that does not include the sitting tenant.
[32]Transcript of Proceedings (16 October 2020) 179.13–179.14.
A rent review clause under which the market rent is to be assessed ‘on the open market’ between ‘a willing landlord and willing tenant’ is not rendered impossible where the sitting tenant has a monopoly position.[33] That is because, for the purpose of such a clause, ‘it is to be assumed that there is at least one hypothetical tenant bidding for the lease’ and ‘it is nothing to the point to prove that there was not’.[34]
[33]Evans (1977) 36 P & CR 185, 190.
[34]Evans (1977) 36 P & CR 185, 191.
An ‘arm’s length transaction’ is one between unrelated parties who bear no special duty, obligation or vulnerability to each other and who act in their own best interest.[35]
[35]Australian Trade Commission v WA Meat Exports Pty Ltd (1987) 75 ALR 287, 291; [1987] FCA 308.
(c) Premises … unoccupied
The phrase ‘having regard to these matters’ in the opening words of s 37(2) of the RLA indicates that the enumerated matters must be considered by the appointed valuer as part of the framework for assessing the market rent for the relevant premises. The reference to the premises being unoccupied does not literally mean that the premises must be treated as being an empty shell. Rather, the purpose of the reference is to remove from the assessment of the market rent for the premises any premium that the sitting tenant would be prepared to pay for continuing its occupation.[36] That purpose is reinforced by the entire context of s 37(2), including the requirement that the value of the sitting tenant’s fixtures, fittings and goodwill not be taken into account. It is clear from that context that s 37(2) seeks to ensure that any special or peculiar features that distinguish the sitting tenant — and its occupation of the premises — from the hypothetical tenant — with average industry attributes who is willing to commence occupation of the premises — do not unfairly inflate the assessed market rent.
[36]Victorian Small Business Commission, Current Market Rent and Engaging Specialist Retail Valuers (19 July 2016) [6.5].
(d) Same, or a substantially similar, use
There is no simple test for determining whether two uses of premises are ‘the same, or … substantially similar’. Such a determination depends on the nature and attributes of the premises and the nature and attributes of the use authorised under the relevant lease, including the regulatory preconditions for that use.
The phrase ‘the same’ has its ordinary meaning, namely, identical. It does not involve questions of degree. However, the phrase ‘substantially similar’ does involve questions of degree. The fact that the expression that is used is ‘substantially similar’ rather than ‘similar’ is critical to an understanding of the phrase. It requires that the two uses must have a high degree of functional commonality. Uses which are broadly or loosely similar may not qualify as ‘substantially similar’. The comparison requires consideration of the core aspects of the two uses, rather than incidental or peripheral aspects of the uses.
However, once issued, the GRA provides that relevant dealings will be between the holder and the regulator. The holder of the premises approval must give the VCGLR notice of any change in the size or layout of the premises.[128] Where the VCGLR proposes to revoke approval, it must serve a notice on the holder.[129] The holder has a statutory right of response.[130] Similarly, the power to surrender the approval is given to the holder.
[128]Section 3.3.11.
[129]Section 3.3.12(1).
[130]Section 3.3.12(2).
Although an application for a premises approval (both between 1997 and 2004 under the GMCA and from 1 July 2004 under the GRA) must be authorised by the owner, and any approval benefits the premises, it does not follow that the owner has any statutory or legal interest in the approval. The approval itself confers a status on the land, and cannot be severed from the particular premises or transferred. It thus lacks many of the hallmarks of property. It is a statutory status that, when combined with other approvals, may allow gaming to be conducted on the relevant premises. It is plainly not necessary that the holder of a premises approval conduct the gaming business itself. Equally, the holder of a premises approval, if armed with the other necessary approvals, could conduct a gaming business on its own behalf without any involvement of the owner.
The questions are not so much who ‘owns’ the premises approval, who benefits from it, or on whose behalf it is held, but who can exercise powers in relation to it. The GRA expressly recognises that the holder has sufficient interest in an approval that it cannot be revoked without giving that person an opportunity to be heard. Equally, the holder of a premises approval can surrender it. In either responding to a proposed revocation or in surrendering the approval, the GRA does not require that the holder act as the agent of the owner. The only authority required is the authority to make the application.
