Eastpoint Shopping Village Pty Ltd v Grayson Pty Ltd
[2011] NSWADT 68
•05 April 2011
Administrative Decisions Tribunal
New South Wales
Medium Neutral Citation: Eastpoint Shopping Village Pty Ltd v Grayson Pty Ltd [2011] NSWADT 68 Hearing dates: 15 March 2011 Decision date: 05 April 2011 Before: P H Molony, Judicial Member Decision: 1.On file number 115019 declare p ursuant to Section 72 (1)(f)(iii) of the Retail Leases Act 1994 , that the parties are not bound by the "current market rental of Ian Handley, dated 22 November 2010 in respect of Shop 1, Eastpoint Shopping Centre, 371 Ballina Road, Goonellabah because it is not a valuation for the purposes of Section 19 of that Act.
2.On file number 105212, the application is dismissed.
Catchwords: Retail leases - appointment of specialist retail valuer Legislation Cited: Retail Leases Act 1994 Cases Cited: Adwell Holdings v Bourne (2007) NSWSC 17, (2007) NSW Conv R 56-188
Perri v Exego Pty Limited [2009] NSWADT 170
Richardson v Lockevo Pty Ltd [2010] NSWADT 305Category: Principal judgment Parties: Eastpoint Shopping Village Pty Ltd (Applicant)
Grayson Pty Ltd (Respondent)Representation: Counsel
Mr Mackay (Applicant)
Mr Guthrie (Respondent)
G A Guthrie (Respondent)
File Number(s): 105212 and 115019
REASONS FOR DECISION
Introduction
Eastpoint Shopping Village Pty Ltd (Eastpoint) leased retail shop premises identified at Goonellabah to Grayson Pty Ltd (Grayson) under a registered leased which commenced operation on 25 May 2005. The lease was for an initial term of 10 years, with a further four five year options. The premises were to be operated as a supermarket. The rent at commencement was
The lease made provision for the annual increases of rent by application of an agreed figure of 3.5% for the first four years. As a result following the 2009 increase, the rental payable was $277,891.67 exclusive of GST. By Item15 of Annexure B to the lease, the rental in the fifth year of the lease is to be reviewed and set using a current market rate method. Cause 15.12 of Annexure B to the lease relevantly provides -
"In this case the rent is to be the current market rent. This can be higher or lower than the rent payable at the rent review date and is the rent that would be reasonably be expected to be paid for the property, determined on an effective rent basis, having regard to the following matters -
5.12.1 the provisions of this lease;
5.12.2 the rent that would reasonably be expected to be paid for the property if it were unoccupied and offered for renting for the same or substantially similar use to which the property may be put under this lease;
5.12.13 the gross rent, less the landlords outgoing payable by the tenant.
5.12.14 where the properly is a retail shop, rent concessions and other benefits that are frequently or generally offered to prospective tenants of unoccupied retial shops; and
5.12.5 the value of goodwill created by the tenant's occupation and the value of the tenant's fixtures and fittings are to be ignored."
When the time came for the rent to be reviewed on a current market rent basis the parties were unable to agree as to a new rent, or on a valuer to be appointed to conduct the valuation upon which the rent could be determined. As a result, application was made to the Tribunal under s19(1A) of the Retail Leases Act 1994 to appoint a specialist retail valuer. On 1 September 2010 the Tribunal appointed Mr Ian Handley.
Mr Handley took submission from the parties and prepared a rental valuation, dated 22 November 2010, which determined that the current market rental of the premises, at 5 May 2010, was $140,000 gross per anum plus GST. That valuation was forwarded to the parties on 8 December 2010.
On 22 December 2010 Eastpoint filed an application to appoint two specialist retail valuers to review that determination under s 32A of the Act.
On 23 December 201 Eastpoint filed a retail tenancy claim in which it sought a declaration that Mr Handley's valuation was not a valuation for the purposes of s 19 of the Act. In so doing Eastpoint relied principally on the decision of the Tribunal in Perri v Exego Pty Limited [2009] NSWADT 170. In that case Molloy JM found that the Tribunal had jurisdiction to make such an order (at [62]), and did make an order declaring that the valuation in issue was not a valuation of current market rent for the purposes of s19.
