Epping Hotels Pty Ltd v Serene Hotels Pty Ltd
[2015] VSC 104
•28 April 2015
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
LIST C
S CI 2014 01708
| EPPING HOTELS PTY LTD (ACN 005 430 991) | Plaintiff |
| v | |
| SERENE HOTELS PTY LTD (ACN 114 040 881) | Defendant |
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JUDGE: | CROFT J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 24 March 2015 |
DATE OF JUDGMENT: | 28 April 2015 |
CASE MAY BE CITED AS: | Epping Hotels Pty Ltd v Serene Hotels Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2015] VSC 104 |
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RETAIL LEASES – Rent review – Matters relevant to rent reviews based on current market rent – Retail Leases Act 2003, s 37 – “Profits method” for determining current market rent for hotel premises – Sky City Adelaide Pty Ltd v Valuer-General [2009] SASC 289 – Whether regard may be had to a supplementary report from a specialist retail valuer – Invensys plc v Automotive Sealing Systems Ltd [2002] 1 All ER (Comm) 222 – Homespace Ltd v Sita South East Ltd [2008] EWCA Civ 1 – Dovastand Pty Ltd v Mardasa Nominees Pty Ltd [1991] 2 VR 285.
PRACTICE AND PROCEDURE – Appeal from Associate Justice granting leave to appeal decision of Victorian Civil and Administrative Tribunal – Appeal from decision of Victorian Civil and Administrative Appeal Tribunal – Victorian Civil and Administrative Tribunal Act 1998, s 148(1) – Supreme Court (General Civil Procedure) Rules 2005, rr 77.06 and 77.06.9 – Whether question of law – Mixed questions of law and fact.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr S. Hopper | Wisewould Mahony |
| For the Defendant | Mr P.R. Best | Hall & Thompson |
HIS HONOUR:
Introduction
This proceeding might be regarded by some as a procedural paradise involving, as it does, a double layer of leave applications and appeals. In spite of this, this proceeding raises important questions with respect to the interpretation and operation of one of the central provisions of the Retail Leases Act 2003 (“the Act”) with respect to the process of determining rent on a rent review based on current market rent pursuant to the provisions of s 37 of the Act, particularly sub-s (2).
This proceeding involves two appeals, both of which arise from a decision by Victorian Civil and Administrative Tribunal (“VCAT” or “the Tribunal”) Member M. Farrelly who, on 7 February 2014, made orders in Serene Hotels Pty Ltd v Epping Hotels Pty Ltd (Retail Tenancies) (“the Tribunal decision”).[1] The principal orders made by the Tribunal Member are:
1. I find and declare that the parties are not bound by the rental determination of Mr Peter Grieve of CBRE Valuations Pty Ltd dated 1 February 2012 in respect of the Epping Hotel, 743 High Street Epping, Victoria.
[1][2014] VCAT 97 (7 February 2014).
By Originating Motion dated 11 April 2014, the Plaintiff sought orders, inter alia, that it be granted leave under s 148(1) of the Victorian Civil and Administrative Tribunal Act 1998 (“VCAT Act”) to file and serve a notice of appeal and, further, that the time to apply for leave to appeal be extended pursuant to r 4.05 of Chapter II of the Supreme Court (General Civil Procedure) Rules 2005 (“the Rules”). The Originating Motion was heard by Mukhtar AsJ who, on 20 October 2014, made orders (“the Orders of Mukhtar AsJ”), inter alia, that:
1.The plaintiff has leave to appeal the order made by the Victorian Civil and Administrative Tribunal in proceeding R113/2013 on 2 April 2014.
In summary, the procedural position is that there are two appeals before the Court, first by the Plaintiff, Epping Hotels Pty Ltd (“Epping”), against the Tribunal decision and, second, by the Defendant, Serene Hotels Pty Ltd (“Serene”), against the Orders of Mukhtar AsJ.
The appeal applications
The Plaintiff presses the following questions in its appeal:
(1)Whether the Tribunal erred in finding that the Act does not allow the methodology employed by the Valuer.[2]
(2)Further or alternatively, whether the Tribunal erred in determining that the Valuer has, contrary to the requirement in s 37(2) of the Act, taken into account the value of the Defendant’s fixtures and fittings, and in so doing the Valuer has fundamentally misconstrued his task.
(3)Further or alternatively, whether the Tribunal was made to understand the elements of the methodology applied by the Valuer; that is, whether it was right, without more, to seize upon the language in his report concerning the future application by the Tenant[3] of its owned fixtures and fittings as manifestly demonstrating an approach in violation of the Act.
(4)Whether the Tribunal erred in deciding that it was able to disregard the Valuer’s supplementary report dated 18 October 2013 (“the Supplementary Report”).
[2]Mr Peter Grieve of CBRE Valuations Pty Ltd (“the Valuer”).
[3]Serene Hotels Pty Ltd (“the Tenant”).
The questions of law which the Defendant seeks to rely upon in its appeal from the Orders of Mukhtar AsJ are as follows:
(1)The interpretation of the Valuer’s speaking valuation by the Tribunal and, in particular, the Valuer’s statement that “the future application by the Tenant of its own[ed] Fixtures & Fittings is included in the rental assessment process”, is a question of fact and not, as the Court apparently found, a question of law and therefore the Court should not have granted leave to appeal on that ground.[4]
[4]See Epping Hotels Pty Ltd v Serene Hotels Pty Ltd [2014] VSC 526 (9 October 2014) [13], [26], [29]–[31].
(2)Whether the Tribunal misunderstood the elements of the methodology applied by the Valuer in making its determination—
(a)is irrelevant to the question of whether or not the Tribunal made an error of law in making its determination;
(b)is not apparent on the face of the Tribunal’s reasons for decision or the record and therefore is a matter of speculation;
(c)raises a question of fact and not, as the Court prima facie found, a question of law;
and therefore the Court should not have granted leave to appeal on that ground.[5]
(3)The Tribunal’s decision to disregard the so-called “supplementary report” of the Valuer:
(a)was the exercise by the Tribunal of its statutory discretion to exclude evidence;
(b)did not raise a question of law;
and therefore the Court should not have granted leave to appeal on that ground.[6]
[5]See Epping Hotels Pty Ltd v Serene Hotels Pty Ltd [2014] VSC 526 (9 October 2014) [13], [26], [29]–[31].
[6]See Epping Hotels Pty Ltd v Serene Hotels Pty Ltd [2014] VSC 526 (9 October 2014) [54]–[55].
The orders sought by the Plaintiff, as set out in its Notice of Appeal are as follows:
(1)The appeal is allowed.
(2)Paragraph 1 of the Orders[7] be set aside and in it[s] place be an order that the proceedings be dismissed.
(3)The … [Defendant] pay the … [Plaintiff’s] costs of this appeal.
(4)Such further or other order as the Court deems fit.
[7]Orders made in Serene Hotels Pty Ltd v Epping Hotels Pty Ltd (Retail Tenancies) [2014] VCAT 97 (7 February 2014).
The orders sought by the Defendant, as set out in its Notice of Appeal are as follows:
(1)The Appeal against Order 1 of Associate Justice Mukhtar made and pronounced on 20 October 2014 in proceeding number S CI 2014 01708 is allowed.
(2)Order 1 of Associate Justice Mukhtar made and pronounced on 20 October 2014 in proceeding number S CI 2014 01708 is set aside.
(3)The … [Plaintiff’s] Originating Motion dated 11 April 2014 is dismissed.
(4)The … [Defendant’s] costs of the proceeding before Associate Justice Mukhtar including reserved costs and the costs of the appeal herein including reserved costs be paid by the … [Plaintiff] on the standard basis.
Principles applicable with respect to appeals
Section 148(1) of the VCAT Act provides:
(1)A party to a proceeding may appeal on a question of law from an order of the Tribunal in the proceeding—
(a)if the Tribunal was constituted for the purpose of making the order by the President or a Vice President, whether with or without others, to the Court of Appeal with leave of the Court of Appeal ; or
(b)in any other case, to the Trial Division of the Supreme Court with leave of the Trial Division.
It follows from these provisions that any appeal is dependent upon two important qualifications. First, that the appeal be on a question of law and second, that the Court gives leave to appeal. The legislative policy underlying these provisions is that “VCAT decisions should not generally be disturbed where cases have been decided in that forum other than on questions of law and where there is something about the decision bearing upon the question of law which warrants a grant of leave to appeal”.[8] It follows that “[t]his Court is not entitled to enter into the fact finding exercise which the legislature has deliberately entrusted to a specialist tribunal”.[9]
[8]Commissioner of State Revenue v Frost [2011] VSC 232 (1 June 2011) [5], referring to Secretary to the Department of Premier and Cabinet v Hulls [1999] 3 VR 331 at 335-6; Myers v Medical Practitioners Board (Vic) [2007] VSCA 163 (23 August 2007) [28].
[9]Boucher v Dandenong Ranges Steiner School Inc [2005] VSC 400 (7 October 2005) [15], referring to Spurling v Development Underwriting (Vic) Pty Ltd [1973] VR 1; Whitehorse City Council v Golden Ridge Investments Pty Ltd [2005] VSCA 198 (11 August 2005).
The leave requirement under s 148(1) is designed to maintain this position. As Pagone J said in Commissioner of State Revenue v Frost:[10]
The requirement for leave under s 148(1) of the VCAT Act “is a safeguard that the appeal is on a pure question of law and that the grounds supporting the question of law articulated for determination by the Court do found the subject matter of the appeal”.[11] It also confers a discretion about whether to grant leave[12] which an applicant must persuade the Court to exercise in its favour. What must be shown will depend upon the particular case bearing in mind the statutory criteria being a grant of leave and not special leave.[13] It will ordinarily be necessary (in addition to a clearly articulated question of law)[14] for an applicant to make out a prima facie case[15] and in an appropriate case it may be necessary for the applicant to show that the question upon which leave is sought has public or general importance.[16]
[10][2011] VSC 232 (1 June 2011) [3].
[11]Commissioner of State Revenue v STIC Australia Pty Ltd [2010] VSC 608 (17 December 2010) [10].
