Commonwealth of Australia v Wawbe Pty Ltd

SUPREME COURT OF VICTORIA

CAUSES JURISDICTION

Not Restricted

No. 7042 of 1997

COMMONWEALTH OF AUSTRALIA	Plaintiff
v
WAWBE PTY LTD & PINEBARK PARK	Defendants
PTY LTD

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JUDGE:	Gillard, J.
WHERE HELD:	Melbourne
DATE OF HEARING:	31 August & 1 September 1998
DATE OF JUDGMENT:	25 September 1998
CASE MAY BE CITED AS:	Commonwealth of Australia v. Wawbe Pty Ltd & Pinebark Park Pty Ltd
MEDIA NEUTRAL CITATION:	[1998] VSC 82

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Lease - Rental Review - Umpire’s determination. Principles concerning challenging determination. Question of mistake. No mistake established.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr P.R. Best	Australian Government Solicitor
For the Defendant	Mr J.R.P. Lewisohn	Aitken, Walker & Strachan

HIS HONOUR:

This is the return of a summons issued on an originating motion whereby the plaintiff seeks a declaration that a valuation made by a valuer is vitiated by mistake and is not binding on the plaintiff and the defendants.
The plaintiff also seeks consequential relief .

Parties

The plaintiff, Commonwealth of Australia, is the lessee of the premises situated at 51 - 65 Clarke Street South Melbourne (“the premises”) pursuant to a lease executed the 2nd November 1990. The premises are used by the plaintiff as an analytical laboratory.
The lessor in November 1990 was Armstrong McDonald Pty Ltd in its capacity as the trustee of Armstrong McDonald Unit Trust. Some time prior to the 4th November 1992 it assigned its interest to the defendants . The defendants are now the owners of the reversion of the lease.

Facts

The evidence placed before the court comprised an agreed statement of facts and two affidavits filed by the plaintiff and one affidavit filed by the defendants. No deponent was cross examined.
The parties agreed to the following facts -

“1.

By a deed of Lease dated the 2nd November 1990 entered into between Armstrong McDonald Pty. Ltd. as lessor and the Plaintiff as lessee the lessor demised the premises known as 51-65 Clarke Street, South Melbourne in the State of Victoria to the Plaintiff for a term of 10 years commencing on the 6th June 1990.

2.

The lease is exhibit SE1 to the Affidavit of Stephen Martin Cahill sworn on behalf of the Plaintiff on the 17th September 1997.
3. The lease was prepared by the Plaintiff’s solicitors.

4.

The premises were let for the purpose of analytical laboratories for the Australian Government Analytical Laboratory as referred to in Item 9 of Schedule 1 to the lease.

5.

As at the commencement date of the lease the premises were an empty shell and were not fitted out as offices or as laboratories.

6.

The Plaintiff carried out a fitout of the premises including performing the works referred to in Schedules 2 and 3 of the lease.

7.

The then lessor credited the Plaintiff with the sum of $678,350.00 in lieu of the lessor carrying out the works specified in Schedule 4 of the lease which would have finished the building as an office building.
8. The Defendant is the owner in reversion of the lease

9.

The initial rental payable under the lease was $474,511.19 per annum.

10.

By a deed of variation of that lease dated the 4th November 1992 entered into between the Defendants as lessors and the Plaintiff as lessee the rental was increased to $489.202.78 as a consequence of an agreement that the Plaintiff would take additional car parking

11.

The lease provides in Item 8 of the First Schedule to the lease for reviews to be conducted each two years and, if the parties are unable to agree upon the rent review, "the rent shall be determined pursuant to Clause 4(9) and (10) Provided that until the rent has been determined the rent applicable as at the date of such review shall continue to be paid but shall be subject to adjustment in accordance with such determination".

12.

On the first and second rent reviews in 1992 and 1994 respectively the parties were unable to agree on the rent payable. Valuers appointed under clause 4(9) of the lease were also unable to agree. The rent was determined by written determinations in 1993 and 1994 respectively by Messrs. Dowling and Scivener, acting in each respective case as umpires (Exhibit SE-IA). The parties accepted and gave effect to these determinations pursuant to which the rent was determined on the first rent review to a figure of $348,000 pa and on the second rent review was determined to a figure of $265,500 pa.
13. The third rent review was due as at the 6th June 1996.

14.