Eastpoint's two applications were listed for hearing before me on 15 March 2010. That hearing focussed on the application for a declaration. There was agreement that the Tribunal had jurisdiction to consider that question.
At the conclusion of the hearing I reserved my decision. It was agreed that should I find that the valuation was a valuation of current market rent under s 19, then I should also make directions progressing Eastpoint's application for the appointment of two specialist valuers to review Mr Handley's determination. Conversely, if I found that the valuation was not a valuation of current market rent for the purposes of s 19, then there was agreement that I should make orders commencing the process for appointment of a new valuer to perform a valuation under s 19.
The Legislation
Section 19 of the Retail Leases Act 1994 provides -
19 Reviews of current market rent
(1) A retail shop lease that provides for rent to be changed to current market rent is taken to include provision to the following effect:
(a) The current market rent is the rent that would reasonably be expected to be paid for the shop, as between a willing lessor and a willing lessee in an arm's length transaction (where the parties are each acting knowledgeably, prudently and without compulsion), determined on an effective rent basis, having regard to the following matters:
(i) the provisions of the lease,
(ii) the rent that would reasonably be expected to be paid for the shop if it were unoccupied and offered for renting for the same or a substantially similar use to which the shop may be put under the lease,
(iii) the gross rent, less the lessor's outgoings payable by the lessee,
(iv) rent concessions and other benefits that are frequently or generally offered to prospective lessees of unoccupied retail shops.
The current market rent is not to take into account the value of goodwill created by the lessee's occupation or the value of the lessee's fixtures and fittings on the retail shop premises.
(b) If the lessor and the lessee do not agree as to what the actual amount of that rent is to be, the amount of the rent is to be determined by valuation carried out by a specialist retail valuer appointed by agreement of the parties to the lease, or failing agreement, by the Tribunal.
(c) The matters set out in paragraph (a) are to be taken into account by a specialist retail valuer appointed under paragraph (b) in determining the amount of the rent.
(d) The lessor must, not later than 14 days after being requested to do so by a specialist retail valuer appointed under paragraph (b), supply the valuer with information (where reasonably available to the lessor) requested in a list provided by the valuer to assist the valuer to determine the current market value, including the following information about leases for comparable retail shops in the same building or retail shopping centre:
(i) current rental for each lease,
(ii) rent free periods or any other form of incentive,
(iii) recent or proposed variations of any lease,
(iv) outgoings for each lease,
and including any other information prescribed by the regulations.
(e) A valuation for the purposes of paragraph (b) is to be in writing, to contain detailed reasons for the specialist retail valuer's determination and to specify the matters to which the valuer had regard for the purposes of making his or her determination.
(f) The parties to the lease are to pay the costs of a valuation by a specialist retail valuer appointed under paragraph (b) in equal shares.
Note. The procedure provided by this section can be avoided if the parties can come to an agreement as to what the rent is to be.
(1A) A party to a lease may apply to the Tribunal for the appointment of a specialist retail valuer for the purposes of subsection (1) (b).
(1B) A party to a lease may make written submissions to a specialist retail valuer to assist in the valuer's consideration of the valuation, and the valuer must consider any such written submissions.
(2) A specialist retail valuer must make a valuation of a current market rent for the purposes referred to in this section not later than 1 month after receiving the information referred to in subsection (1) (d).
(3) A specialist retail valuer may apply to the Tribunal under Part 8 for an order that a lessor comply with a request referred to in subsection (1) (d) to supply relevant information about leases for retail shops situated in the same building or retail shopping centre to assist the valuer to determine the rent.
(4) The reasons and matters included in a valuation as referred to in subsection (1) (e) must not be set out in a way that discloses information identifying other leases or parties to other leases or relating to the business of parties to other leases. This subsection does not apply to leases between the parties to the lease for which the valuation is made or to leases whose parties consent to the disclosure of the information.
It should be noted that the provisions of cl 5.12 require the current market rent to be determined on the same basis as does s 19(1)(a). There is no inconsistency between the two.