[12]Secretary to the Department of Premier and Cabinet v Hulls [1999] 3 VR 331; Al-Hakim v Monash University (Unreported, Victorian Supreme Court of Appeal, 28 March 2003); Myers v Medical Practitioners Board (Vic) [2007] VSCA 163 (23 August 2007).
[13]See Morris v R (1987) 163 CLR 454 at 475.
[14]Osland v Secretary to the Department of Justice (2010) 241 CLR 320 at 333 [21].
[15]Morris v R (1987) 163 CLR 454 at 475; Secretary to the Department of Premier and Cabinet v Hulls [1999] 3 VR 331 at 335.
[16]Secretary to the Department of Premier and Cabinet v Hulls [1999] 3 VR 331 at 335-6; Commissioner of State Revenue v Challenger Property Nominees Pty Ltd [2006] VSC 203 (6 June 2006) [20], [65].
In considering an application of this nature, courts have been concerned to respect the role entrusted by the legislature to the particular tribunal and not, in effect, subvert this position by seeking out error. Thus, Kirby J in Roncevich v Repatriation Commission, said:[17]
[17](2005) 222 CLR 115 at 136 [64].
Courts conducting this form of review have been repeatedly enjoined by this Court to avoid overly pernickety examination of the reasons.[18] The focus of attention is on the substance of the decision and whether it has addressed the “real issue” presented by the contest between the parties.
Similarly, in Vegas Nominees Pty Ltd v Werribee Sports & Community Club Inc, Ashley J said:[19]
This Court has said more than once that it should not examine briefly stated reasons by an expert Tribunal in an over-legalistic manner or by the over-zealous drawing of inferences in order to disclose some supposed error; although where unambiguous language is used, the user should be taken to mean what the words say. I should add that the Court is not entitled to interfere with the Tribunal’s decision unless it is satisfied that there was in fact a vitiating error of law. It is not enough for the appellant to show that the Tribunal’s reasons for its decision are so expressed as to suggest the possibility that it proceeded upon a wrong view of the law. In support of the several propositions that I have just stated I refer to Portland Properties Pty Ltd v Melbourne & Metropolitan Board of Works,[20] Michaelis Bayley (Vic) Pty Ltd v Melbourne & Metropolitan Board of Works[21] and Teston Investments Pty Ltd v Melbourne & Metropolitan Board of Works.[22]
Additionally, “[o]n appeal this Court must recognise the forensic realities of the way in which the case was put to the Tribunal. It is these realities to which a Tribunal must respond in its reasons”.[23]
[18]Minister for Immigration and Ethnic Affairs v Guo (1997) 191 CLR 559 at 575, 597. Cf Minister for Immigration and Multicultural Affairs v Yusuf (2001) 206 CLR 323 at 348 [74].
[19](Unreported, Supreme Court of Victoria, Ashley J, 21 December 1994) at 13.
[20](1971) 38 LGRA 6 at 18.
[21](1980) 44 LGRA 65 at 67–8.
[22](1985) 62 LGRA 346 at 349–50.
[23]The Gombac Group Pty Ltd v Vero Insurance Ltd [2005] VSC 442 (9 November 2005) [59].
Mere want of logic in the reasons given by a tribunal does not, of itself, establish an error of law. Thus, Mason CJ said in Australian Broadcasting Tribunal v Bond:[24]
[24](1990) 170 CLR 321 at 356 (emphasis in original) (“Bond”) referred to with approval by Osborn J in Lucas v Transport Accident Commission [2003] VSC 97 (31 March 2003) [10].
But it is said that “[t]here is no error of law simply in making a wrong finding of fact”: Waterford v The Commonwealth.[25] Similarly, Menzies J observed in Reg. v District Court; Ex parte White:[26]
[25](1987) 163 CLR 54 at 77.
[26](1966) 116 CLR 644 at 654.
Even if the reasoning whereby the Court reached its conclusion of fact were demonstrably unsound, this would not amount to an error of law on the face of the record. To establish some faulty (e.g. illogical) inference of fact would not disclose an error of law.
Thus, at common law, according to the Australian authorities, want of logic is not synonymous with error of law. So long as there is some basis for an inference – in other words, the particular inference is reasonably open – even if that inference appears to have been drawn as a result of illogical reasoning, there is no place for judicial review because no error of law has taken place.
In the same vein, Batt J, in Roads Corporation v Dacakis, said:[27]
[27][1995] 2 VR 508 at 520 (emphasis in original).
… a finding of fact will only be open to challenge as erroneous in law if there is no probative evidence to support it (and not also if it is not reasonably open on the evidence), whilst an inference will be open to challenge as being erroneous in law if it was not reasonably open on the facts.
Batt J continued:[28]
But, as the statement of Mason CJ … [in Bond[29]] shows, there is virtually no difference between the tests.
Batt J continued, quoting the passage from the judgment of Mason CJ in Bond at 356, which is set out above, and concluded:[30]
For the reasons I have given, I consider that I should take that passage as stating the law which I must apply. The ascription of value to a parcel of land or a chattel is, or at least will frequently involve, an inference of a fact. Accordingly, a want of logic in drawing that inference will not by itself constitute error of law. But it may, I consider, sound a warning note and put one on enquiry whether there was indeed any basis for the inference.
This conclusionary statement was made by Batt J after a comprehensive review of the authorities in relation to the nature of a question of law or an error of law.[31]
[28][1995] 2 VR 508 at 520.
[29](1990) 170 CLR 321 at 360.
[30][1995] 2 VR 508 at 520. See also Tisdall v Webber (2011) 193 FCR 260 at 270–1 [31]–[32], at 296 [126].
[31]See Roads Corporation v Dacakis [1995] 2 VR 508 at 517–20.
The relevant parts of the Rules with respect to the Defendant’s appeal from the Orders of Mukhtar AsJ are contained in the following provisions:
77.06 Appeals generally
Subject to section 17A of the Supreme Court Act 1986 and to Rule 16.5 of Chapter V of the Rules, an appeal from any judgment or order of an Associate Judge made under any Chapter of the Rules lies to the Trial Division constituted by a Judge of the Court, except in any case where an appeal lies to the Court of Appeal.
…
77.06.9 Powers of Judge of the Court hearing appeal
(1)On an appeal under Rule 77.06, a Judge of the Court shall have all the powers of the Court constituted by an Associate Judge.
(2)On an appeal under Rule 77.06, a Judge of the Court shall have power to—
(a)draw inferences of fact; and
(b)give any judgment and make any order which ought to have been given or made; and
(c)make any further or other order as the case may require.
(3)On an appeal under Rule 77.06, a Judge of the Court shall have power to receive further evidence upon questions of fact, whether by oral examination in court, by affidavit, or by deposition taken before an examiner.
(4)The powers of a Judge of the Court under this Rule may be exercised notwithstanding—
(a)that no notice of appeal has been given in respect of any particular part of the judgment or order of the Associate Judge which is the subject of appeal under Rule 77.06 or by any particular party to the proceeding before the Associate Judge; or
(b)that any ground for allowing the appeal or for affirming or varying the judgment or order of the Associate Judge is not specified in the notice of appeal.
Summary of position with respect to appeals
For the reasons which follow with respect to the substance of matters raised in both appeals and having regard to the broad powers of a judge under r 77.06.9, I am of the opinion that the Orders of Mukhtar AsJ should be affirmed and, accordingly, that the Plaintiff’s appeal from the Tribunal decision should be entertained. In relation to this appeal, I am satisfied, for the reasons which follow, that there are matters raised in the Plaintiff’s Notice of Appeal which constitute vitiating errors of law on the part of the Tribunal such as would warrant the granting of leave to appeal. Accordingly, I would grant leave to appeal, although this grant is not necessary having regard to the Orders of Mukhtar AsJ.
Finally, with respect to the Orders of Mukhtar AsJ and his Honour’s Reasons for Judgment,[32] I am satisfied, again for the reasons which follow, that the provisions of r 77.06.9 enable the Court to entertain and hear all matters which the Court now regards as relevant arising under and with respect to the Plaintiff’s Notice of Appeal. Accordingly, I propose to address matters in issue with reference to the questions raised in the Plaintiff’s Notice of Appeal, questions which, in my view, as answered in the reasons which follow, address the matters raised in the Defendant’s Notice of Appeal.
[32]Epping Hotels Pty Ltd v Serene Hotels Pty Ltd [2014] VSC 526 (9 October 2014).
Factual matters
The factual background to this proceeding and the substantive issues in dispute, together with the conclusions of the Tribunal on those issues are helpfully set out in the Tribunal decision as follows:[33]
[33]Serene Hotels Pty Ltd v Epping Hotels Pty Ltd [2014] VCAT 97 (7 February 2014) [1]-[8] (emphasis in original).
1The issue in this proceeding is whether the parties are bound by a market rental valuation provided by an independent specialist valuer appointed by the parties. The Applicant tenant says the parties should not be so bound because the valuer, in reaching his determination, failed to apply the criteria set out in s 37 (2) of the Retail Leases Act 2003 (“the Act”).
2By a lease dated 1 February 2007 (“the lease”) the Respondent leased premises in Epping to the Applicant for an initial period of 14 years. The Applicant runs its business, known as the Epping Hotel, from the premises. The lease provides for rent to be adjusted on the fifth anniversary of the lease - 1 February 2012 (“the review date”) - to a sum which, if not agreed by the lessor and lessee, to be the “then current market rental for the demised premises” as determined by an independent specialist valuer. The lease provides that the valuer’s decision is “final and binding”.
3The review date passed and, the parties being unable to reach agreement on an adjusted rental sum, agreed to the appointment of Mr Grieve of “CBRE Hotels” as the independent specialist valuer (“the Valuer”). The Valuer’s appointment was confirmed in around November 2012.
4The Valuer requested certain information from the Applicant including the Applicant’s trading accounts for the financial years 2009, 2010 and 2011. Although the requested information was provided, the Applicant communicated to the Valuer the Applicant’s view that, having regard to the requirements of s 37(2) of the Act, the Valuer should be cautious in using the Applicant’s trading figures and that the Valuer should first consider the rent and conditions of any comparable retail premises. The Applicant also submitted to the Valuer its view that the Valuer should pay no regard to legislative change to the Victorian gaming industry which came into effect on 16 August 2012, six and a half months after the review date.
