Commonwealth Funds Management Limited v Freehills Services Pty Ltd

[2005] VSC 81

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL LIST

No. 4158 of 2005
F5794

COMMONWEALTH FUNDS MANAGEMENT LIMITED (ACN 052 289 442)	Plaintiff
v
FREEHILLS SERVICES PTY LTD (ACN 091 861 835)	Defendant

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JUDGE:	Byrne J
WHERE HELD:	Melbourne
DATE OF HEARING:	11 March 2005
DATE OF JUDGMENT:	24 March 2005
CASE MAY BE CITED AS:	Commonwealth Funds Management Ltd v Freehills Services Pty Ltd
MEDIUM NEUTRAL CITATION:	[2005] VSC 81

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Practice and procedure – rent review – expert evaluation – whether question of interpretation of lease – whether hypothetical question.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Dr I J Hardingham QC with Mr I S Williams	Blake Dawson Waldron
For the Defendant	Mr N J Young QC with Mr J C Delany SC	Mallesons Stephen Jaques

HIS HONOUR:

1. By Lease dated 29 June 2004 the plaintiff, Commonwealth Funds Management Limited (“the Lessor”), leased to the defendant, Freehills Services Pty Ltd (“the Lessee”), certain premises in the Melbourne CBD, namely parts of Levels 43-50 at 101 Collins Street, and part of the basement carpark of that building for a term of 14 years commencing on 1 July 2000.  Further parts of the building, including part of level 42 were added to the Demised Premises  with effect from 2 February 2004.

1. The initial Minimum Rent was $5,217,011.33 per annum with provision for review on certain Market Review Dates which were fixed at 1 July 2003 and 2 February 2004 (part of premises on Level 42 only) and thereafter on 1 July of each of the following years 2005, 2007, 2009, 2011 and 2013.  The first rent review on July 2003 has occurred.  This proceeding concerns the February 2004 review and perhaps the subsequent reviews.

1. The Lease contains in its First Schedule procedures for review of the rental on the Market Review Dates.  The following summarises the steps to be taken under the Schedule:

(a)       Lessor gives a Review Notice setting out the proposed new rental[1];

[1]Clause A.2.1

(b)If the Lessee does not within 21 days give an Acceptance Notice agreeing to the proposed rental the rental is to be determined in accordance with the succeeding provisions of the Schedule[2];

(c)       The parties must negotiate in good faith for a two month period[3];

(d)If the negotiations do not achieve resolution of the rental, each of the Lessor and the Lessee must appoint a valuer and consider the report of such valuer for a further 21 days[4];

(e)If the rental still remains unresolved it is to be determined by a Valuer appointed pursuant to a request made by the Lessor or the Lessee.[5]

Further provisions for the appointment of the Valuer are set out in cll A4 and A5, but these are not relevant for my purposes.

[2]Clause A.2.3

[3]Clause A.2.5

[4]Clause A.3

[5]Clause A.3

1. Clause A6 deals with the manner of determination of the rental by the Valuer.  It is in these terms:

“A6.    Manner of Determination of Rent

A6.1The Valuer appointed pursuant to Clause A3 or Clause A5 by the President or appointed pursuant to Clause A4 shall determine the Minimum Rent acting as an expert and not an arbitrator and his or her decision shall be final and binding on the parties.

A6.2The Valuer shall call for and, if provided within fourteen (14) days of the Valuer’s request, consider written submissions from the parties hereto.

A6.3The Valuer shall determine the Minimum Rent by establishing what the current annual market rental, or, in the case of the July 2003 Review, the current annual market rental value, of the Demised Premises will be, is or was at the Relevant Market Review Date having regard to all matters which in the opinion of the Valuer are relevant and having regard to the following specific criteria:

(i)the current annual rental value of other commercial office premises in the central business district of the City of Melbourne being premises of a quality, nature, size and location similar to the Demised Premises;

(ii)taking no account of any goodwill attributable to the Demised Premises by reason of the trade business or activity carried on therein by the Lessee;

(iii)taking no account of the relevant of the fact that relocation costs would be payable by the Lessee moving from the Demised Premises and/or by any Lessee moving from any premises;

(iv)disregarding the value of fixtures, fittings and internal partitions installed by the Lessee;

(v)taking no account of the fact that certain items of fixtures, fittings, furnishings, plant, machinery and equipment supplied by the Lessor may have been supplied only, rather than supplied and installed by the Lessor, and taking no account of the value of any items installed by the Lessee in substitution for such items supplied by the Lessor;

(vi)the terms conditions provisions and agreements contained in this Lease (except to the extent that they are inconsistent with the specific criteria in Clauses A.6.3(i) to (v) inclusive);  and

the Valuer shall endeavour to deliver his or her determination supported by his or her reasons therefore and at the same time shall determine the contribution each party should make to payment of the cost of the valuation, and the parties shall then pay their respective contributions.”

1. In the present case, the Lessor has given a Review Notice which has not been accepted.  The parties have considered the reports of their valuers but the Valuer has yet to be appointed.