Previous decisions of the Tribunal
Eastpoint, relying on the decision in Perri v Exego Pty Limited [2009] NSWADT 170, has sought a declaration that the valuation is not a valuation of current market rent for the purposes of s19. In Perri Molloy JM found that the valuation under consideration was not a valuation for the purposes of s19 due to a number of deficits. First, it did not refer to the Retail Leases Act 1994 or s19 at all. It also did not apply the statutory formula for the determination of current market rent. The Tribunal said of this, at [20]:
"The failure of an appointed specialist retail valuer to refer to Section 19 and, more importantly, to apply Section 19 as the statutory method for determination of current market rent, is in my very respectful opinion, although perhaps not fatal to a valuation, certainly raises significant questions about the valuation and the methodology adopted by the valuer. It is certainly not helpful."
The second deficit identified within the valuation in Perri was that it did not take into account the current market rent between a willing lessor and willing lessee determined on an effective rent basis. Rather, it applied the API definition of current market rent. This did not require that the market rent be determined on an effective rent basis: see [31-32].
Thirdly, the valuation in Perri did not take into account the rent that would be reasonably expected to be paid for the shop, if it were unoccupied and offered for renting for the same or substantially similar use to which the shop would be put under the lease. Rather, the Tribunal found that the valuer had regard to factors specified in clause 1.1 of the Second Schedule of the lease. This specified different criteria with respect to the use of the premises: see [41].
Fourthly, as a result of adopting the API definition the valuer in Perri did not take into account "the gross rent, less the lessor's outgoings payable by the lessee": (s19(1)(a)(iii)), see [43].
Fifthly, the valuation in Perri did not take into account rent concessions and other benefits that are frequently or generally offered to prospective lessees of unoccupied premises as required by s.19(1)(a)(iv). The Tribunal said, at [44-45] -
44. .... In the valuation the valuer gives chapter and verse to "market evidence", stating that he "had regard to rentals of comparable use premises within surrounding localities as well as rental evidence of other comparable premises within this locality", and then he refers to a number of premises and gives some details. The first example is a showroom and warehouse at Rockdale which is examined by the valuer, noting a cash incentive and "outgoing free period", and then specifies the "effective rental"; the second is a property at Liverpool where there is no reference to any incentives or even "effective rent"; the third is at Bankstown where again there is no reference to any incentives nor any reference to "effective rental"; and the fourth is a property at Campsie where there is no reference to any incentives but the valuer describes the result as "effective rental".
45 In my opinion the valuation fails the Section 19 test in this regard because there is little or no reference to "rent concessions and other benefits that are frequently or generally offered to prospective lessees of unoccupied retail shops".
The Tribunal concluded that, at [47-48]:
47 It may well be that the valuer in this case has carried out the valuation in accordance with the terms of the Lease and in accordance with the terms of the instructions that were given to him by the parties. As I endeavoured to point out above, there is little or no reference to the Retail Leases Act, the Tribunal or to
Section 19. It may well be that the valuer has proceeded on a basis that was different from what the parties intended, but inadvertently so. Even so, in my opinion the parties and the valuer should all have recognised that the valuation, whatever the lease may say, must be carried out, as a matter of law, pursuant to and in compliance with s.19.
48 For the reasons that I have set out above, in my opinion the valuation does not comply with the statutory strictures of Section 19. That is not to say, of course, that a valuation that did so comply with have reached any other conclusion. But, for whatever reason the valuer did not apply the statutory requirements and as such I am driven to the conclusion that the valuation is not a rental determination pursuant to Section 19(1)(b), particularly bearing in mind that sub- section (c) makes it a statutory imperative to take into account the matters in sub-section (a).
Among the conclusions of principle Molloy JM set out at the end of his decision was the following -
(xiv) Section 19(1)(a) is a code, or contractual term imposed by statute, and a valuation that takes into account matters not referred to in s.19(1)(a) is not a complying s.19 valuation. There is no provision in s.19 that entitles a valuer to take into account matters other than as set out in s.19(1)(a).