5In February 2013 the Valuer provided to the parties his report as to his assessment and determination of the current market rental for the premises applicable from the review date (“the valuation report” and “the rent determination”). It is apparent from the valuation report that in reaching the rent determination the Valuer relied on the Applicant’s trading figures and also took into account the legislative changes which came into effect on 16 August 2012.
6The Applicant says that the Valuer has failed to apply the criteria as required under s 37(2) of the Act.
7The Respondent says that it is appropriate, and not contrary to the criteria set out in s 37(2) of the Act, that the Valuer place reliance on the Applicant’s trading figures. The Respondent says also that it was appropriate that the Valuer consider the effect of the legislative changes effective from 16 August 2012 because, as at the review date, it was common knowledge within the gaming industry that the legislative change was coming.
8For the reasons discussed below, I find that the Valuer has failed to apply the criteria in s 37(2) of the Act and, as such, the Valuer has misconceived the task required of him by the terms of the lease. For this reason, the parties are not bound by the rent determination.
Legislative provisions
The provisions of the Act which are relevant to the present proceeding are as follows:
37Rent 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 Commissioner—
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).
(6)The valuation must—
(a)be in writing; and
(b)contain detailed reasons for the specialist retail valuer's determination; and
(c)specify the matters to which the valuer had regard in making the determination.
(7)The specialist retail valuer—
(a)must carry out the valuation within 45 days after accepting the appointment, or within such longer period as may be agreed between the landlord and tenant, or if there is no agreement, as determined in writing by the Small Business Commissioner; and
(b)may seek to enforce under Part 10 (Dispute Resolution) an obligation of the landlord under subsection (4).
Sub-section (2) is the principal provision the subject of the present proceeding, though sub-ss (3) to (7) provide some further statutory context to the valuation process. Sub-section (1) is also a significant provision, as discussed in the reasons which follow. As discussed in these reasons, these provisions have the effect of treating the provisions of sub-ss (2) to (6) as terms of the relevant lease.
Issues on appeal
As indicated previously, it is most convenient to deal with the issues raised in both the Plaintiff’s Notice of Appeal and the Defendant’s Notice of Appeal by reference to the questions raised in the Plaintiff’s Notice of Appeal.
1. Whether the Tribunal erred in finding that the Act does not allow the methodology employed by the Valuer (“Question 1”)
As threshold issues in the consideration of Question 1, the Defendant, Serene, submits as follows:
(1) Mukhtar AsJ did not grant leave to appeal on the general issue of whether or not the Tribunal found that the profits method offended s 37 of the Act; and
(2) In any event, the Tribunal decision was based on a factual issue as to what the Valuer considered or failed to consider. Therefore, Serene claims, the Tribunal decision does not raise an issue as to whether the Act allows the methodology employed by the Valuer as a general proposition.[34]
[34]Defendant’s Outline of Submissions — Appeal of Leave to Appeal (4 March 2015) [54]–[61]. Transcript, pp 66 to 67.
With respect to the grant of leave to appeal, and as the Plaintiff, Epping, submits, Order 1 of the Orders of Mukhtar AsJ merely grants leave to appeal and does not settle the questions for appeal.[35]
[35]Plaintiff’s Outline of Submissions — Appeal of Leave to Appeal (20 March 2015) [5].
Furthermore, the wording of Question 1 mirrors that of the Tribunal decision where it was found that:[36]
However reasonable the Valuer’s methodology may seem, and whether or not it is a method that has in the past been commonly adopted by valuers in the hotel industry, I do not accept that s 37(2) of the Act allows the methodology employed by the Valuer. I am satisfied that the Valuer has, contrary to the requirement in s 37(2) of the Act, taken into account the value of the Applicant’s fixtures and fittings, and in so doing the Valuer has fundamentally misconstrued his task. As such, I find that the parties are not bound by the rent determination.
To my mind, this statement makes it patently clear that the Tribunal decision puts the question of whether the Act allows the methodology employed by the Valuer directly in issue. Whether the Tribunal may or may not have erred in considering, and expressing a conclusion on, this issue to begin with does not change the fact that it clearly did so.
[36]Serene Hotels Pty Ltd v Epping Hotels Pty Ltd (Retail Tenancies) [2014] VCAT 97 (7 February 2014) [41] (emphasis added).
The Defendant submits that the Tribunal was never concerned with determining whether, as a general proposition, s 37(2) allows a profits based method of determining rent.[37] However, even if I were to accept this point, the fact remains that the Tribunal was essentially concerned with whether s 37(2) allows the methodology actually employed by the Valuer and, in my view, was properly so concerned. The Tribunal was properly concerned to deal with the substance of the matters it was called upon to consider.
[37]Transcript, p 67, lines 1 to 22.
As a result, the threshold issues raised by the Defendant are resolved and Question 1 is properly entertained by this Court.
Whether the Tribunal erred in finding that the Act does not allow the methodology employed by the Valuer depends upon the answer to the following two questions —
(1) What was the methodology employed by the Valuer?
(2) Does the Act allow the methodology employed by the Valuer?
What was the methodology employed by the Valuer?
The rental determination, dated 1 February 2012, provided by the Valuer, is in the form of a “speaking” valuation (“the Rental Determination” or “the Valuation”). The Valuation does, in terms of its “speaking”, expose the Valuer’s methodology and reasoning process together with references to the detailed factual matters which, in the Valuer’s judgment, are relevant to the particular hotel premises. Moreover, the Rental Determination has not been relevantly criticised as a rental valuation in the context of the issues now raised in this proceeding other than with respect to compliance with the Act. In this latter respect, only the Defendant contends non-compliance.
Having regard to the issues raised in this proceeding, it is important to consider the Valuer’s methodology and reasoning process in some detail and, for this purpose, reference is made to the following parts of the Rental Determination:[38]
[38]The parts of the Rental Determination which have been deleted are not relevant for the purposes of this proceeding as they relate to gaming matters, which are not now in issue. Deletion of this material does not detract from a clear understanding of the Valuer’s methodology and reasoning process.
6 Rental Determination Methodology
6.1 Pertinent Matters
…
I refer to the long established valuation practice within the hotel industry which measures worth on the basis of net operating profit/EBIDTAR (earnings before interest, depreciation, taxation, amortisation & rent) whereby private financial arrangements are disregarded as these are not considered direct operating expenses. As a consequence Profit & Loss Statement inclusions such as interest on loans, depreciation, amortisation, leasing charges, hire purchase costs and taxation are excluded from the calculation of EBIDTAR.
The issue in respect to the new gaming structure therefore arises in respect to the appropriate treatment of cost items incurred by the Venue Operator (in this situation the Tenant) which include:
ØProfessional/Consultancy advice in the lead up to the introduction of the new gaming structure;
ØThe cost of the gaming entitlements;
ØThe cost of gaming equipment;
ØThe costs associated with the operations of gaming which have been undertaken by the Gaming Suppliers: Tabcorp and Tattersall’s.
In my view the doctrine of EBIDTAR being the basis of value should continue to be observed and that costs and expenses incurred which relate to payments in respect of capital purchases should be disregarded in the assessment of EBIDTA[R], this includes the following items:
ØPayments in respect to gaming entitlements;
ØPayments relating to the leasing of gaming equipment;
ØPayments relating to loans advanced in respect of the new gaming structure.
…
6.3 Overview
Hotel premises are, largely by the nature of their design, specialised improvements. It is my observation over many years that the industry measures value and rental on the basis of trading propensity and operational profitability, assuming good average standard of management. In my view, given this market norm, the current market rent for the Epping Hotel should be assessed on this same basis.
Therefore a significant component of this rental determination is the assessment of a reasonable trading level for the Epping Hotel.
6.4 Trading Overview
The Epping Hotel trades pursuant to Late night general Liquor Licence No. 31915347 which provides for on premises trading from 7am to 7am the following morning daily except for Good Friday & Anzac Day and off premises trading from 7am to 11pm daily except Sunday (10am start) and Good Friday & Anzac Day;
It does trade 7 days per week and offers the following facilities for patrons:
· Lunch and dinner seven days;
· Full bar facilities via three service areas;
· Gaming room with 40 Electronic Gaming Machines;
· Drive in bottle shop.
6.5 Competition
The catchment area of the Epping Hotel is anticipated to be principally derived from its local and outer northern suburb catchment areas within a radius of some 5 to 10 kilometres. The licensed premises which are closest to this venue include the Epping Plaza Hotel, Casa D’abruzzo Club, Epping RSL, Bundoora Hotel, Excelsior Hotel and Plough Hotel. Other venues include the new Highlands Hotel in Craigieburn, Commercial Hotel South Morang, Bridge Inn Hotel Mernda and Whittlesea Hotel. Competition in respect of Off Premises sales is derived principally from the eight packaged licensed venues within Epping including the Dan Murphy’s store in Epping Plaza.
6.6 Independent Verification
Independent verification of actual trading results at the Epping Hotel is possible only in relation to gaming revenues, the following information has been sourced from the Victorian Commission for Gaming & Licensing Regulation website.
…
Given the date of preparation of this rental determination many of the VCGLR statistics available as at the date of valuation have been updated to current date. Information derived from the website is detailed as follows.
…
6.7 Adopted Trading
I am aware of my obligation in the assessment of trading to assume a good average standard of management. I advise that my assessment of trading has been undertaken on this basis.
In this respect I have reflected on the following information:
Øactual trading information provided for the venue;
Øcomments and information provided within the submissions;
Øcomments provided by the Tenant during my inspection of the premises;
Ømy knowledge of trading outcomes of venues which are considered to have some comparability to the Epping Hotel
In my view it is prudent that a five year trading forecast be undertaken to ensure that the full influence of the new gaming structure be incorporated into the assessment of current market rental.
Trading adopted in this Rental Determination is summarised in the following table:
…
7 Rental Determination Rationale
7.1 Overview
Traditionally rental for hotel premises has been assessed in the market on the basis of turnover levels and perceived EBIDTAR levels, it being a basic underlying notion that the business’s capacity to pay is a major rental consideration. The trading cash flows assessed for the Epping Hotel reflect, in my view, a level of revenue and profitability forecasts which are reasonable as at the date of this determination.