For so long as it is in place, the premises approval benefits the land because it allows gaming to be conducted and this appears to be a highly profitable use of licensed premises. However, I do not accept that it runs with the land in the sense that it is in the control of the owner of the land from time to time. As noted, the holder of a premises approval is able to surrender it and, in my view, that is not conditional on obtaining the prior authority of the owner.
The fact that a premises approval applies in respect of particular premises, that the criteria for its grant are based on the suitability for gaming, that it confers a legal status, that it is valuable, and that it must be applied for with the authority of the owner, does not mean that the premises approval is relevantly held on behalf of the owner. The GRA does not require that conclusion.
Equally, the dichotomy between a legal status of premises and a personal right or privilege is unhelpful for present purposes. Such a dichotomy may be relevant in other contexts. For example, the law of property has long drawn a distinction between an interest in land and a licence or permission with respect to land. The critical question here is the identification of the person who can exercise powers with respect to the statutory approval and the limits that exist on those powers. Most importantly, the relevant power is the ability to surrender the approval. The GRA provides expressly that this right or facility belongs to the holder. There is no reason to circumscribe that power in circumstances where the GRA does not do so nor does it require that a premises approval be held on behalf of the owner. However, there may be contractual or equitable obligations that prevent a holder from surrendering an approval without the authority of the owner.
The lease required LE, at its own cost, to obtain the necessary statutory approvals in order to undertake the permitted uses of the premises, including gaming. LE was obliged to comply with all laws that regulated the use of the Premises. The lease did not set rent by reference to turnover or profit. Bevendale could not have withheld authority for an application to be made so that LE could enjoy the benefits of the lease. However, giving the necessary authority did not mean that Bevendale thereafter had an interest in the business. In my opinion, the business conducted by LE was not conducted for the benefit of its landlord. Nor was the Premises Approval held for it. That conclusion is not altered by the fact that the Premises could be put to a more profitable use.
In short, the correct legal position, as I apprehend it to be, is that the Premises Approval will continue in force unless revoked or surrendered. The GRA does not require LE to obtain the permission or approval of Bevendale to surrender the Premises Approval. LE may surrender the Premises Approval without the permission or approval of Bevendale.
Although s 14 of the ILA did not apply, there was no error in VCAT’s conclusion that the Premises Approval could be surrendered by LE without reference to Bevendale.[131] I accept that LE could not surrender the Premises Approval during the currency of the lease. However, no equitable or contractual obligation was identified that would prevent LE from surrendering the Premises Approval at the conclusion of the lease.
[131]Reasons [81].
The significance of that conclusion is complicated by the fact that the Valuer assumed that the Premises Approval would remain in place, and that this was an assumption mandated by s 37 of the RLA, independently of the likely position. It will be necessary to return to this topic in the context of my consideration of the other Grounds.
For the above reasons, Contention 1 is made out and Ground 1 must be rejected.
The other Grounds and Contentions concern the application of s 37 of the RLA. It is desirable to start with some observations about the construction of that provision.
The construction of s 37 of the RLA
Section 37 operates where a retail lease provides for a rent review to be made on the basis of the current market rent. It necessarily requires that there exist a market in which there is one or more available tenants who would be willing and able to lease the premises. At issue is the price which the market would set for such a lease. There are two aspects of that process that require elucidation. The first is the proper construction of s 37 and what assumptions it requires a valuer to make. The second is the nature of the task undertaken by the valuer.
The opening words to s 37(2) provide that the rent is ‘taken to be the rent obtainable … in a free and open market between a willing landlord and willing tenant’. In arriving at that figure, the parties, and in the absence of agreement a specialist retail valuer, must have regard to certain matters and disregard others. The matters to which the valuer must have regard are set out in paras (a) to (d). To use the language of Minister for Aboriginal Affairs v Peko-Wallsend Ltd,[132] those matters are mandatory relevant considerations. However, it is important to observe that they are not a substitute for the ultimate inquiry, but are matters to be considered in the ascertainment of market rent.
[132](1986) 162 CLR 24; [1986] HCA 40.