A different view of s19(1)(a) was adopted by Fox JM in Richardson v Lockevo Pty Ltd [2010] NSWADT 305 . There the Tribunal referred to the above statement of principle made in Perri and said, at [10] -
"I respectfully disagree with that interpretation. Clearly enough s19(1)(a) sets a guide which the appointed valuer must follow, but I do not read the section as setting out an exclusive code or set of
matters to be included, or excluded. Admittedly the not so uncommon legislative words to the effect of "any other matter the valuer may consider relevant" do not appear, but neither does the word "only" appear in the last words of the ss(a) introduction. It does not say:- ".....having regard only to the following matters". The valuer is appointed as an expert, and is expected to apply his skill and knowledge to establish a rental amount, and only he or she knows what is, and what is not relevant to that skilled exercise. I am of the view that as long as the valuer has considered all of the matters raised, and has not considered the identified matter excluded, he or she has complied with s19 (1)(c) and are at liberty to have regard to other matters which they in their expert opinion consider to be relevant, (so long as, of course, they are clearly stated and their relevance explained)."
Eastpoint's Submissions
In the present case Eastpoint to a series of matters in the valuation which it submits say place it on all fours with Perri v Exego Pty Limited .
The first of these is the lack of reference to s 19 of the Retail Leases Act 1994 . Eastpoint does acknowledge that there is a reference to s 19 of the Retail Leases Act at page 7, where the valuer states -
We received submissions in respect of this rental determination both from the Lessor and lessee as per section 19 of the Retail Leases Act 1994 (1994) as amended.
Eastpoint says this should be read as a reference to s 19(1B).
Next Eastpoint points to a paragraph on page 20 of the valuation which refers to the determination being of a "fair market rent". Eastpoint makes the point that the reference to "fair market rental" points to an application of criteria other that the required by s 19.
Eastpoint submits that the valuation has taken account of factors which it was not required to take into account, namely demographic data, a trade area analysis, the tenancy mix and turnover at the shopping centre where the premises are located, and "unverified" turnover figures provided by Grayson. These are all factors which Eastpoint argues are not relevant for the purposes of a valuation under s 19, relying on the decision in Perri. Eastpoint makes the point that tenancy mix and turnover should not be a factor to be taken into account when Grayson is an "anchor" tenant,
Eastpoint also says that the valuer failed to take account of the gross rent less outgoings payable by the lessee as required by s 19(1)(a)(iii). It says that there are only two references to the gross rent in paragraphs 14 and 18.12 of the valuation. It submits that the valuer failed to explain how, if at all, it had regard to the gross rent. This, it submits, is a breach of the valuer's duty to give reasons: Adwell Holdings v Bourne (2007) NSWSC 17, (2007) NSW Conv R 56-188 per Young J. Eastpoint makes a similar submission with respect to the requirement that the valuer consider 'rent concessions and other benefits that are frequently or generally offered to prospective lessees of unoccupied retail shops."
Further, in oral submissions, Eastpoint argued that the valuation was made on a turnover basis, which again was not a valuation made on the basis required by s 19(1)(a).
Grayson's submissions
Grayson took issue with each of the points made by Eastpoint, arguing that the valuer had clearly set out that he was having regard to the Act, and was entitled to have regard to additional factors to those set out in s19(1)(a), and to use accepted valuation practices.
Grayson argued that the issue of whether or not the valuation complied with s 19(1)(a) should be undertaken having regard to the valuation report as whole. Read in that manner, it submitted that the valuation complied with the strictures of s 19(1)(a).
Consideration
With respect to the issue of whether s19(1) is a code, the effect of which is to prohibit valuers from taking into account factors other than those specified in s19(1)(a), there are two conflicting decisions of the Tribunal. In my opinion the conclusion reached by Fox JM in Richardson v Lockevo Pty Ltd is compelling. The fact that a valuer is appointed as an expert compels the conclusion that, in addition to the factors to which s19(1)(a) says a valuer must have regard, a valuer may also have regard to matters that the valuer considers relevant to those factors, in the light of his or her expert skills, knowledge and expertise, and accepted valuation practices. The relevance of these matters has to be clearly stated and explained.
This is not to say that a valuer may make a valuation on a basis other than that authorised by s19(1)(a). Within the strictures of that sub-section a valuer may have regard to other matters that the valuer considers relevant to a full consideration of the s19(1)(a) factors, in the light of his or her expert skills, knowledge and expertise, and accepted valuation practices. In my opinion, Perri is an example of a different situation in which the valuer, by adopting the API definition of market rental value, made his valuation on a different basis to that provided under s19(1)(a).