I refer to Section 37(2) of the Retail Leases Act which directs the Determining Valuer as follows; “….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.” It is usual industry practice that the fixtures and fitting used in the operation of the business be held in the ownership of the Tenant and it is the Tenant’s responsibility to adequately maintain or if necessary replace such items.
It is also the market norm whereby the negotiation of a new lease agreement would also comprise the Tenant’s purchasing the Fixtures & Fittings plus the negotiation of a Rental. My review of transactional evidence suggests the following broad industry parameters have been applied in assessment of rental:
______________________________________________________________
Rental Approach Rental Parameters
______________________________________________________________
By Gross Turnover: Bar Sales: …
Off Premises Sales: …
Food Sales: …
Accommodation Sales: …
Gaming Commissions: …
Other Income: …
______________________________________________________________
By EBIDTAR: EBIDTAR: 38.0% to 40.0%
______________________________________________________________
It is pertinent to note that the future application by the Tenant of its owned Fixtures & Fittings is included in the rental assessment process, the market based rental ratios take this ownership into account so as to avoid double dipping.
In a post 16th August 2012 market environment the operation of the new gaming structure will deliver a new set of trading parameters whereby (assuming constant gaming expenditures) revenues to venues will be increased due to the changed allocation and taxation regimes whilst operational expenses will increase due to the onus of gaming operations being the responsibility of the Venue Operator (not Tabcorp or Tattersall’s). Bearing this in mind it is a reasonable expectation that the rental ratio applied to gaming income will alter.
The new gaming structure also delivers market uncertainties which were not present in the prior structure, specifically these relate to perceived risks in regard to:
ØLife cycle of gaming entitlements is ten years, the cost of future entitlements is an unknown factor;
ØThe Gaming industry is highly regulated, community concerns in regard to problem gambling have in the past regularly resulted in unforseen changes to legislation being enacted with a view to reducing gaming expenditures, this is an ongoing perceived risk;
ØThe growth of internet based gambling is viewed as a significant threat to the hotel gaming industry;
ØPre-commitment remains as a stated policy objective in Victoria, it represents a risk to trading within the period to the next market rental review.
On account of these issues I am of the opinion that the rental to EBIDTAR ratio should decrease.
7.2 Rental Evidence
Unlike typical retail premises, hotels are looked upon as a specific asset class. In this respect, I am satisfied that market rental evidence supports the rental ratios indicated earlier in respect of the pre 16th August 2012 period, and, it is the specific characteristics of the Epping Hotel which must be addressed herein. I have done so in the trading adopted.
In the post 16th August 2012 period I restate my view that the rental ratios need to be adjusted to take account of the changed way that gaming will be operated in hotel venues.
7.3 Market Rental Calculation
I have determined to assess the current market rental for the Epping Hotel via the application of a 38.0% rental ratio to the EBIDTAR assessed for the trading period 1st February 2012 to 15th August 2012 and a 34.0% rental ratio to the EBIDTAR assessed for the period post 16th August 2012. My calculations which take into account the annual rental increases are detailed as follows:
…
As is clear from the Rental Determination, the Valuer’s methodology is best described as an application of the “profits method” of rental valuation. Care must, naturally, be exercised with respect to labelling methods of valuation in such general terms, particularly when it is necessary to have regard to the parameters within which the rental valuation is to be conducted — in other words, the terms of the Valuer’s “charter”. In this instance, the critical aspects of the Valuer’s “charter” are provided by the provisions of s 37(2) of the Act, whether viewed as statutory provisions or contractual, lease, terms mandated by statute as a result of the operation of s 37(1) of the Act. It is implied that any valuation process to which s 37(2) applies must comply with accepted valuation methodology in order to allow the “current market rent” to be determined.
It is in the context of the matters to which reference has been made — and keeping in mind the terms of the Valuer’s “charter” — that it is helpful to review some of the cases concerning rental valuation of similar premises, particularly with reference to trading history and profits. In some of the cases to which reference is made, the consideration of the relevance of profits and trading figures is considered in the context of a freehold valuation — for rating or other purposes. Nevertheless, the methodology and considerations discussed are, in my view, applicable with respect to rental valuations of similar premises. Moreover, it makes no relevant difference in the present circumstances that the valuation process may be applied in the course of an arbitration rather than an expert determination process, by a valuer.
In relation to rating valuations, Halsbury’s Laws of England states the position as follows:[39]
The simplest method of valuing a public house would be by ascertaining the rents which are prevalent in the neighbourhood for “free” houses; but as “free” houses are comparatively few, it is rarely possible to apply this test. Evidence of the trade actually done and of the profits made by the actual occupier is admissible in order to ascertain the rental value. An occupier may be compelled to give evidence of the trade done on the licensed premises.
[39]Halsbury’s Laws of England (4th ed) vol 39 (LexisNexis, at 1982) 114 [132] (footnotes omitted).
And further:[40]
The usual method of valuation of licensed premises when based on trade is to take the profits, actual or estimated, of the last year or over an average of years, together with the tied rent, and to subtract from them the remuneration which the hypothetical tenant would expect for himself, and to apportion the remainder between rent (i.e. gross value) and rates. Another possible method is to take a percentage on gross receipts. Valuation by reference to capital values is not an effective method.
[40]Halsbury’s Laws of England (4th ed) vol 39 (LexisNexis, at 1982) 115 [133] (footnotes omitted).
More particularly, in Cartwright v The Guardians of the Poor of the Sculcoates Union in Kingston-upon-Hull,[41] Lord Macnaghten said:
[41][1900] AC 150 at 153 (“Cartwright”).
What the learned arbitrator has done is to take into consideration the amount of business which this public-house was doing. Was he wrong in that? Surely the very first thing that a tenant who was going to offer for a house of this sort would do would be to consider (roughly if he could not do it accurately) what amount of business the house commanded. It appears to me that the volume of business done in a public-house, as apparent to the man in the street — if I may use the expression — is the very first thing that a tenant proposing to make an offer for such a house would take into consideration.
Similarly, Lord Shand said:[42]
[42]Cartwright v The Guardians of the Poor of the Sculcoates Union in Kingston-upon-Hull [1900] AC 150 at 156.
… it seems to me that such evidence would be admitted as an important element in ascertaining what trade has been done in the house; for really it appears to me that this would be the element of all others which a tenant might be expected to take into view in fixing the rent he ought to give for the premises.
And similarly, Lord Morris said:[43]
[43]Cartwright v The Guardians of the Poor of the Sculcoates Union in Kingston-upon-Hull [1900] AC 150 at 155.
[The arbitrator] asked himself almost the very first question that the hypothetical tenant would ask, namely, is this a house doing a good business or a bad business; is it a house with what is popularly called a roaring business, or is it a house that is going down for some reason or other, such as there being other houses in its neighbourhood?
More generally, Lord Davey added:[44]
You have in each case to find out in the best way you can what is the rent which a tenant may reasonably be expected to give, and if the best way under the particular circumstances is to ascertain the use which a tenant might expect to be able to make of the premises, the facility afforded by the premises for the carrying on of a trade appears to me to be a primary and elementary consideration in the case. If you are to take into account the fact that the premises command a trade, you must surely ask what trade. Is it a large trade, or is it a small trade? And I do not know myself any better test of what trade they may be expected to command than the trade which they actually do command. It is not that you rate the profits, it is not that you rate the man’s skill and judgment or discretion in the mode of carrying on the business, but you have to ascertain what sort of a trade the hypothetical tenant, as he is called, may reasonably expect to be able to carry on on those premises as an element in determining the rent he would be willing to offer.
And Lord Brampton, emphasising the “market” perspective, said:[45]
How would the landlord himself look at the matter, apart from the tenant altogether? He would say, “I have a house; it is a house capable of enabling a man to earn by diligence and the application of his own personal abilities ₤1,000 a year in that house; he wants to hire it from me. I am not going to let it to him for a mere percentage representing the interest upon what I have laid out in bricks and mortar upon the house; that would not represent what I think the value of the house is; it is upon a spot where custom is attracted to it; if he can make ₤1,000 a year, as I think he can, I must have a suitable proportion — at all events, a bigger rent than I should have if the house were only capable of yielding him a profit of ₤100.” My Lords, I will put the case in this way: Supposing in a street which runs at right angles to another street, so as to form in point of fact two streets, two ordinary houses are built, both alike in all their materials and in the accommodation which is provided — they are each licensed: the one house is let at ₤200 a year, but in that house there is very little custom done, but yet there is enough custom there to support a man who pays his ₤200 a year rent, and he is quite satisfied to pay that in that house. The house on the opposite side at the opposite corner of the street is capable of enabling a man to earn ₤1,000 a year. Is it right or reasonable, or good sense, to suppose that the landlord would let the one house for ₤200 a year to a man who could earn by diligence ₤1,000 a year in that house simply because the two houses were like each other? He must take into consideration the capability of the house, the position it is in, and the power it gives to a tenant who properly occupies it to make a very large sum of money for his own profit. It seems to me that common sense would dictate the course I have suggested to the landlord.
[44]Cartwright v The Guardians of the Poor of the Sculcoates Union in Kingston-upon-Hull [1900] AC 150 at 159.
[45]Cartwright v The Guardians of the Poor of the Sculcoates Union in Kingston-upon-Hull [1900] AC 150 at 161.
The approach in Cartwright[46] has been applied in Australia. For example, in R v Devonport; Ex parte Ferrall, Morris CJ said:[47]
It seems perfectly clear from … [the decision in Cartwright] that if by experience one can say how much profit a proprietor of a licensed premises ought to be able to make on certain purchases, and if it can be said that intending proprietors will pay such rents for the ability to make such profits, that is a perfectly proper way of fixing the annual value.
[46][1900] AC 150 at 153.
[47][1949] Tas SR 165 at 170.
In Harewood Hotels Ltd v Harris,[48] the English Court of Appeal considered whether the tenant’s financials were admissible when determining market rent under s 34 of the Landlord and Tenant Act 1954 (UK),[49] which is broadly similar to s 37(2) of the Retail Leases Act 2003. Lord Evershed MR, echoing Lord Brampton in Cartwright, said:[50]
But, in my judgment, it is plainly legitimate for a judge to hear evidence which bears upon the question which he has to decide, namely: what would the particular holding reasonably be expected to be let at in the open market? Plainly, I should have thought, in arriving at a conclusion upon that question, it is legitimate to hear evidence of what similar premises which are being let for a particular purpose (as the one in suit is) can be expected to earn for a potential lessee in the market in the place where the premises are; and, if so, then similar evidence is, in my judgment, admissible for proving the same point about the premises in suit. In other words, if the purpose of the evidence of the figures was for that limited objective, then I think for my part that they were perfectly admissible and that no objection can be made to them.