Paragraph (a) requires the valuer to take into account the terms of the lease. Self-evidently, the lease will provide details as to the premises and permitted uses which will be important factors in the ascertainment of market rent. Clauses in the lease that seek to control the assessment of market rent will be invalid to the extent that they are inconsistent with s 37.[133]
[133]RLA s 94(1).
Paragraph (b) requires the valuer to have regard to ‘the rent that would reasonably be expected to be paid for the premises if they were unoccupied and offered for lease for the same, or a substantially similar, use to which the premises may be put under the lease’. In arriving at the market rent, the valuer must have regard to that hypothetical rent, however, it does not follow that this will always equate to the market rent for the purpose of the lease. There may be reasons, found in the lease or in the regulatory environment, that mean that a hypothetical tenant would not be a reflection of a true market participant.
Paragraph (b) performs an important role in the determination of market rent under s 37. As the joint reasons recognise, the purpose of the exercise is to determine the market rent for a sitting tenant.[134] At the time of that determination, the tenant will be bound to the lease. However, para (b) requires consideration of what a new tenant would pay for the premises if they were unoccupied and offered for lease for the same, or a substantially similar, use. Because the market rent is to be ascertained for that use, it would confound the exercise to assume that no such hypothetical tenant exists. Equally, it would be wrong to inflate the market rent because the tenant is a captive tenant bound by the terms of an existing lease. A related aspect of this latter consideration, to which I shall return, is that s 37(2) seeks to extract from the market rent the goodwill and fixtures and fittings of the tenant.
[134]Joint reasons [167].
Ascertaining the range of uses that are ‘substantially similar’ to the use undertaken by the sitting tenant involves questions of degree. It will be a matter for the valuer to determine what constitutes a ‘substantially similar’ use. However, it would be wrong to identify the comparable use too generally, for example, as a retail store, as this would give insufficient weight to the word ‘substantially’. That is especially true given that all of the premises governed by the RLA are retail premises.
On the other hand, the articulation of the use of the premises by the sitting tenant must not be too fine grained, and in respect of which there is not a ready comparator. For example, if the tenant has a unique or rare product, service, process or intellectual property, it would be wrong to use para (b) to hypothesise a comparator that has exactly the same attributes.
The danger in using s 37(2)(b) to construct a hypothetical tenant with the same attributes and assets of the sitting tenant, and then to treat that hypothetical rent as the market rent, is twofold. It risks valuing the business rather than the use of the premises, and it may incorporate into the market rent the peculiar and special characteristics of the tenant that are not easily replicated in the market. Such an approach also runs counter to the other components of s 37(2) that require the valuation to not take into account the value of the tenant’s goodwill created by its occupation of the premises or the value of its fixtures and fittings.
In order to engage s 37, a retail lease must provide for a market rent. The terms of s 37 proceed on the premise that there is a market. It is not possible to proceed on the basis that there is an insurmountable regulatory or economic barrier to finding a tenant because that would be to deny the existence of the market and falsify the essential premise of the lease.[135] However, that is not to say that the regulatory and economic barriers to finding an alternative tenant are to be ignored or assumed away. Such an assumption does not reflect the market in which the landlord and tenant actually exist. In my opinion, the market is assumed to be efficient and transparent,[136] but it is not to be assumed that it is free of all existing regulatory and other constraints.[137] By analogy, a valuation of land could hardly ignore planning restrictions on the use to which the land might be put.
[135]Joint reasons [141].
[136]Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413, 436 [50]; [1999] HCA 25 (McHugh J).
[137]Spencer v Commonwealth (1907) 5 CLR 418, 441; [1907] HCA 82 (Isaacs J).
In my view, para (b) does not mean that the valuer is to ignore the ease with which the hypothetical tenant might be found in the market when it comes to the determination of market rent. The demand for such premises by persons who are in a position to undertake the same use will plainly be a relevant matter to consider. If there are relatively few such persons then this will affect the demand and, therefore, the price that might be paid. The volume of demand may be a product of a number of variables but there is no reason to ignore regulatory considerations.