1. It is said that a difference of view exists between the Lessor and the Lessee as to how the Valuer, when appointed, should approach the task under cl A6.  Accordingly, on 14 January 2005 the Lessor commenced this proceeding by originating motion seeking the determination of three questions:

“1.Whether the appointed valuer in determining the current annual market rental of the premises and in having due regard to the criteria set out in Clause A.6.3 (i) to (vi) of the first schedule to the lease must have regard to leases of similar premises within the meaning of clause A.6.3(i) irrespective of whether those leases contain provisions for the payment of any premiums, concessions, incentives, inducements or other allowances (‘incentives’) to secure the lessees or occupiers and irrespective of whether incentives are otherwise provided in respect of those leases?

2.To the extent that the appointed valuer is required to have regard to leases of similar premises within the meaning of clause A.6.3(i) in respect of which there are provisions for incentives or in respect of which incentives are otherwise provided, is the appointed valuer required to:

(a)have regard to;  or

(d)disregard –

the incentives in considering the rent payable in respect of such leases?

3.If and to the extent that the appointed valuer, in considering leases of similar premises, is required to have regard to incentives, how is regard to be had by the valuer to such incentives in determining the current annual market rental of the premises?”

1. Before the Court is an application brought by the Lessee seeking an order pursuant to R. 23.03, that the proceeding be dismissed or, alternatively, stayed pending further order.  The basis of the application is that the questions put to the Court are hypothetical questions seeking an advisory opinion;  they require the Court to interpret the language of the Lease in the abstract and in the absence of any determination of facts by an expert Valuer and that the proceeding is premature.  Accordingly, I am asked to determine whether the proceeding, as presently framed, will fail on that basis.

1. The point which counsel for the Lessor would have the Court determine may be expressed this way.  There is, as a matter of valuation principle, a difference between a current market rental and  a current market rental value.  I was told that the former is the amount which the tenant is obliged to pay under the Lease and is sometimes referred to as the “face rent”.  The latter is the face rent but after allowance has been made for matters such as incentives and non-monetary benefits or dis-benefits which may affect the actual rental burden assumed by the Lessee.[6]  This is sometimes referred to as “the effective rent”.  The Lease in clauses A.6.3 and A.6.3(1) recognises this distinction for it uses both expressions.

   [6]See Colonial Mutual Life Assurance Society Ltd v Australian and Overseas Telecommunications Corporation Ltd (unreported, SC (Vic), Eames J, 31 July 1992)

1. At this point the matter at issue becomes obscure.  Counsel for the Lessor told me that his client would have the Valuer determine the current annual market rent, that is, the face rent and that there was a fundamental difference between the parties as to whether the rent review was to be conducted as a face rent review or as an effective rent review.  It became clear as the argument developed that there was no dispute as to the fundamental task to be entrusted to the Valuer.  This is to determine the rental “by establishing what the current market rental... of the demised premises... was” on 2 February 2004.  The point of departure is what use might be made by the Valuer of information as to current market rental values of comparable premises referred to in paragraph (i). 

1. It is worth recalling in this regard certain aspects of the review process, insofar as they refer to the Valuer.  First, the Valuer is to act as an expert, and not as an arbitrator.  Second, it is likely that the Valuer will have expertise in the valuing of commercial premises.   Third, the Valuer must consider submissions provided by the parties.  Fourth, the Valuer is to perform the fundamental task, “having regard to all matters which in the opinion of the Valuer are relevant”.  Finally, in performing this task, the Valuer must have regard to the current annual market rental value of comparable premises and the five other matters set out in cl. A.6.3.

1. The Valuer has not yet been appointed.  This is not a case where the Valuer has given some indication of a misapprehension of his or her task.  No potentially comparable premises have been identified.

1. In these circumstances, the questions posed are entirely hypothetical: they may never arise.  A further aspect of this is exposed when one imagines how the questions might be answered without any factual background provided.  The position is particularly evident with respect to question 3.  In the case of that question, it is likely that any answer given would be productive of great controversy when the Valuer finally comes to undertake the task of determining the current annual market rental.  This is sufficient to dispose of the application before me and to cause me to dismiss the proceeding.

1. I add that, in my opinion, it would be entirely inappropriate in any event for the Court to interpose itself in the review process at this stage.  The questions proposed by the Lessor are not in truth questions as to the construction of the Lease[7];  they are essentially matters for the expert Valuer.  I am mindful of the contractual instruction that the Valuer is to have regard to all matters which he or she considers relevant.  In general, it is not appropriate in such a case to give instruction or guidance to a Valuer as to how to exercise his or her professional judgment[8]. 

   [7]Cf Bank of South Australia v SA Health Commission (1996) 65 SASR 409 at 415, per Olsson J

   [8]Email Ltd v Robert Bray (Langwarrin) Pty Ltd [1984] VR 16 at 21, per Crockett, Kaye, Gray JJ; Re McCafferty [1992] 2 Qd R 538 at 559, per Cooper J, Williams J concurring

1. Doubtless the Valuer will be aware that his or her task is to establish what is the current annual market rental on the relevant date and will receive the assistance of written submissions from the parties as to this.  I must assume, as doubtless did the parties when they referred the review to an expert, that the expert will carry out this task in accordance with cl. A.6.3.

1. I propose, therefore, that the proceeding be dismissed with costs.

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