The Defendants and the Plaintiff were unable to agree on the rent payable following the third rent review and, in accordance with Clause 4(9) of the lease, the parties each appointed their own valuer.
15. The valuers were unable to agree as to the rent payable.

16.

At a conference on the 17th September 1996 the parties agreed that an umpire would be appointed by the President of the Real Estate Institute of Victoria in accordance with clause 4(9) and 4(10) of the lease to determine the rental due as at the 6th June 1996 pursuant to the lease.

17.

Malcolm Gray of Gray and Johnson (Number 1) Pty. Ltd. was appointed as umpire on the 22nd November 1996 to determine the rent payable.
18. Submissions were made to the umpire by:

(a)

Ms. Andrea Summers of the Australian Valuation Office on behalf of the Plaintiff dated the 28th November 1996 together with a further letter dated the 19th December 1996 (Exhibit SE3 to the Affidavit of Stephen Martin Cahill sworn on behalf of the Plaintiff on the 17th September 1997);

(b)

Mr. Paul Wheeler of A.T. Cocks and Partners Pty. Ltd. on behalf of the Defendants dated the 2nd December 1996 together with a further letter dated the 18th December 1996
(Exhibit PW1 and PW3 to the Affidavit of Paul Wheeler sworn
the 17` December 1997).

19. The umpire, by a determination dated the 6th January 1997 (Exhibit SE4 to the affidavit of Stephen Martin Cahill sworn on behalf of the Plaintiff on the 17th September 1997), determined that the proper rental for the two year period commencing on the 6th June 1996 was $363,600.
20. The Plaintiff, pending the outcome of this proceeding, has paid to Defendant the rental set out in the determination of the umpire, backdated to the 6th June 1996, and continues to pay the rental at that rate.”

The only other fact noted at this point is that the umpire was deemed to be acting as an expert and not an arbitrator. The lease expressly excluded the laws of this State in force relating to arbitration.

The Court’s Jurisdiction

The plaintiff by its originating motion invokes the jurisdiction of the court found in section 137 of the Property Law Act 1958. That section gives the plaintiff the right to apply to this court “in respect of .. any question arising out of or under or connected with the lease”. The courts jurisdiction is to “make such order upon the application as to it appears just”.
In effect the plaintiff asserts that the umpire Mr Malcolm Gray (“the umpire”) made a fundamental error in his valuation and accordingly the valuation was vitiated by mistake and does not bind the parties.
In its summons the plaintiff has sought various heads of relief but in the end there were only two declarations sought and which were in dispute between the parties. They are:

“1. A declaration that the valuation of M A Gray of Gray and Johnson, Estate Agents, dated 6 January 1997 is vitiated by mistake and is not binding upon the plaintiff and the defendants.
2. A declaration that upon the true construction of clause 4 (9) and (10) of the Lease and the terms of the lease as varied a valuer or umpire appointed pursuant to clause 4 for the determination of the proper rental is;

(a) required to determine the rental for the premises as if it was an ordinary average commercial office building;
(b) required to ignore the use of the premises by the plaintiff and any building and fit out works and improvements to the premises undertaken by the plaintiff;
(c) required to ignore any right in or obligation upon the plaintiff to remove its fixtures and fittings from the premises at or prior to the termination of the lease as varied.”