There is no fixed way in which a valuer might take into account the existing regulatory and economic barriers, including those that give the tenant an economic advantage that is unique or not easily replicated. Section 37(2)(b) requires the valuer to assume a hypothetical situation. By adjusting the nature of the comparable use, the valuer may catch other hypothetical tenants in a way that overcomes market constraints on the use undertaken by the sitting tenant. However, there is only so far that the valuer can go while remaining faithful to the actual use under the lease. The valuer may also need to take into account the rent that the sitting tenant would be forced to pay if it sought comparable alternative premises. That would require an assessment of what the tenant would pay for comparable premises.
Either as part of the exercise contemplated by s 37(2)(b) itself through the requirement to assess a reasonable rent or at some other point, it is necessary to test whether the hypothetical rent calculated under para (b) is realistic in the market, having regard to market conditions.
The role of the valuer
The aphorism that valuation is an art not a science[138] captures the idea that what is involved is a judgment, based on all of the relevant material, that may be made in a variety of different ways and is not singularly correct. Recently, in Strike Australia Pty Ltd v Data Base Corporate Pty Ltd,[139] Bell P conducted a detailed survey of the relevant authorities, and distilled the following propositions ‘concerning valuation and what it means to act as an expert and not an arbitrator’,[140] which I gratefully adopt:
[138]River Bank Pty Ltd v Commonwealth (1974) 4 ALR 651, 653 (Stephen J); Boland v Yates Property Corporation Pty Ltd (1999) 167 ALR 575, 579–80 [12] (Gleeson CJ), 651 [277] (Callinan J); [1999] HCA 64.
[139][2019] NSWCA 205 (‘Strike v Data Base’).
[140]Strike v Data Base [2019] NSWCA 205, [22].
(a) valuation is a field of specialised expertise which involves subjective judgments and evaluative choice;
(b) prima facie, all relevant information, that is to say matters or considerations affecting value, should be taken into account in a valuation exercise;
(c) ‘experts’ draw upon their own knowledge, skills and observations;
(d) given the broad and quasi-discretionary nature of valuation, valuers may be given some guidance by contractual parties or the legislature, as the case may be, as to what to have regard to and what to disregard, in what may be a wide ranging exercise; but
(e) the ultimate exercise is a valuation (or rent determination) in respect of which the valuer is an expert and is to apply his or her expertise.[141]
[141]Strike v Data Base [2019] NSWCA 205, [22]. Bell P was in dissent in the result but not on the articulation of principle.
The role of VCAT
Section 89 of the RLA confers jurisdiction on VCAT to hear and determine an application by a landlord or tenant under a retail premises lease seeking resolution of a ‘retail tenancy dispute’.[142] A retail tenancy dispute means the dispute between the landlord and tenant arising under or in relation to a retail premises lease.[143] However, a retail tenancy dispute does not include a dispute that is capable of being determined by a specialist retail valuer under ss 34, 35 or 37 of the RLA. In the present case, the dispute was whether the valuation was undertaken in accordance with the terms of s 37 of the RLA and the lease.
[142]RLA ss 81, 89.
[143]RLA s 81.
VCAT had no jurisdiction to determine the market rent. The circumstances in which a valuation can be impugned have been identified in many authorities, including in Legal & General.[144]
[144](1985) 1 NSWLR 314.
The jurisdiction of the Court
This Court has jurisdiction to hear an appeal on a question of law from a decision of VCAT under s 148 of the Victorian Civil and Administrative Tribunal Act 1998. Although the question whether the Determination was validly made under the lease probably involves a question of law, any findings of fact necessary to resolve that question were for VCAT to determine.
With that statutory context in mind, I turn to the balance of the Grounds and Contentions.
Ground 2
Ground 2 and Contention 2 are concerned with the assumption made by the Valuer that a hypothetical tenant would be able to utilise the existing Premises Approval and deploy 100 GMEs.
As recorded in the joint reasons,[145] there were five relevant steps in the reasoning of the Valuer concerning the Premises Approval. There was a Premises Approval in place; it was not a personal right of LE; neither the RLA nor the lease required the Valuer to assume that the Premises Approval had been revoked or surrendered; the hypothetical tenant could use the existing Premises Approval; and this should be factored into the current market rental.
[145]Joint reasons [145].