[48][1958] 1 WLR 108 (“Harewood Hotels”).
[49]The text of s 34 of the Landlord and Tenant Act 1954 (UK) is set out in footnote 1 to the headnote of the report, as follows:
“The rent payable under a tenancy granted by order of the court under this Part of this Act shall be such as may be agreed … or as, in default of such agreement, may be determined by the court to be that at which, having regard to the terms of the tenancy (other than those relating to rent), the holding might reasonably be expected to be let in the open market by a willing lessor, there being disregarded (a) any effect on rent of the fact that the tenant has or his predecessors in title have been in occupation of the holding, (b) any goodwill attached to the holding by reason of the carrying on thereat of the business of the tenant. … (c) any effect on rent of any improvement carried out by the tenant …” (d) [relates to licensed premises].
[50]Harewood Hotels Ltd v Harris [1958] 1 WLR 108 at 111. See also the judgment of Romer LJ at 114–6.
Similarly, in Cooper v City of Perth,[51] Jackson SPJ of the Supreme Court of Western Australia considered an appeal against the valuation of a hotel based on 7 per cent of the annual bar takings. The plaintiff in that case contended that the assessment should be based upon the net profits of the hotel. Neither party contended that the valuer should have adopted a direct comparison method. The Court held as follows:[52]
In the cases of licensed premises I suppose, in the first place, a valuer would seek to base his valuation on actual rent paid or comparable rents in the locality if that information were available. Here it is agreed that the rent paid by the appellant and his wife as tenants to the appellant as owner is not a reliable index of annual value. Apparently comparable rentals also were unavailable. In those circumstances the next best method of arriving at a fair value is to examine the accounts of the hotel and to endeavour to ascertain from them what amount, by way of rental, a hypothetical tenant would be prepared to pay for a letting from year to year. Now I have no doubt that one of the first questions which a prospective tenant would ask would be as to the nature and extent of the business being done at the hotel. But that information is sought not as the ultimate enquiry but as the means whereby the enquirer may satisfy himself as to the likely profits which he should make at the hotel. In the end the hypothetical tenant is concerned about his net profits. When he knows what these are likely to be he can estimate how much rent he can afford to pay. Information as to the business done, that is the gross receipts, is of itself insufficient for that purpose. No doubt a prospective tenant with experience in the hotel trade would be able quickly to estimate from the gross receipts the probable amount of gross profit. He might also, from his experience, be able to take the next step and calculate or estimate the outgoings which he would be required to expend in order to gain that amount of gross profit and thereby he might be able to estimate for himself his probable net profit. But his ultimate concern must be with his net profit, and hence the hypothetical tenant would be vitally interested and concerned to ascertain the net profit actually being made by the present licensee, if those figures were available to him. Of course he would not necessarily regard the current actual net profits as those which he himself might make. On the one hand he might recognize that the present licensee was both popular and experienced, who was able by reason of his own efforts to carry on with a minimum of staff or to reduce outgoings in other directions, and in those circumstances the prospective tenant might contemplate that his own net profits would be lower. On the other hand it is very likely, human nature being what it is, that the hypothetical tenant would think he could run the business somewhat better than the present occupier, increase the gross takings and the gross profits and reduce the outgoings, thus providing on all counts an increased net profit. But I emphasize again the ultimate enquiry in his mind would be to the net profits and not merely to the takings. It follows from this that when a valuation is being made on the basis of the capacity of a hotel business, the actual net profits being made by the present licensee are highly relevant to determine the probable net profits to be made by the hypothetical tenant which in turn is a vital consideration.
[51](1960) 7 LGRA 369.
[52]Cooper v City of Perth (1960) 7 LGRA 369 at 373.
It is clear from more recent decisions that the use of the “profits method” or of trading figures for the premises is not always appropriate. Thus, in W J Barton Ltd v Long Acre Securities Ltd,[53] the English Court of Appeal held that the tenant’s trading figures were not relevant to a determination of the market rent for retail bakers, confectioners and pastry cooks. However, the Court added more general observations, consistent with the authorities to which reference has been made:[54]
Certainly the [Harewood Hotels[55]] decision shows that there may be cases where the production of trading figures may be both relevant and admissible and that where that is so section 34 [of the Landlord and Tenant Act 1954 (UK)] does not inhibit the consideration of such evidence for the narrow limited purpose described even though the exclusion of any consideration of the effect of the tenant’s occupation and of goodwill may present the judge with a very difficult task.
It is, we think, clear that there are several types of premises, of which a hotel is only one example, where the ascertainment of an open market rent may depend on an assessment of the likely profitability of the business for which the premises are peculiarly adapted. Other instances might be a petrol-filling station, a theatre or a racecourse, in all of which the market rent may well depend on the average takings. It is both unnecessary and would be unwise to seek to define or limit the categories of premises where such evidence would be relevant for the limited purpose described in the Harewood Hotels case.[56] But that is a far cry from saying that such evidence is always relevant and, in our judgment, considerations of this sort do not apply in the ordinary case of shop premises with no peculiar features in a business area such as that with which the instant case is concerned and where there are plenty of comparable premises from which the open market rents can be deduced.
[53][1982] 1 WLR 398.
[54]W J Barton Ltd v Long Acre Securities Ltd [1982] 1 WLR 398 at 404. See also Cornwall Coast Country Club v Cardgrange Ltd [1987] 1 EGLR 146 (“Cardgrange”); Temple & Crook Ltd v Capital & Counties Property Co Ltd [1990] 38 EG 118.
[55][1958] 1 WLR 108.
[56][1958] 1 WLR 108.
Similarly, in Modick R C Ltd v Mahoney,[57] the New Zealand Court of Appeal considered whether the tenant’s trading figures were relevant in determining a reasonable rent for a car dealership. Cooke P said:[58]
[57][1992] 1 NZLR 150.
[58]Modick R C Ltd v Mahoney [1992] 1 NZLR 150 at 155.
The question must be what rent should fairly be paid for the premises during the relevant period by a reasonable motor vehicle dealer. Presumably a reasonable motor vehicle dealer would give prominent regard to potential profitability.
It is conceivable that there is enough evidence of truly comparable transactions to enable the proper rent to be arrived at with sufficient confidence without any consideration of the tenant's accounts. If so, it would be proper for the arbitrator to find that reasonable parties would go no further. But, in the light of the evidence and the questions asked by the arbitrator of the Court, I think that the tenant is entitled to an opportunity of contending before the arbitrator that this case is not in that category.
Even where rent is expressly required to be fixed on an open market basis, evidence of the trading results that have been or can be achieved in the particular premises is relevant unless there is enough other evidence to establish the figure satisfactorily; see, for example, the cases in the English Court of Appeal, Harewood Hotels[59] and WJ Barton Ltd v Long Acre Securities Ltd.[60]
[59][1958] 1 WLR 108.
[60]W J Barton Ltd v Long Acre Securities Ltd [1982] 1 WLR 398.
Hardie Boys J added:[61]
[61]Modick R C Ltd v Mahoney [1992] 1 NZLR 150 at 157.
… the arbitrator cannot make his assessment in blinkers or in a vacuum. The profitability of a business for which the site is suitable, and even more the profitability of a business of the only kind that is able to be carried on on the site, may well have a bearing on the value of the property and the rental to be obtained from it. The valuer or arbitrator is unlikely to be an accountant or an expert in business management, and so is likely to look to true, ie contemporary, market rentals of real comparability as a better guide than the lessee’s own accounts, for they may reflect factors peculiar to the business rather than factors relevant to the rental value of the property. But in so far as they bear on the latter, they will be relevant.
The relevance of evidence as to profitability must necessarily be limited. The important distinction is between evidence that is related to the rental value of the property as between lessor and lessee on the one hand, and evidence as to the ability or willingness or reluctance of the lessee to pay a particular rent on the other. A recent judgment of Millett J in ARC Ltd v Schofield,[62] is helpful in this respect. Evidence of the latter kind is generally irrelevant, for the underlying assumption to which I have referred must remain. It was subject to this distinction that evidence of the tenant's financial results was admitted in Harewood Hotels. [63] I do not accept Mr Craddock’s submission that the case is authority only in a situation where there is no other evidence of value, although as I have said, where there is such other evidence the tenant's profitability may carry little if any weight.
…
Thus it cannot be said in the present case that the profitability of the lessee is necessarily irrelevant to the decision which the arbitrator was required to make.
And Gault J said:[64]
In my view once Mr Craddock acknowledged, as he was obliged to do in the face of such cases as Harewood Hotels,[65] that in certain circumstances and for limited purposes, the accounts of trading of the business conducted in the premises can be relevant (as where there is no, or inadequate, evidence of truly comparable rents), he must accept that it is for the arbitrator to determine whether in this case such accounts are relevant.
It is for the arbitrator to determine also whether particular evidence of accounts is helpful. It is to be emphasised, however, that the relevance of such accounts is not to establish what the lessee can afford to pay, but to bear upon what would be a reasonable rent over the period for which the rent is to be fixed in all the circumstances and in light of the use restriction in the lease.
[62][1990] 2 EGLR 52.
[63][1958] 1 WLR 108.
[64]Modick R C Ltd v Mahoney [1992] 1 NZLR 150 at 158.
[65][1958] 1 WLR 108.