Richardson v Lockevo Pty Ltd is also an example of the valuation not complying with s 19(1)(a). There the valuer did not have regard to the requirement of s 19(1)(a)(iii) that the determination be made having regard to ' the rent that would reasonably be expected to be paid for the shop if it were unoccupied and offered for renting for the same or a substantially similar use to which the shop may be put under the lease.' The valuation in issue did not have regard to the same or similar use requirements. It also failed to clearly indicate a consideration of the impact of rent holidays and other concessions referred to in s 19(1)(a)(iv).
Here Eastpoint says that by having regard to demographic data, a trade area analysis, the tenancy mix and turnover at the shopping centre where the premises are located, and "unverified" turnover figures provided by Grayson, the valuer had regard to impermissible factors which cause the valuation not be one made under s 19. I disagree.
In my view each of those types of information are ones which a knowledgeable and prudent lessor or lessee, voluntarily engaged in an arms length transaction, would have regard to when determining the rent that would reasonably be expected to be paid for the shop, if it were unoccupied and offered for renting for the same or a substantially similar use. Each of those sources of information would reasonably be expected to impact on, or be indicative of, the likely demand, turnover and income from the shop, when used for the same or similar use. Those are factors which a knowledgeable and prudent potential lessor or lessee would take into account in considering the rent that could reasonable expected to be paid. Having carefully read the valuation, it is my view this is precisely the use to which the valuer put this information when preparing his valuation. I do not accept that the valuer had regard to impermissible factors.
Eastpoint points to a series of other deficits in the valuation. It points to there being only one reference to s 19 of the Retail Leases Act 1994 , which it says, in any case, should be read as a reference to s 19(1B), and to the use the term "fair market rental" on page 20.
A valuation under s 19(1)(a) is a complex document setting out an expert opinion on matters requiring expertise, knowledge and skill. It should set out set details as to how the valuer arrived at the determination, specify the matters to which the valuer had regard, and explain how those matters were considered in the process of making the valuation : Adwell Holdings v Bourne (2007) NSWSC 17, (2007) NSW Conv R 56-188 per Young J. An analysis of whether a valuation satisfies those requirement is to be made having regard to the valuation report as a whole, without undue attention to minutiae. It is ultimately an expert opinion, not a drafting exercise. An assessment of whether or not it is sufficient and addresses all the matters it is required to, can only be fairly made having regard to the document as a whole, and not with an eye "keenly attuned to a perception of error" (see Minister for Immigration and Ethnic Affairs v Wu Shan Liang [1996] HCA 6).
In the present case, Eastpoint is correct in pointing out that paragraph on page 20 of the valuation incorrectly refers to determining the "fair market rental," when 19(a)(1) requires the determination of a "current market rent." That submission does not, in my view, fairly address what the valuation, viewed as a whole, considers. Thus the valuation at page 3 refers to the valuer receiving instructions to determine "current market rental." The following other relevant passages can be found in the report .
In arriving at our opinion of the current market rental for the subject property we have had regard to the terms and conditions of the lease ... (page 7)
We note that this is the first review to a current market rent since the lease commencement date ... (page 7)
RENTAL DETERMINATION
We have determined the current market of the subject property ... as at 25 July 2010 having regard to the written instructions, the submissions from the Lessor and Lessees representatives, the existing terms and conditions of lease, and subject to the qualification contained in the report is: $140,000 per annum exclusive of ... GST. (also on page 20)
In the light of those passages, and having regard to the valuation report as a whole, I am not persuaded that the valuation was prepared on a "fair market rental" basis, as opposed to a "current market rental" basis. My view is that the use of the word "fair" in the paragraph 20 is a mistake or a slip. I think it clear that the valuer has approached his task on the basis that he was required to perform his valuation on a current market rental basis, and that this is what he has done. One incorrect and infelicitous word, in a 20 page report, does not persuade me to the contrary.