At the outset I should say that there is no suggestion that the umpire was guilty of fraud or collusion or actuated by any improper motive. The plaintiff submits that the valuer proceeded on an erroneous principle and accordingly made a mistake. It follows according to the plaintiff that the parties are not bound by the umpire’s valuation.
There has been considerable discussion with respect to the courts approach over the past 45 years in a case such as the present.
Principles - challenging decision
The plaintiff submits that the valuer's decision should be set aside on the ground of mistake. The law has for many years recognised the right of a contracting party to challenge the decision of an expert certifier who has been entrusted with making a decision pursuant to the contract between the parties.
It is well established in the absence of fraud or collusion, a court should be slow to interfere with a decision made by an expert valuer pursuant to an authority given him by the contract.
In A. Hudson Pty Ltd v. Legal and General Life of Australia (1986) 61 A.L.J.R. 280 the Privy Council at p.281, after referring to an attack upon the terms of a valuer's report observed -
“In general their Lordships consider that it would be a disservice to the law and to litigants to encourage forensic attacks on valuations by experts where those attacks are based on textual criticisms more appropriate to the measured analysis of fiscal legislation."
Much the same observations can be made when an attack is made upon a valuer's interpretation of the contract which gives him the authority to make the valuation.
The reasons are obvious. The parties to a contract agree that the value is to be determined by an expert acting as such and using his own skill, judgement and experience. He is not a lawyer. His authority derives from the contract. The terms of the contract are to be considered by him. It would be contrary to the parties' common intention to expect the valuer to construe the contract and apply it as a court would. The parties have entrusted the task to an expert valuer, not a lawyer. They must be taken to accept the determination "warts and all" and subject to such deficiencies as one would expect in the circumstances. The parties put in place the procedure, they must accept the result unless it would be contrary to their common intention.
In Baber v. Kenwood Manufacturing Co Ltd and Anor (1978) 1 Ll.R. 179 Lawton, LJ said at p.181 -
“They (the auditors) were to be experts. Now experts can be wrong; they can be muddle headed; and, unfortunately, on occasions they can give their opinions negligently. Anyone who agrees to accept the opinion of an expert accepts the risk of these sorts of misfortunes happening. What is not acceptable is the risk of the expert being dishonest or corrupt."
However, the law does recognise that a valuation may be challenged and held not binding on the ground of mistake. However, what type of mistake is a question involving some controversy.
It is clear -
(i) that if there is fraud collusion or improper motive on the part of the valuer the determination does not bind the parties;
(ii) that the basis for any challenge must be found in the terms of the contract between the parties.
The plaintiff alleges that the valuer made a mistake.
Given that it is accepted law that a valuer's determination can be set aside on the ground of mistake, the question is what type of mistake justifies the court in declaring that the determination does not bind the parties?
The Full Court in Karen Lee Nominees Pty Ltd v. Gollin and Co Ltd (1983) 1 V.R. 657 discussed the principles at pp.668 et seq.
The court commenced its consideration by quoting the well-known dicta of Romilly, MR in Collier v. Mason (1825) 25 Beav. 200; 53 E.R. 613. His Lordship said at 53 E.R. p.64 -
“This court upon the principle laid down by Lord Eldon, must act on that valuation, unless there be proof of some mistake, or some improper motive, I do not say a fraudulent one; as if the valuer had valued something not included, or had valued it on a wholly erroneous principle, or had desire to injure one of the parties to the contract; ... in any one of these cases the court would refuse to act on the valuation."
The Full Court made two observations with respect to the dicta at p.669.
First, the court said -
“The judge can decline to act on the valuation in this context only if one of the defects mentioned by his Lordship emerges - mistake in a relevant sense, or lack of good faith, or fraud."
The question then arose as to what was a "mistake in a relevant sense".
The court said this -
“The second comment is that the mistake referred to is of the kind mentioned. An illustration of valuation carried out on a wrong principle will be found in Jones v. Jones (1971) 1 W.L.R. 840) where the valuer was required to value on a 'going concern' basis, but did so on a 'break up' basis. See also Chichester v. Mc'Intire (1830) 5 E.R. 28 where the error was in appreciation of an obligation to repair, so that there was error as to the incidents of the subject matter of the valuation."
The court then observed “in cases of this kind it is important to bear in mind that the parties have contracted that their rights are to be determined by one or more valuations”. In the final determination it is a question of contract and whether the parties agreed to accept the valuation that was made.
The court considered a number of recent English decisions but in the end did not state a definition of "mistake" where a challenge was made to a valuer's determination.
The court said at p.671 -
“It is sufficient to say that the criticisms enumerated by his Honour (the learned trial judge) were not such as to establish 'mistake' as that word was intended to be understood by Sir John Romilly MR in Collier v. Mason. The learned Master of the Rolls was referring rather to mistake of a kind which would enable a defendant successfully to resist a suit for specific performance of a contract. Usually this is a bona fide mistake by the defendant as to the subject matter or terms or effect of the contract, eg Webster v. Cecil (1861) 30 B. 62; 54 E.R. 812.
The mere attribution of too much or too little weight by one of two valuers to matters which bear upon the ultimate valuation arrived at cannot be considered a mistake vitiating a valuation for the purposes of this contract."
But as the court stated earlier, the mistake must be of the kind mentioned by the Master of the Rolls.