It will be recalled that VCAT accepted that a premises approval granted under the GRA ‘ran with the land’ and inhered for the benefit of the owner of the land.[146] Under the GRA transitional provisions, an existing premises approval was ‘deemed to have been granted’ under the GRA and it was that Act that ‘guide[d] the characterisation of the Approval’.[147] However, the existing Premises Approval was a ’right or privilege’ belonging to LE and, absent an express contrary intention, s 14 of the ILA applied to preserve it, with the consequence that LE ‘is the holder for its own benefit and not on behalf of Bevendale’.[148] It followed that VCAT did not accept that the Premises Approval would be available to a hypothetical tenant.
[146]Reasons [73].
[147]Reasons [77].
[148]Reasons [79]–[81].
The joint reasons have concluded that the existing Premises Approval would remain in place if LE does not surrender it. Further, they concluded that there is no reason for LE to surrender the Premises Approval once its lease comes to an end because it could not transfer the approval to any other site and there would be nothing to gain by surrendering it.[149] In any event, and this applies to the Premises Approval, the VOL and the GMEs, Kyrou and McLeish JJA have concluded that the existence of those permissions is a necessary assumption that the Valuer was obliged to make in order to give effect to s 37 of the RLA and the lease obligation to strike a market rent.[150]
[149]Joint reasons [166].
[150]Joint reasons [167]–[175], [177].
I am unable to accept that there would be no reason for LE to surrender the Premises Approval. Neither the Valuer nor VCAT made a finding of fact to that effect. Any fresh application to approve premises would have to have regard to the net economic and social impact. Given that the number of GMEs in the Whittlesea A region is capped, if LE wished to use its GMEs in that region, including by establishing its own premises, then the removal of an existing approval may well improve its odds of being able to do so. In my view, when the lease comes to an end, the risk that LE would surrender the Premises Approval is real.
It follows that Bevendale could not assume that, were the lease to come to an end, and LE were to leave the Premises, it would be able to use the Premises Approval with a new tenant. It also follows that, for the purposes of applying s 37(2)(b), the hypothesis that there is a tenant who could rely on the Premises Approval for the same use may not reflect reality.
There is no single way the risk that there is not a prospective tenant who can use the Premises for the same use might be factored in to the assessment of current market rent. However, it does not mean that the exercise must fail. The assessment of current market rent is concerned with the ongoing lease. In that context, LE has a real interest in maintaining the Premises Approval. Indeed, LE could not surrender the Premises Approval during the currency of the lease. That is so for two reasons. First, during the lease, it would not accord with its obligations under the lease to put itself in the position where it could not undertake one of the permitted uses under the lease. Second, there would be no reason to prevent itself from enjoying the continued revenue from gaming which provides the lion’s share of its total income. In assessing market rent, it would plainly be relevant to know what rent the tenant would be expected to pay for a comparable premises in which a gaming business could be conducted.
Of course, it is a necessary part of the task committed to the expert valuer to make assumptions, including as to the operation of the market. Those assumptions may be based on professional judgment and the valuation will not be inconsistent with the lease simply because the assumptions are shown to be doubtful or heroic. Simply falsifying the assumptions upon which the expert valuer determined market rent does not provide a sufficient foundation for overturning the valuation. However, where the assumption is thought to be based on a statutory imperative or it is obviously not validated by or fails to grapple with the evidence, there will come a point at which the valuation based on those assumptions does not reflect a market rent and is not one made in accordance with the lease. That is what has occurred here. The use of a hypothetical alternative tenant should not be used as the vehicle to ascertain a market rent that is divorced from the actual market in which the landlord and tenant operate.
It follows that, to the extent that Ground 2 is premised on the proposition that s 37 of the RLA required the Valuer to fix the market rent on the assumption of the continued availability of the Premises Approval, I would reject it.
Contention 2
The GMEs presents a similar issue but with important differences. Again, the Valuer assumed that the hypothetical tenant would have access to 100 GMEs.
For the reasons given in relation to the Premises Approval, s 37 of the RLA did not require the Valuer to make that assumption. And, again for the reasons given, if that assumption were made, when it came to calculate the market rent, it was necessary to test it against the likelihood of it reflecting reality. As a matter of fact, while there was a tradable market for GMEs, there were a number of reasons why the assumption made by the Valuer was heroic.