With respect to s19 of the Retail Leases Act 1994 the valuation records -
We received submission in respect of this rental determination from both the lessor and the lessee as per Section 19 of the Retail Leases Act 1994 (as amended). [page 7]
19.0 ALPC [who made submission on Grayson's behalf to the valuer] reviews the requirement of the current lease and its relationship to Retail Leases Act Case Law and definitions for the record. (page 12)
In my view the first of these passages makes it clear that the valuer understood that he was conducting his valuation under s19, while the second passage highlights the fact that the submission he received from the lessee addressed the requirements of that section. The valuation also contains a number of references to, and decisions made by the valuer in reliance on, the requirements of clause 15.12 of Annexure B to the lease. This, as I have already observed, effectively replicates the requirements of s 19(1)(a).
Eastpoint also says that the valuation did not have regard to the following factors required by s 19(1)(a) -
- the gross rent, less the lessor's outgoings payable by the lessee,
- rent concessions and other benefits that are frequently or generally offered to prospective lessees of unoccupied retail shops.
Eastpoint asserts that there are only two references to the gross rent and that the valuer does not explain how it was taken into account. In the Table on page 14 the valuer sets out the gross rent, and converts it to a rent per square metre ($229.50 + GST). He notes, but does not quantify, the outgoings paid by the lessor. This, in my opinion is a failure by the valuer to consider a matter essential to his valuation, i.e. the gross rent, less the lessor's outgoings payable by the lessee. The valuer also, in that Table, refers to rent per square metre, inappropriately, as the current market rent.
Much of the valuer's discussion thereafter, including his comparisons with the rental payable on comparable properties, is undertaken on a rent per square metre basis. He notes that Grayson in its submissions to him has -
...imputed the rental rates of this evidence into a 8949 metre equivalent store to illustrate whether or not one might consider the rent as being "reasonable" by showing it as a percentage of current turnover ... [page 13]
He notes that Grayson submits that the "current gross rent" is 6.10% of turnover, and the rent proposed by the lessor is 6.9% of turnover. He observed that the submissions then made a comparison of rent, on a square metre basis and a percentage of turnover basis, with stores they cited as equivalents, before submitting that the current market rent should be a -
...gross annual rent for the ... store is $81,800, based on the evidence of comparable country stores with higher freight charges of 2.30 and 3.20% of turnover using the FRMC as a reference posit for supermarket businesses. Further they believe some adjustment should be made for the new Woolworths store in the same catchment, and form their industry experience when a new entrant comes into a given catchment sales can fall by 20%. [page 16]
Among his many conclusions, the valuer accepted that the proposed annual rental is 'not sustainable' and added that "enquiries elsewhere confirm 6.90% of turnover could also not be sustainable." In my view it is clear that the valuer had regard to the gross rental (but not the gross rent, less the lessor's outgoings payable by the lessee) and explained how he took it into account. His use of the rent per square metre on a percentage of turnover basis was proper for the purposes of considering what a prudent and informed lessee would pay for the shop when operating the same or a similar business.
The valuation does not discuss rent concessions offered to prospective lessees of unoccupied retail shops. In all the numerous references the valuer made to the submissions made by the parties there is no mention of this issue being addressed. Similarly, in his summary of the many comparable properties advanced by the parties there is no mention of concessions. I conclude that it was not an issue agitated by the parties. It was not addressed by the valuer as required by s 19(1)(a)(iv).
Conclusion
As a result I am persuaded that the valuation does not comply with the strictures of s 19(1)(a)(iii) and (iv). That conclusion does not mean that the valuation was not a full and considered one, or that the conclusions reached are wrong. Section 19(1)(a) sets out the basis upon which current market rent valuations are to be made. Each of the factors set out in that sub-section should be addressed by the valuer, and reasons given for the conclusions reached about them. Those conclusions should explain how each of those matters is taken into account in arriving at the valuation.
Because it does not address fully the factors which 19(1)(a)(iii) and (iv) requires be considered, the valuation does not bind the parties. Eastpoint is entitled to a declaration to this effect. Eastpoint's application under to appoint two specialist retail valuers to review that determination under s 32A is redundant as a result. I will dismiss it accordingly.
I will, as requested by the parties, make separate directions commencing the process for the appointment of a different valuer to conduct a valuation under s 19.
I hereby certify that this is a true and accurate record of the reasons for decision of the Administrative Decisions Tribunal.
Registrar
**********
Decision last updated: 05 April 2011
2
4
1