In the following year the Full Court made reference to the principles in the case of Email Ltd v. Robert Bray (Langwarrin) Pty Ltd [1984] V.R. 16 at p.21 when the court said -
“It would appear to us that the rent assessment could not be attacked upon the ground that relevant matters had been disregarded or irrelevant matters considered. As the parties have agreed to be bound by the valuer's assessment, they will be bound unless the assessment is vitiated by fraud collusion or mistake: Karen Lee Nominees Pty Ltd v. Gollin and Co Ltd (1983) 1 V.R. 657 at p.670."
If what the Full Court said concerning relevant and irrelevant matters is to be taken as a principle of law that a determination cannot be set aside on those grounds then I would respectfully query whether that is the law. In the Karen Lee case at p.670, the court stated the principle in the terms of the weight that is to be attached to various matters. As a general proposition, one could not attack a determination on the ground that the valuer gave too much weight or insufficient weight to a certain factor. But this is a different question to ignoring relevant matters or taking into account irrelevant matters.
The court said in Karen Lee -
“It is not to be said of him that he has mistakenly overemphasised the importance of some aspect, or underestimated the influence of another. Nor is the merit of the weight which he gives to various matters to be called in question."
On appeal, the High Court did not consider the principles to apply because the court held that the valuation was not made: Gollin and Co Ltd v Karenlee Nominees Pty Ltd (1983) 153 CLR 455. But the court observed that the attacks on the valuation accepted by the trial judge were not capable of amounting to “identifiable error and mistake” which precluded the valuation from satisfying the requirements of the contract - ibid - p.472-3. The criticisms upheld by the trial judge concerned comparable sales which went to the question of weight and that the valuer gave too little or too much weight to certain factors. The Full Court and the High Court held that the criticisms did not establish “mistake” in the valuation.
The starting point for any consideration of the modern law is to be found in what Lord Denning, MR said in Campbell v. Edwards (1976) 1 W.L.R. at p.407 when he said -
“It is simply the law of contract. If two persons agree that the price of property should be fixed by a valuer on whom they agree, and he gives that valuation honestly and in good faith, they are bound by it ... if there were fraud or collusion, of course, it would be very different. Fraud or collusion unravels everything."
(Quoted with approval in Karen Lee, supra at p.670.)
In Legal and General Life of Australia Ltd v. A. Hudson Pty Ltd (1985) 1 N.S.W.L.R. 314 the Court of Appeal was concerned with a valuer's decision and whether it should be set aside on the ground of mistake. One of the three judges, McHugh, JA, considered the principles that should be applied and summarised them at p.335 as follows -
"This review of the authorities shows that this branch of law has been subject to much difference of opinion over the last thirty years. Moreover, much of the discussion appears to have proceeded upon the assumption that at least the general proposition espoused by Sir John Romilly MR, in Collier v. Mason can be applied to both legal and equitable remedies. With respect, I think that this is a mistake. Only one decision (Jones v. Jones), however, has resulted in a valuation being set aside by the application of what I regard as a wrong principle. The preferable course, in my opinion, is to restate the law on the matter in accord with what I believe is its correct basis.
In my opinion the question whether a valuation is binding upon the parties depends in the first instance upon the terms of the contract, express or implied. This was pointed out by Sir David Cairns in the Court of Appeal in Baber v Kenwood Manufacturing Co Ltd (at 181). A valuation obtained by fraud or collusion can usually be disregarded even in an action at law. For in a case of fraud or collusion the correct conclusion to be drawn will almost certainly be that there has been no valuation in accordance with the terms of the contract. As Sir David Cairns pointed out, it is easy to imply a term that a valuation must be made honestly and impartially. It will be difficult, and usually impossible, however, to imply a term that a valuation can be set aside on the ground of the valuer's mistake or because the valuation is unreasonable. The terms of the contract usually provide, as the lease in the present case does, that the decision of the valuer is 'final and binding on the parties'. By referring the decision to a valuer, the parties agree to accept his honest and impartial decision as to the appropriate amount of the valuation. They rely on his skill and judgment and agree to be bound by his decision.
While mistake or error on the part of the valuer is not by itself sufficient to invalidate the decision or the certificate of valuation, nevertheless, the mistake may be of a kind which shows that the valuation is not in accordance with the contract. A mistake concerning the identity of the premises to be valued could seldom, if ever, comply with the terms of the agreement between the parties. But a valuation which is the result of the mistaken application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case the critical question must always be: Was the valuation made in accordance with the terms of a contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account or has failed to take into account matters which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract.
Furthermore, when a party seeks the assistance of equitable remedies to enforce an agreement to abide by the valuation of a third party, mistake, fraud or collusion can be a defence to the action in certain
circumstances: Collier v Mason; Weekes v Gallard. But those
equitable defences are not available when the plaintiff seeks a common law remedy. To hold otherwise is to become a victim of 'the fusion fallacy' which Messrs Meagher QC, Gummow and
Lehane so roundly condemn: Equity, Doctrines and Remedies, 2nd
ed (1984) at 44-58. Of course, defences of fraud, collusion or mistake may be available when a common law remedy is sought. But that is because the express or implied terms of the contract permit them.
The defences of which Sir John Romilly MR spoke in Collier v Mason were equitable defences to an equitable remedy. They are
not available in a common law action." [My emphasis]