Some English cases suggest that there is no requirement to disclose trading figures that were not available in the open market as those figures could not have influenced the market.[66] More particularly, in South Tyneside v Wickes Building Supplies Ltd,[67] Gross J, sitting in the Queen’s Bench Division, considered an application to set aside a witness summons issued by the defendant tenant seeking production of documents relating to negotiations for the lease of a comparable premises by the tenant’s competitor. The Court dismissed the summonses on the grounds that they were too broad, that the documents were not required for the arbitration and the information may have been obtained from elsewhere and that the competitor’s confidentiality outweighed the need for the production of the documents. In considering the relevance of the documents sought, the Court considered the authorities in Cardgrange[68] and Lynall[69] and said:[70]
… there is an attractive argument for saying that this reasoning [in Cardgrange and Lynall] is inapplicable to an open market letting of a comparable property, which is relevant because of the inference which may be drawn from the objective fact of the conclusion of such a bargain … and not because of the knowledge or deemed knowledge of that bargain by the parties to the hypothetical transaction. If right so far, then Lynall is (with respect) similarly distinguishable. All this is, however, a provisional view only and, for the reasons given, academic.
[66]See, eg, ARC Ltd v Schofield [1990] 2 EGLR 52; Cornwall Coast Country Club v Cardgrange Ltd [1987] 1 EGLR 146. See also Duvan Estates Ltd v Rossette Sunshine Savouries Ltd [1982] 1 EGLR 20; Electricity Supply Nominees Ltd v London Clubs Ltd [1988] 2 EGLR 152; Lynall v Inland Revenue Commissioners [1972] AC 680 (“Lynall”).
[67][2004] EWHC 2428 (Comm) (4 November 2004) (“South Tyneside”).
[68]Cornwall Coast Country Club v Cardgrange Ltd [1987] 1 EGLR 146.
[69]Lynall v Inland Revenue Commissioners [1972] AC 680.
[70]South Tyneside v Wickes Building Supplies Ltd [2004] EWHC 2428 (Comm) (4 November 2004) [39].
It is, however, suggested by Reynolds and Fetherstonhaugh that the English approach may be too restrictive:[71]
In previous editions of this Handbook, the authors have expressed the view that the rule, as expressed in the English authorities, is too restrictive and is, indeed, precisely the opposite of what it should be.
According to the authors’ argument, accounts which would have been available to the hypothetical lessee should not be admitted because to do so would fail to give effect to the usual requirement to disregard the effect on rent of the occupation of the tenant. If the tenant had not been in occupation, there would have been no published accounts available to the hypothetical lessee and the disregard requires that any effect which such accounts would have had on the mind of the hypothetical tenant, and thus on the market, must be ignored. Yet the same criticism cannot be made of accounts that were not public and thus could not directly have affected the market. Such accounts should be admitted because, without infringing the disregard, they bear direct relevance to the central question in a notional profits valuation, namely, what is the profit-earning potential of the premises.
The proposition just stated can be illustrated by an example: in the rent review of a casino, both landlord and tenant might adopt the notional profits method. The landlord might allege that a casino of the quality and in the location of the subject premises might be expected to achieve a turnover of ₤40 million per annum. The tenant might assert that a properly-run casino of that size in that location could only be expected to achieve a turnover of ₤10 million. In deciding who is right, surely the arbitrator ought to be entitled to receive evidence as to the actual turnover achieved by the tenant over the previous five years. If he had in fact been turning over some ₤40 million then, in the absence of some good explanation, the arbitrator would be justified in treating the tenant’s case with some scepticism.
[71]Handbook of Rent Review, vol 1 (Sweet & Maxwell, at Service 60, November 2013) 721 [7.7.4].
Continuing, Reynolds and Fetherstonhaugh say:[72]
(c)In the light of the dictum of Gross J in the South Tyneside[73] case and the Commonwealth cases, there must be more doubt about the application of the above principle where the trading information is alleged to be relevant because of what it shows about the way certain businesses are conducted, what profit margins can be anticipated, or even whether the demised premises themselves have a particular profit-earning capacity relating to that particular business. It can be argued that the significance of such evidence is not (as Gross J put it) “the knowledge or deemed knowledge” of the trading information by the parties in the hypothetical transaction but rather the “objective facts” which such evidence establishes. If such a distinction is sound, it may justify the admission in evidence of trading accounts even when one or more of the reasons identified above would otherwise require its exclusion.
(d)This distinction may indeed be the basis of the “exception” as to disclosure (but not as to inadmissibility) of trading information described in paragraph 7.7.3 above. Since the party seeking disclosure is trying to ascertain from the accounts “objective facts” which will assist him in preparing his case or damaging that of the other party, disclosure is appropriate according to ordinary principles. Whether the documents thus disclosed will or will not ultimately be admissible will turn (it is suggested) upon the purpose for which they are being tendered in evidence.
[72]Handbook of Rent Review, vol 1 (Sweet & Maxwell, at Service 60, November 2013) 722–3 [7.7.6].
[73]South Tyneside v Wickes Building Supplies Ltd [2004] EWHC 2428 (Comm) (4 November 2004).
In my view, the authorities and commentaries which have been discussed provide more than an adequate basis for the view that the Valuer has, in the present circumstances, in conducting a rental valuation of hotel premises, approached his task with a methodology and reasoning process which has a firm foundation in the general law as being appropriate. Moreover, this position is, in my view, further confirmed when consideration is given to the nature of the, so-called, “profits method”, as has been applied and endorsed in the authorities and commentaries.[74] The nature and rationale of the “profits method” is concisely stated by Hill and Redman, as follows:[75]
[74]See especially Hill and Redman’s Law of Landlord and Tenant (LexisNexis, Online Loose-leaf Service) [2382]–[2401]. See also Handbook of Rent Review, vol 1 (Sweet & Maxwell, at Service 60, November 2013) 719–23 [7.7.1]–[7.7.6].
[75]Hill and Redman’s Law of Landlord and Tenant (LexisNexis, Online Loose-leaf Service) [2383].
The concept which underlies the profits method of valuation is easy to describe. Essentially, there are three steps in the process.
(a) An estimate is made of the income from the business. In the case of a hotel this will mean that an estimate is made of the likely income from such sources as the letting of rooms, the restaurant and bars and ancillary functions such as holding conferences or running a health club. In the case of a casino an estimate will be made of the amount which members of the club will gamble and how much will be retained by the operators.
(b) An estimate is then made of the various expenses and outgoings involved in the operation of the premises. To take again a hotel as an example there will be staff expenses, purchases of items such as food and drink, and outgoings such as fuel, rates, insurance and advertising.
(c) The difference between the income and the running costs is the net profit. This amount is available for the payment of rent. The final step is therefore to decide what proportion of the net profit should be taken as that which the willing lessee would be willing to pay as rent.
Hill and Redman continue:[76]
A willing lessee of premises such as a hotel would be likely to be faced with substantial initial expenditure. The rule, explained earlier, that all tenant’s fixtures are taken to be removed means that the incoming lessee would have to provide items such as bedroom furniture and equipment for the restaurant and common parts. When a comparables method of valuation is used, it is not usually necessary to do a calculation of initial fitting out costs since the need to fit out the premises will be a factor already taken into account in the rent agreed or determined for the comparables. The use of the profits method entails the cost of fitting out and similar work being brought into the calculations since it is a cost which will be borne by the lessee in order to make a profit. The usual means of paying regard to this aspect of the operation is to estimate the capital cost involved and then to rentalise it over the period of the expected life of the equipment. The annual or rentalised sum will then be an item of expenditure to be put into the notional accounts. A similar process would be necessary if a willing lessee would expect to carry out improvements to the premises.
Does the Act allow the methodology employed by the Valuer?
[76]Hill and Redman’s Law of Landlord and Tenant (LexisNexis, Online Loose-leaf Service) [2387] (footnotes omitted and emphasis added).
The Tribunal answered this question negatively for the following reasons:[77]
39In my view, it is very clear from the statements in the valuation report that the rent determination is founded on the Applicant’s own trading figures, and that the Valuer has taken into account the value of the Applicant’s fixtures and fittings. This is borne out in particular by the Valuer’s statement in the valuation report, referred to above, that “It is pertinent to note that the future application by the Tenant of its owned Fixtures & Fittings is included in the rental assessment process...”. Section 37(2) of the Act mandates that the Valuer not take into account the value of the Applicant’s fixtures and fittings.
40The Respondent submits that the methodology employed by the Valuer is consistent with the evident purpose of the Act to strike a fair balance between the interests of the Landlord and the Tenant and to secure a fair and reasonable estimate of the rent that would be paid if the premises were let on the open market. The Respondent says that it is reasonable that the Valuer consider the profits which a willing lessee would make in the future assuming average competent management of the same business by a hypothetical willing lessee. The Respondent says that this “profits method” of determining market rent — where the Valuer takes account of the profits generated by the sitting tenant — is common in the hotel industry and not prohibited by s37(2) of the Act.
41However reasonable the Valuer’s methodology may seem, and whether or not it is a method that has in the past been commonly adopted by valuers in the hotel industry, I do not accept that s 37(2) of the Act allows the methodology employed by the Valuer. I am satisfied that the Valuer has, contrary to the requirement in s 37(2) of the Act, taken into account the value of the Applicant’s fixtures and fittings, and in so doing the Valuer has fundamentally misconstrued his task. As such, I find that the parties are not bound by the rent determination.
[77]Serene Hotels Pty Ltd v Epping Hotels Pty Ltd (Retail Tenancies) [2014] VCAT 97 (7 February 2014) [39]–[41] (emphasis in original).
As the Tribunal reasons indicate, the critical issue with respect to the Valuer’s methodology and reasoning is whether or not he has taken into account the value of the tenant’s fixtures and fittings contrary to the requirements of s 37(2) of the Act. For the reasons which follow, I am of the opinion that the Valuer has not done so and, consequently, the Tribunal is in error having misconstrued the requirements of those provisions of the Act. As discussed elsewhere in these reasons, the error is an error of law in this respect. It is not an error flowing from the application of an unambiguous statutory provision in a factual context.[78]
[78]See below [47]–[67].
Serene submits that the passages from Hill and Redman’s Law of Landlord and Tenant set out above indicate that it is necessary to make an express capital cost adjustment when adopting the “profits method”.[79] Serene also relies on the decision of Bleby J in Sky City Adelaide Pty Ltd v Valuer-General,[80] in support of its argument that an express capital cost adjustment is required. Sky City is, however, of no assistance in the present circumstances. The legislative context considered in Sky City was significantly different and thus that case is merely an example of Serene’s preferred interpretation of the “profits method”.
[79]See above [40].
[80][2009] SASC 289 (”Sky City”).