First, the total number of GMEs in Victoria is allocated and capped, and the evidence was that there were none for sale as at 30 May 2016. Second, there is a sub-cap of 581 GMEs in the Whittlesea A region, in which the Premises are situated, that had been reached. Although the evidence did not show that it was impossible for a new tenant to have 100 GMEs available that could be accommodated within the Whittlesea A region, it did not establish the likelihood of that occurring and the Valuer made no finding to that effect.
The Valuer did find that because of the high return on the machines at the Premises he would expect that a number of tenants would view the opportunity to lease the Premises favourably[151] but made no finding as to the likelihood of that occurring. In part, that either required LE to leave the Whittlesea A region or for a tenant with existing GMEs within that region to move to the Premises. There was no assessment about whether or not that was feasible.
[151]Determination [7.5.4]; joint reasons [148].
The likelihood that a tenant with 100 GMEs could be found to replace LE was untested. The existence of the local cap, the extent to which other GMEs were tied to existing premises, whether there were other premises within the region where LE could place its entitlements, and the absence of evidence of GMEs for sale, all meant that this assumption was suspect. The Valuer did not accommodate that risk. The net result is that the market rent was assessed on the basis of a hypothetical tenant and an existing Premises Approval that may not exist. Both of those matters were at least relevant to the rent that the landlord might be able to earn in the open market were the Premises unoccupied and available for rent. Equally, if, for the purposes of s 37(2)(b), such a tenant was assumed, that assumption needed to be tested against reality in the overall assessment of market rent.
It follows that Contention 2 is made out.
Contention 3
Pursuant to s 37(2)(a), the Valuer was required to have regard to the terms of the lease, including cl 4.5(d) of the 2006 deed of renewal. That clause required the Valuer to have regard to ‘current market rental values for comparable premises in the vicinity of the Premises’. In my opinion, that clause was relevant to the market rent — first, as to the question whether the profits method was the appropriate methodology; and second, as a factor against which the outcome of the profits method needed to be tested.
In my view, cl 4.5(d) obliged the Valuer to have regard to the rent payable for other premises within the Centre even if they were being used in a different way. Two premises could be comparable even if they were being put to different uses. In considering the scope of cl 4.5(d) of the 2006 deed of renewal, it is relevant that the lease did not set rent on the basis of turnover or profit. That did not preclude those methods being introduced as a component of market rent, but doing so represented a significant shift in the way rent was to be calculated. Further, the Premises formed part of a large shopping centre precinct which included a number of large format retail stores. The requirement to have regard to comparable premises did not, in terms, require the Valuer to limit his consideration to premises being used in the same or a substantially similar way. Rather, it pointed to the integration of the Premises within the larger shopping centre precinct.
I accept that the ‘vicinity’ extends beyond the bounds of the Centre, however, it connotes a relatively close physical proximity to the Premises.[152]
[152]Strike v Data Base [2019] NSWCA 205.
The lease requirement to have regard to current market rental values for comparable premises was not exhaustive[153] but it was important. Beyond mentioning it, the Valuer did not refer to it. Many of the gaming venues to which the Valuer had regard were well outside any reasonable conception of being in the vicinity of the Premises. Further, the ratio of rent to profit was not, in my opinion, a rental value. The fact that the Premises were in a large shopping centre and that the lease required consideration of comparable premises, directed attention to the rents payable for other large format premises. It allowed consideration of other comparable premises relatively nearby. However, the rents paid at these premises were not the subject of any particular analysis or consideration other than as part of the larger cohort of gaming venues. I would uphold Contention 3.
[153]Strike v Data Base [2019] NSWCA 205.
Contention 4
As formulated, Contention 4 contends that the method adopted by the Valuer impermissibly took into account LE’s goodwill. In argument, the attack on the profits method was broader and was directed to the effect of its application in this case, which was to assume away significant impediments to the ability to find another tenant who could conduct gaming from the Premises. I would not describe the statutory rights held by LE as goodwill, and I would not uphold Contention 4 in its terms. However, in my opinion, the application of the profits method miscarried in this case because the Valuer proceeded on the basis of assumptions that were never tested.