In my respectful opinion, what his Honour has written states the law. I respectfully agree that in the end it is a question whether the valuation complies with the terms of the contract.
What his Honour wrote has been followed on a number of occasions - see Woolworths Ltd v. Merost Pty Ltd (1988) 14 NSWLR 300 at 303; Strang Patrick Stevedoring Pty Ltd v. James Patrick & Co (1993) 32 NSWLR 583 at 586 and Skiperch Pty Ltd v Mocom Systems Pty Ltd, per Hayne. J, delivered 15 March 1995.
When that case went to the Privy Council the Judicial Committee declined to consider what type of mistake could be the basis for declaring a valuation not binding on the parties. Their Lordships said -
"There being no discernible mistake in the valuation their Lordships are not concerned to consider the kinds of mistake which might justify interference by the court with the valuation of an expert."
- supra 61 A.L.J.R. 280 at p.281.
The Court of Appeal in England reconsidered the principles in 1989 in a case which was not reported until 1992.
In Jones v. Sherwood Computer Services plc (1992) 1 W.L.R. 277, Dillon, LJ considered the recent English authorities and stated at p.287 -
"On principle, the first step must be to see what the parties have agreed to remit to the expert, this being, as Lord Denning said in Campbell v. Edwards (1976) 1 W.L.R. 403 at 407, a matter of contract. The next step must be to see what the nature of the mistake was, if there is evidence to show that. If the mistake made was that the expert departed from his instructions in a material respect - e.g. if he valued the wrong number of shares, or valued shares in the wrong company, or if, as in Jones v. Jones (1971) 1 W.L.R. 840, the expert had valued machinery himself whereas his instructions were to employ an expert valuer of his choice to do that - either party would be able to say that the certificate was not binding because the expert had not done what he was appointed to do."
The trend of the authorities establish that the mistake must be of a kind which demonstrates that the valuer did not perform his task as required by the contract making allowance for the fact that the valuer in construing the agreement, where necessary, is a valuer and not a lawyer.
In my opinion it follows that the court should consider three questions -
(i)         What did the parties agree to remit to the expert?
(ii)        Did the valuer make a mistake and if so what was the nature of the mistake?
(iii)       Is the mistake of such a kind which demonstrates that the valuation was not made in accordance with the terms of the contract and accordingly does not bind the parties?
The valuer's authority?
The umpire was appointed by the parties in accordance with the terms of the lease. It is plain that he gets his authority from the agreement between the parties and he is obliged to determine the valuation in accordance with the terms of the lease.
The lease in question does set out in some detail what the umpire had to do.
The lease was for a period of ten years commencing on 6 June 1990 and the rent for the first two years was $474,511.18 per annum.
The lease provided for a rent review every two years and proceeded on the basis that if the parties were unable to agree then the rent was to be determined in accordance with clause 4(9) and (10).
The rent was reviewed in 1992 and in 1994 and the valuation the subject of the proceeding was the 1996 rent review.
Clause 4(9) provided -
"Any dispute arising between the parties hereto in respect of suspension of rent or review of rent or determination of rent under any option set out in Schedule One shall be referred for determination to two valuers one to be appointed by either party and in the event of no determination having been made by the said valuers within one month of their appointment the dispute shall be determined by an umpire appointed in manner hereinafter appearing and the written determination of such valuers or umpire as the case may be shall be conclusive and binding on the parties."
Clause 4(10) provided for the appointment of valuers and the umpire and clause 4(10)(e) set out what the umpire was required to do in the course of the valuation.
It provided -
"4(10)(e) In determining a proper rent for the premises on any dispute in respect of review of rent under this Agreement or determination of rent under any option to take a renewed lease set out in Schedule One the valuers and the umpire shall:
(i)         assume that the premises form part of an ordinary average commercial office building of a kind commonly found in the vicinity;
(ii)        exclude from their consideration any and all value that may attach to the premises by reason of their use as a laboratory;
(iii)       without in any way limiting the generality hereof, exclude from their consideration any and all value that may attach to the premises by reason of those fit-out works added to the premises at the lessee's expense and set out in Schedule two hereto;
(iv)       without in any way limiting the generality hereof, exclude from their consideration any and all value that may attach to the premises by reason of those building upgrading works added to the premises at the lessee's expense and set out in Schedule three hereto;
(v)        have regard to rents ruling in the vicinity in respect of ordinary average commercial office buildings and to such other matters, consistent with this Agreement, as may be relevant at the date on which such rent shall commence; and
(vi)       in respect of the car parking spaces, have regard to rents ruling in the vicinity for similar car parking spaces;
(vii)      take into account that the Lessor credited the Commonwealth with the sum of $678,350 in lieu of those works specified in Schedule 4 which would have finished the building as an office building."
It is pertinent to observe that in paragraph (v) the umpire is to have regard "to such other matters, consistent with this agreement, as may be relevant at the date on which such rent shall commence."
The relevant date is 6 June 1996.
Did the umpire make an error?
Mr P.R. Best of counsel for the plaintiff submitted that the error made by the umpire is to be found in the last paragraph of paragraph 10.4 of his written valuation and demonstrates that the valuation was not in accordance with the contract between the parties.
What the umpire was obliged to do was to determine "a proper rent for the premises" and this required him to consider the premises in their permitted state as at 6 June 1996 and the provisions of the lease and in particular clause 4(10)(e). The rent to be ascertained was that payable by a willing lessor and a willing lessee on the same terms and conditions as the lease.
The umpire’s determination of rental is a detailed report covering some 31 pages.
Paragraph 10 is headed “BASIS OF DETERMINATION”.
The umpire then went on to state -
“In arriving at my determination the following matters or issues
require specific consideration and mention:

• the roof
• nett lettable area
• “proper rent”
• reinstatement
• rental evidence”

The umpire set out his reasons with respect to each issue and with respect to reinstatement wrote:
"10.4 Reinstatement
The matter of reinstatement has been raised by both Mr Paul
Wheeler and Ms Andrea Summers.
The only reference in the lease to the erection of fixtures and fittings and the removal of them is found in Clause 3(4) which gives the lessee the right to erect fixtures and fittings if it desires and if the lessee removes them it must make good any damage. The lease does not require any removal of fixture and fittings or any reinstatement of the building.
Mr Wheeler argues in his submission that the credit of S678.350 referred to in Clause 4 (10) (e) (vii) in some way is connected to the fact that there is no requirement for the lessee to reinstate the building to an office use. I reject this notion as in my view Clause 4 (10) (e) (vii) is one of the seven factors to be taken into account when assessing the rental as it is in part explanation why the building is to be assessed as an office building and has nothing to do with reinstatement or the lack of it.
Ms Andrea Summers argues that no adjustment to rental value is
warranted because there is no reinstatement requirement in the lease
and supports this view with a statement from the Australian
Government Solicitor in a letter dated 1 8 October 1993 as follows:
'I do not consider that the valuer in determining the proper rent for
the premises can take into account the fact the lease does not impose
an obligation on the lessee to reinstate the premises on the expiration
of the term.''
I do not agree with this view as a valuer must determine the rental in accordance with the terms and conditions of the lease and in this case where there is no requirement to reinstate it can be held that the lease Is a 'soft' lease in that it is favourable to the lessee because of the lack of the need to reinstate expecially (sic) as it could have been the expense of reinstating the building from a laboratory to an office and therefore it is reasonable that a tenant would pay a higher rent under this lease than under a lease requiring reinstatement."
Mr Best submitted that the umpire made an error when he took into account the fact that there was no requirement to reinstate at the end of the lease and submitted that this was contrary to the express terms of the lease. He accordingly submitted that it was “a mistake” as understood in the authorities and demonstrated that the valuer did not make a valuation in accordance with the terms of the contract.
Mr Best accepted that the factor which the umpire took into account with respect to reinstatement may be a relevant factor on a valuation to determine a proper rent. Indeed, on the first rent review in 1992 it was taken into account, on the rent review of 1994 it was considered irrelevant and in the present rent review the parties made submissions with respect to it.
What Mr Best submitted, however, was that in taking into account the matter, the umpire was acting contrary to the express terms of the lease.
Mr Best submitted that the umpire was obliged to take into account the matters enumerated in clause 4(10)(e) and in particular paragraphs (ii), (iii), (iv) and (v).
I agree that the umpire was obliged to take into account the matters enumerated in clause 4(10)(e).
Mr Best then went on to submit that on a proper construction of the lease the umpire was required to ignore the lessee's fit-out and any other works in every respect. He finally submitted that the umpire was required to value the premises as an ordinary average commercial office building divorced entirely from the fact that the lessee had carried out extensive building and fit-out works and was using the premises as an analytical laboratory.
I do agree that the umpire was obliged to exclude from his consideration any value that may attach to the premises by reason of fit-out works which were set out in Schedule 2 or building upgrading works which are set out in Schedule 3. But the question is did the contract prohibit the umpire from considering the question of reinstatement of the premises in the valuation process? Mr Best submits the lease excluded the factor.
It is important to consider precisely what the umpire did.