As discussed, the authorities to which reference has been made do,[81] in my view, indicate that the Valuer’s methodology and reasoning would, as a matter of general law, be regarded as uncontroversial and in conformity with valuation law and practice with respect to hotel premises. Although the “profits method” which the Valuer has applied differs in a number of respects from that described in Hill and Redman’s Law of Landlord and Tenant,[82] the differences are merely in the technique or process applied to achieve the same outcome — which is to ensure that the value of the tenant’s fixtures and fittings is not taken into account in the calculation of current market rent.
[81]See above [29]–[40].
[82]Hill and Redman’s Law of Landlord and Tenant (LexisNexis, Online Loose-leaf Service) [2382]–[2401].
As Hill and Redman indicate, this does not mean that the value of fixtures and fittings that may be required for the generation of profit through the conduct of the hotel business are necessarily excluded from the calculations required to estimate the current market rent. What it does mean is that the value is treated in the calculations in such a way that, as between the notional prior and future tenant, the value is in effect “cancelled out” so that the future tenant is not advantaged or disadvantaged in the rental calculation as a result of the prior tenant’s expenditure and ownership of the fixtures and fittings. Clearly, in my view, this is the objective and meaning of the provisions of s 37(2) of the Act which are relevant to this proceeding.
On this basis, I accept the position as put by the Plaintiff:[83]
[83]Plaintiff’s Outline of Submissions (24 December 2014) [31]–[32] (emphasis in original).
31.The Tribunal erred in relation to both of those findings, in that:
(a)s 37(2) of the … [Act] requires the specialist retail valuer to assume the Premises is unoccupied and to disregard the value of the tenant’s fittings and fixtures;
(b)however, s 37(2) also requires the specialist retail valuer to assume that there is a willing tenant bidding on the retail premises. In order to make good that assumption, the specialist retail valuer must posit certain attributes to the hypothetical tenant;
(c)in assessing the market that would bid on the lease, the specialist retail valuer concluded that the hypothetical bidder for the lease would be the operator of a hotel and gaming venue. That conclusion has not been criticised (nor could it be);
(d)the specialist retail valuer considered the sitting tenant’s earnings before interest, taxation, depreciation, amortisation and rent (EBITDAR). By using EBITDAR (and not some other figures), the specialist retail valuer excluded the acquisition costs of the sitting tenant’s gaming machines and gaming entitlements from the rental determination. It follows that the specialist retail valuer has assumed that the hypothetical tenant is leasing an empty shell and has acquired its own gaming machines and gaming entitlements;
(e)contrary to the Tribunal’s findings at para 39, the phrase “[i]t is pertinent to note that the future application by the Tenant of its owned Fixtures and Fittings is included in the rental assessment process …” does not indicate that the specialist retail valuer has failed to disregard the sitting tenant’s fittings and fixtures. That phrase shows that the specialist retail valuer has assumed that the hypothetical tenant will derive its income from fittings and fixtures that it owns, not from the sitting tenant’s fittings and fixtures. This is precisely what s 37(2) requires the specialist retail valuer to do, ie to disregard the sitting tenant’s fittings and fixtures and assume that the hypothetical tenant will lease a bare shell;
(f)the Tribunal attached significance at paragraphs 43-44 of its reasons to the assumption by the valuer that the hypothetical tenant would acquire the sitting tenant’s gaming machine and entitlements. However, this is merely a convenient hypothesis that does not affect the rental determination as the acquisition costs (ie depreciation, amortisation, interest or letting costs) are excluded from the figures that the specialist retail valuer considered. This proposition can be tested by assuming that the hypothetical tenant either:
i.brings its own gaming machines to the leased premises;
ii.borrows to buy gaming machines; or
iii.leases gaming machines.
Either way, the figures considered by the specialist retail valuer would be the same, that is, the hypothetical tenant’s projected EBITDAR. It follows that the specialist retail valuer has both assumed a willing tenant and excluded the value of the tenant’s fittings and fixtures;
(g)the steps taken by the specialist retail valuer to exclude the value of the tenant’s fittings and fixtures are different to the process suggested in the extracts referred to above from … [Hill and Redman’s Law of Landlord and Tenant].[84] … [T]he authors suggest that up-front costs would be “rentalised” over the life of the lease … .[85] The effect of this approach is to spread the tenant’s set-up costs across the life of the lease (ie a large cost up front is defrayed over the life of the lease). The same is achieved by the specialist retail valuer in this case by projecting the hypothetical tenant’s EBITDAR for the new term. Rather than defraying the costs across the life of the lease, they are simply taken out of the equation altogether. Either way, it is clear that the specialist retail valuer turned his mind to the exclusion of the value of the tenant’s fittings and fixtures and completed his task in accordance with the contract; and
For the preceding reasons with respect to Question 1, Question 2 must also be answered in the affirmative. The Tribunal erred in determining that the Valuer had taken into account the value of Serene’s fixtures and fittings because the methodology adopted effectively “cancels out” that value.
3. Whether the Tribunal was made to understand the elements of the methodology applied by the Valuer; that is, whether it was right, without more, to seize upon the language of his report concerning the future application by the Tenant of its owned fixtures and fittings as manifestly demonstrating an approach in violation of the Act (“Question 3”)
Serene submits that Question 3 is a specific instance of the factual issue raised by Question 2 and is therefore not reviewable by this Court.[114] For the preceding reasons, I am satisfied that Question 3 raises a question of law and is properly before this Court in this proceeding.
[114]Defendant’s Outline of Submissions — Appeal of Leave to Appeal (4 March 2015) [66]–[69].
In my view it is clear from the Tribunal’s reasons that in finding that s 37(2) did not allow the methodology applied by the Valuer, the Tribunal was not made to understand the elements of that methodology and appears to have taken certain statements in the Rental Determination out of context. In any event, as indicated in the preceding reasons, the methodology adopted and applied by the Valuer does not offend the Act.
4. Whether the Tribunal erred in deciding that it was able to disregard the Supplementary Report (“Question 4”)
I now turn to the second umbrella issue raised in the Plaintiff’s Notice of Appeal, being the fourth question, namely, whether the Tribunal erred in deciding that it was able to disregard the Supplementary Report.
By letter dated 18 October 2013 (being the Supplementary Report referred to in Question 4), the Valuer wrote to the parties, the relevant paragraphs of which state:
I refer to Section 2.2 of the … [Rental Determination], specifically the first paragraph of Page 9 which states that in undertaking the determination the provisions of Section 37(2) had been applied.
Based upon my experience in the hotel industry I am of the opinion that rent concessions and other benefits are not typically offered to prospective tenants of unoccupied premises. The rental evidence considered as part of the determination process was not, so far as I am aware, affected by concessions or other benefits offered to the prospective tenants.
The Supplementary Report was requested by Epping’s solicitors, who, on 16 October 2013, wrote to the Valuer requesting:
… further details of your consideration of rent concessions and other benefits offered to prospective tenants of unoccupied premises as required by s 37(2)(d) of the Retail Leases Act 2003.
In deciding whether to consider the Supplementary Report (in order to determine whether the Valuer had regard to the matters set out in s 37(2)(d) of the Act), the Tribunal found:[115]
[115]Serene Hotels Pty Ltd v Epping Hotels Pty Ltd [2014] VCAT 97 (7 February 2014) [61]–[66].
61In my view there is no hard and fast rule as to whether parties, who have appointed an independent specialist valuer and received his valuation report, are bound to accept supplementary reports or material from the valuer. It depends on the circumstances in each case.
62There is nothing in the Act or the lease to suggest that the Valuer is limited to providing one document on one occasion.
63However, having regard to the means by which the supplementary letter was obtained, the date the letter was provided and its contents, I find that it would be unfairly prejudicial to the Applicant to pay any regard to it.
64It is clear from the terms of the supplementary letter itself that the Valuer has provided the letter in response to a specific request from the Respondent, a request which, in my view, is a blatant prompt to the Valuer to provide further information in respect of a matter which is conspicuously absent in the valuation report.
65 Further, the Respondent’s request to the Valuer was made some 8 months after the Valuer provided the valuation report to the parties and some 5 months after the Applicant commenced this proceeding. In my view, once the Applicant commenced this proceeding challenging the valuation report, it became untenable for the Valuer to provide any supplementary report.
66 In all the circumstances, I am satisfied that the supplementary letter should be wholly disregarded.
Again, as a threshold issue, Serene submits that Question 4 does not raise a question of law. It is claimed that the Tribunal’s treatment of the Supplementary Report was a determination of an issue of fact within the Tribunal’s general statutory discretion to exclude or admit evidence and is therefore not reviewable by this Court.[116]
[116]Defendant’s Outline of Submissions — Appeal of Leave to Appeal (4 March 2015) [52]–[53], [71]; Defendant’s Outline of Submissions (4 March 2015) [61].
I am satisfied that Question 4 does raise a question of law and is properly before this Court. For the reasons that follow, the Tribunal did not have a general statutory discretion to exclude the Supplementary Report because it forms part of the Rental Determination itself. It follows that the failure to have regard to the Supplementary Report raises a question of law in the same way that a failure to have regard to any aspect of the Valuation in the context of compliance or otherwise with the provisions of s 37(2) of the Act in the present circumstances would raise a question of law.
Before addressing whether the Tribunal should have had regard to the Supplementary Report, it should be noted that it is not clear, in my view, that the Valuer failed to have regard to those matters set out in s 37(2)(d) of the Act before the preparation of the Supplementary Report in any event.
At paragraph 2.2 of the Rental Determination, under the heading “Basis of Determination”, the Valuer recites s 37(2) and states that these requirements were complied with in the preparation of the Rental Determination. The matters set out in sub-s (2)(d) are not mentioned elsewhere in the Valuation; however, this is consistent with the Valuer’s statement in the Supplementary Report that the rental evidence considered as part of the Valuation was not affected by concessions or other benefits offered to prospective tenants, rather than an indication that these matters were disregarded.