The Valuer noted that, across metropolitan and regional Melbourne, there were a number of tenants of gaming premises whose rents were calculated on the basis of EBITDAR. The Valuer selected a figure within that range as referrable to an operator of general competence to avoid taking into account any goodwill belonging to the tenant, and adjusted for the funding cost of the GMEs. That methodology was approved by this Court in Serene Hotels (CA).
As the judgment of Croft J in Serene Hotels (TD)[154] demonstrated, profits or turnover has long been used as a basis for valuing market rent for licensed premises.[155] On appeal from Croft J, this Court held that the profits method could be applied to gaming venues in a way that did not offend s 37. Specifically, it was held that the method applied in Serene Hotels (TD) did not impermissibly take into account the fixtures and fittings of the tenant. That was because the chosen ratio of rent to profit reflected a standard that applied to all gaming operators regardless of the value of their individual fixtures and fittings.
[154][2015] VSC 104.
[155][2015] VSC 104, [28]–[34].
Serene Hotels (CA) was concerned with the question whether or not the tenant’s fixtures and fittings had been taken into account in the valuation, however, the reasoning would appear to be equally applicable to the tenant’s goodwill. That is because the ratio is that which would be paid by a competent operator without any peculiarly favourable characteristics that might attract additional custom. It follows that Contention 4 in its terms, and confined to goodwill, cannot be upheld in the light of Serene Hotels (CA). I am unable to say that Serene Hotels (CA) is clearly wrong insofar as it stands for the proposition that the profits method is not necessarily inconsistent with s 37 of the RLA.
Although the profits method has been upheld by this Court as both sound and not inconsistent with s 37 of the RLA, its application in a given case depends on the factual matrix that exists and having regard to the terms of the particular lease as required by s 37(2)(a). In this case, the Valuer’s assumption that the Premises Approval would be available to a putative tenant with access to 100 GMEs formed the factual underpinning for the application of the profits method.
As explained above, that assumption was not one that could be made, at least without significant qualification. That meant that the application of the profits method was fundamentally and fatally undermined. The Valuer did not validate the outcome of the profits method by testing the assumptions that he had made against the regulatory and market reality.
If the assumption that a tenant with a very profitable business can be replaced with another tenant with the same business and comparable profitability is false or uncertain, the ability to extract a rent based on profit must be doubtful. That is so unless the tenant could not find alternative premises from which it could conduct the same business at the same profit. A tenant would have no reason to agree to a proportion of profit as a basis for rent in circumstances where it enjoys a level of profit that could not easily be replicated in the premises. To do otherwise would be to value the business rather than the premises.
Further, such an approach would be inconsistent with the structure of s 37 of the RLA which seeks to ensure that any premium a sitting tenant would be prepared to pay based on its own goodwill and assets should be removed from the assessment of market rent. As the joint reasons expose, these provisions seek to ensure that special or peculiar features that distinguish sitting tenants do not unfairly inflate the assessed market rent.[156] With respect, the vice that s 37 seeks to avoid is inherent in the use of the profits method based on assumptions as to the operation of the market that were at best doubtful.
[156]Joint reasons [132].
As a result, the assessment of market rent adopted excludes the ability of the tenant to bring to bear its position within the market which would not easily be replicated by a substitute tenant. The unique, or at least special, features of LE’s business were obliterated by the assumptions made by the Valuer. The effect was to value the business, rather than the use of the Premises, in circumstances where the evidence showed that the availability of a replacement tenant was, at best, uncertain. The assumption as to the free movement of tenants and their statutory gaming rights, on which the profits method depends, did not accurately reflect reality.
Ground 3 and Contention 5
The joint reasons address Ground 3 on the basis, contrary to their Honours’ findings, that the VCAT decision was correct and that one or more of Contentions 1 to 4 have been upheld. I agree with what they have written on Ground 3 and Contention 5 and have nothing to add to it.[157]
[157]Joint reasons [267]–[268].
Conclusion
The appeal should be dismissed.
- - -
4
13
0