What the umpire did was to take into account that in the lease there was no requirement to reinstate the premises at the end of the lease and accordingly, the lessee was relieved of this obligation. (“The Reinstatement Factor”). Hence in the circumstances a lessee would derive a benefit from this fact for which he should pay in the form of an increased rent to the lessor to cover the prejudice suffered by the landlord in having to reinstate the premises from a laboratory to an office at the expiration of a lease. In other words, the lessor if desired would have to re-instate the premises and since the willing lessee did not have to find the cost of reinstatement it meant that a willing lessee in those circumstances would be prepared to pay a higher rental. The building was erected to be an office space building.
Mr Lewisohn of counsel who appeared for the defendant submitted that the plaintiff's submission equated two different concepts as one and misunderstood the intention of the parties with respect to the factors set out in clause 4(10)(e). He emphasised that paragraphs (iii) and (iv) which required the umpire to exclude from his consideration certain matters were concerned with excluding any value to the premises by reason of the works carried out by the lessee. But what the umpire was doing was taking into account the fact that because the plaintiff as lessee was not obliged to reinstate the premises at the end of the lease it was gaining a benefit which should be reflected in the amount of rent payable.
In order to determine whether the lease excluded the reinstatement factor it is necessary to analyse cl. 4(10(e) and construe it in context, giving effect to the purpose of the clause.
Paragraph (i) requires the umpire to make an assumption, that is, that the premises forms part of an ordinary average commercial office commonly found in the vicinity. The re-instatement factor is not inconsistent with that assumption.
Paragraph (ii) requires exclusion of any value that may be attached to the use as a laboratory. Again, this requirement is not inconsistent with the reinstatement factor.
Paragraphs (iii) and (iv) oblige the umpire to ignore any of the schedule 2 fitout works and the building upgrading works in schedule 3, performed at the plaintiff lessee’s expense. Again, in my opinion, neither of these factors excludes the reinstatement factor.
Paragraph (v) obliges the umpire to have regard to rents ruling in the vicinity for ordinary average commercial office buildings and this requirement is not inconsistent with the reinstatement factor.
Paragraph (vi) was not relied upon by the plaintiff and is not relevant to the issue.
Paragraph (vii) required the umpire to take into account the fact that the lessor allowed the plaintiff lessee a sum of $678,350 in lieu of it finishing the works in schedule 4 “which would have finished the building as an office building”.
It is pertinent to observe that the greater bulk of the allowance was for mechanical services which would include air-conditioning. In other words the bulk of the works would have had to be performed whether the building was an office building or a laboratory. Again, in my opinion, this paragraph does not exclude the reinstatement factor.
Returning to paragraph (v) the umpire was also obliged to consider “such other matters consistent with this agreement, as may be relevant at the date on which such rent shall commence”.
In my opinion this did permit the umpire to take into account the reinstatement factor unless it was “not consistent with this (the) agreement”.
In my opinion neither individually nor collectively do the factors set out in cl. 4(10(e) exclude the consideration of the reinstatement factor in the valuation process.
I am satisfied that the plaintiff did value the premises as an ordinary average office building found in the vicinity excluded the fitout works and building upgrade works and took into account the credit factor.
The reinstatement factor was relevant to the valuation process and in my opinion was not excluded by cl. 4(10(e) or any other clause of the lease.
Mr Best also submitted that the valuer failed to ignore any right in, or obligation resting upon, the plaintiff to remove its fixtures and fitting at or prior to the termination of the lease and therefore this was a mistake.
Clause 3(4) provides:

“(4) The lessee may from time to time affix erect or install such fixtures and fitting and make such alterations in (not being of a structural nature) upon and to the premises as the lessee may consider necessary and at any time during the continuance of the tenancy or within 14 days after the end or sooner determination thereof remove the same making good all damage caused thereby.”

This is the only reference in the lease to the question of reinstatement.
Both counsel submitted that the sub-clause gave the lessee an option and if it exercised it, it was obliged to make good all damage caused thereby. I agree. The umpire referred to the matter in his determination and what he said discloses no error on his part. The presence of such an option does not exclude the reinstatement factor.
The umpire inspected the building and made his assessment of what would be involved in the reinstatement and the practical effect of the option in cl. 3(4).
In my opinion, clause 4(10)(e) did not preclude the umpire from taking into account what would happen at the end of the period with respect to the question of any possible reinstatement.
It follows that in my opinion the plaintiff has not demonstrated that the valuer made a mistake in the sense that his valuation did not accord with the terms of the lease.
Another argument which was raised late in the proceeding was whether the umpire was obliged to ignore any question of reinstatement because the lease did not oblige the lessee to reinstate. It was submitted that it was the common intention of the parties that there should be no obligation because of the obligations that rested upon the plaintiff lessee with respect to the completion and fitout works were set out in the schedules 2, 3 and 4.
As already noted the lease does not contain any obligation upon the lessee to remove anything from the premises at the expiration of the period of the lease. The lease, gives an option to the lessee to remove fixtures, fittings and other building works and if it does so, it is obliged to make good all damage caused thereby - see cl. 3(4).
It was submitted that this sub-clause should be construed in light of the terms of the lease and the objective facts known to the parties at the time the lease was executed.
The terms of the lease and the background facts establish that prior to the execution of the lease the parties negotiated and eventually agreed that the plaintiff, as potential tenant, would take over the building before it was completely fitted out and do certain works to establish the building as a laboratory. Some of the works are set out in Schedule 4 to the lease and because the plaintiff was to carry out the works, the then landlord agreed to provide a credit in the sum of $678,350. Some of the works in question would have had to be carried out irrespective of whether the building was completed as an office block or a laboratory. But it is also clear from the terms of Schedule 2 and 3 of the lease and paragraphs (iii) and (iv) of clause 4(10)(e) that the lessee was to also perform other works. There is an overlap between works referred to in Schedule 4 and works in Schedules 2 and 3.
It was submitted that clause 3(4) operated prospectively and did not refer to the works set out in Schedules 2, 3 and 4. It followed that any right to remove or alter only arose in relation to works outside Schedules 2, 3 and 4. Hence, the obligation to make good if any of those works were removed only related to those works and not the other works.
It followed that the parties contemplated and intended at the commencement of the lease that all of their respective obligations had been agreed. Hence the lessor never expected to receive back any building other than a laboratory and expected to have to convert the building back to an office, if it so chose, at its expense.
It would follow that the cost of reinstatement was irrelevant and should not have been taken into account.
Whether that submission is correct depends upon the effect of clause 3(4) of the lease. Whilst initially attracted to the submission, I am not prepared to conclude that it was the common intention of the parties that the works covered by clause 3(4) are separate and distinct from those carried out pursuant to Schedules 2, 3 and 4.

On the contrary I think that the works referred to in cl. 3(4) also cover some of the works in the schedules provided, of course they answered the description “fixtures and fittings”. The parties did not intend that all questions of re-instatement had been settled by the terms of the agreement.
Accordingly, I am not persuaded that the umpire made an error in taking in to account the reinstatement factor.
Conclusion
In conclusion, I am not persuaded by the plaintiff that the umpire made any error of fact or law in making his determination pursuant to the terms of the lease. On the contrary, I am satisfied that the umpire performed his task in accordance with the terms of the lease.
Subject to any submissions from counsel, I propose to make the following orders -
(i) that the plaintiff's proceeding be dismissed;
(ii) that the plaintiff pay the defendants' costs including any reserved costs.

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•	the roof
•	nett lettable area
•	“proper rent”
•	reinstatement
•	rental evidence”

[1998] VSC 82

25 September 1998