Nevertheless, having regard to the requirement in s 37(6)(c) of the Act, that the valuation “specify the matters to which the valuer had regard in making the determination”,[117] it may be that a general reference of the kind found in the Rental Determination may in some instances be insufficient. Nevertheless, in the present circumstances a reading of the Rental Determination as a whole would indicate to a reasonable reader that all relevant matters as required by the Act had been addressed. In any event, the fact that Epping requested the Supplementary Report and sought to have it considered by the Tribunal suggests that Epping considered the absence of a specific reference to the matters set out in sub-s (2)(d) might have been, at least, problematic.[118] It is on this basis then that I proceed to determine the question of whether the Tribunal should have had regard to the Supplementary Report.
Parties’ submissions
[117](emphasis added).
[118]As much was acknowledged by counsel for Epping during argument. See Transcript, p 16, lines 11 to 17.
Epping submits that the Supplementary Report forms part of the Valuation and is therefore part of the material to which the Tribunal should have had regard in determining whether s 37(2) was complied with.[119] The following submissions are made as to why the Tribunal erred in disregarding the Supplementary Report:
(1)Nothing in the text of s 37(6) of the Act, or in the terms of the lease, required the Valuer to confine his report to a single document. To require otherwise would (a) render a report invalid and liable to be set aside at significant expense to the parties because of a minor omission, and (b) be inconsistent with the objects of the Act.[120]
(2)English authorities establish that an expert, such as the Valuer, is not obliged to supplement his or her report, but that a court (and so the Tribunal) should have regard to any supplementary material that an expert elects to provide.[121]
(3)Authorities prohibiting the cross-examination of a determining expert are not relevant if the Supplementary Report forms part of the Valuation.[122]
(4)Authorities about functus officio are not relevant because the Valuer was exercising a contractual function.[123]
(5)The Supplementary Report shows that the Valuer had regard to incentives.[124]
[119]Plaintiff’s Outline of Submissions (24 December 2014) [43]; Transcript, p 14, lines 2 to 6.
[120]Plaintiff’s Outline of Submissions (24 December 2014) [44]–[48].
[121]Plaintiff’s Outline of Submissions (24 December 2014) [49]–[55].
[122]Plaintiff’s Outline of Submissions (24 December 2014) [56]–[57].
[123]Plaintiff’s Outline of Submissions (24 December 2014) [58]–[61].
[124]Plaintiff’s Outline of Submissions (24 December 2014) [62].
In response, Serene submits that the Tribunal acted lawfully in excluding the Supplementary Report as a matter of procedural fairness.[125] It is submitted that Serene would have been unfairly prejudiced if the Tribunal were to have considered the Supplementary Report in circumstances where Serene was unable, as a matter of law, to cross-examine the Valuer.[126]
[125]Defendant’s Outline of Submissions (4 March 2015) [71]–[81]; Serene Hotels Pty Ltd v Epping Hotels Pty Ltd (Retail Tenancies) [2014] VCAT 97 (7 February 2014) [63]–[65].
[126]Defendant’s Outline of Submissions (4 March 2015) [71]–[74].
Specifically, the Supplementary Report is claimed to be prejudicial to Serene because the Supplementary Report —
(1) was provided by the Valuer with knowledge that the Valuation was the subject of litigation and, in particular, an application that it be vitiated; and
(2) would need to be tested in cross-examination on the grounds that the phrases “[b]ased upon my experience” and “so far as I am aware” are so vague that it is not clear whether the Valuer in fact considered the issue at all at the time of preparing the Valuation.[127]
[127]Transcript, p 87, lines 12 to 31, p 88, lines 1 to 3, p 90, lines 13 to 22.
Serene also cited comments made by J Forrest J in Matthews v SPI Electricity Pty Ltd (Ruling No 35), in the context of interpreting s 135 of the Evidence Act 2008, to support the proposition that an inability to cross-examine may result in prejudice to a party.[128]
[128][2014] VSC 59 (27 February 2014) [49], [52]. Section 135(a) of the Evidence Act 2008 provides:
135General discretion to exclude evidence
The court may refuse to admit evidence if its probative value is substantially outweighed by the danger that the evidence might—
(a) be unfairly prejudicial to a party.
As such, Serene submits that the Tribunal did not err in deciding that it was able to disregard the Supplementary Report because this was an exercise of its discretion to exclude evidence that would be unfairly prejudicial to a party.[129]
Should the Tribunal have had regard to the Supplementary Report?
[129]Transcript, p 92, lines 10 to 16.
In summary, I accept the Plaintiff’s submissions on Question 4 and find that the Tribunal erred in deciding that it was able to disregard the Supplementary Report.
In so doing, I accept the Defendant’s submission that a speaking, or reasoned, valuation such as that to which this proceeding relates, cannot be impeached or elaborated upon by cross-examination.[130] The words of Yeldham J in Joint Coal Board v Noone Pty Ltd are apt to describe the rationale for this rule in the present circumstances.[131] His Honour noted that:[132]
The parties expressly contracted to accept the valuation of an expert and, there being no error on its face, they are bound to accept it.
Consequently, given that it is not claimed that a mistake is evident on the face of the Valuation or the Supplementary Report, it would not have been permissible for the Valuer to be cross-examined.
[130]Mayne Nickless Ltd v Solomon [1980] Qd R 171 at 178; Riciardello v Caltex Oil (Australia) Pty Ltd [1991] ANZ ConvR 445. See also Joint Coal Board v Noone Pty Ltd (1984) 3 BPR 9440 at 9451. Cf Kanivah Holdings Pty Ltd v Holdsworth Properties Pty Ltd [2001] NSWSC 405 (21 May 2001) [61]–[81].
[131](1984) 3 BPR 9440.
[132]Joint Coal Board v Noone Pty Ltd (1984) 3 BPR 9440 at 9451.
However, to frame the admissibility of the Supplementary Report as a question of prejudice arising from the impermissibility of cross-examining the Valuer is to misconstrue the issue. In this regard — and in the absence of any Australian authorities specifically on point — a consideration of the relevant English authorities demonstrates that the issue is correctly characterised as a question whether a letter supplementary to an expert’s primary report forms part of the determining valuer’s report (and is therefore admissible).
In Invensys plc v Automotive Sealing Systems Ltd,[133] Thomas J, sitting in the Queen’s Bench division, considered an expert determination by an accounting firm of the final consideration payable under a sale agreement. The parties had agreed that the determination would be binding except in the case of manifest error and that the determination would be set out in a written report. Following publication of the report, the purchaser wrote to the expert on two occasions seeking clarification of its reasoning. The expert responded on both occasions and the purchaser then sought to challenge the determination on grounds that it exhibited manifest errors.
[133][2002] 1 All ER (Comm) 222 (“Invensys”).
In deciding that the Court should consider the further reasons provided by the expert, and after noting the lack of authority on this point, Thomas J held:[134]
19.… If an Expert considers it necessary to amplify or (as in this case) clarify the reasons given, when the terms of reference require reasons, it would not be right to ignore those further reasons in examining the question of manifest error. The documents setting out the further reasons, together with the original reasons, represent the totality of the reasoning and it is that totality that should be examined.
…
22.Thus, construing this particular agreement for an expert determination where the parties have provided for a reasoned determination which is to be final and binding save for manifest error, it is in my judgment permissible to examine the additional materials that form an essential part of those reasons.
[134]Invensys plc v Automotive Sealing Systems Ltd [2002] 1 All ER (Comm) 222 [19], [22].
In Homespace Ltd v Sita South East Ltd,[135] the English Court of Appeal considered an expert’s responses to requests for clarification of his certificate and report prepared in relation to a rent determination. In determining whether the Court should take into account the expert’s responses, Lloyd LJ considered relevant authorities, including Invensys, and held:[136]
[I]n the light of the decisions referred to above, and as a matter of general principle, I agree with the judge that it is legitimate to consider … [the expert’s] explanations or clarifications of his reasoning and approach in this subsequent correspondence, as it is also to refer to the body of his report, not just to his certificate, to see whether he undertook the task entrusted to him by the agreement, or some different task. All of that material is “properly before the court”… .
[135][2008] EWCA Civ 1 (“Homespace”).
[136]Homespace Ltd v Sita South East Ltd [2008] EWCA Civ 1 [34].
Lloyd LJ went on to find that:[137]
[The expert] need not have responded to the requests for clarification of his certificate and his report. If he had not done so, he could not have been compelled to explain himself. However, since he did so, and thereby made clear the basis on which he had proceeded, it seems to me that the court must look at his explanations when considering what was the reasoning which led him to issue his certificate, and whether it was prepared on the correct basis.
[137]Homespace Ltd v Sita South East Ltd [2008] EWCA Civ 1 [36].
In both Invensys and Homespace the supplementary correspondence from the expert was considered on the basis that it formed part of the expert’s reasons for making the determination in question. As such, it was proper to have regard to the supplementary correspondence in order to provide a completed picture of the experts’ reasoning in each case.
In my view, the same reasoning should apply in the present case. The Tribunal should have had regard to the Supplementary Report because it forms — to adopt the phrase used by Thomas J in Invensys — the “totality of the [Valuer’s] reasoning”.[138]Therefore, the Tribunal was not entitled to disregard the Supplementary Report, in the same way that it would not have been entitled to disregard any other aspect of the Rental Determination.
[138]Invensys plc v Automotive Sealing Systems Ltd [2002] 1 All ER (Comm) 222, [19].
It is revealing to observe that the way in which Serene frames its cross-examination submission impliedly supports the above analysis. As noted above, Serene argues that it would be impermissible to cross-examine the Valuer about the Supplementary Report. In so doing, Serene relies on authorities dealing with the grounds upon which a speaking valuation may be impeached or elaborated upon by cross-examination. As such, Serene’s submission assumes that the Supplementary Report is a speaking valuation. Given that it was not put to me that the Valuer produced more than one valuation, Serene’s submission impliedly supports the proposition that the Supplementary Report is properly characterised as a part of the Rental Determination.
The fact that proceedings had not yet been commenced in either Invensys or Homespace at the time that the supplementary information was provided is not relevant here. In both cases, as in the present case, the determination in question was under attack and one of the parties was making enquiries of the expert.
The English approach is also consistent with the provisions of the Act. As submitted by Epping and noted by the Tribunal, nothing in the Act suggests that a specialist retail valuer must confine his or her report to a single document.[139] Moreover, this approach is consistent with the main purpose of the Act to the extent that it embraces timely and cost-effective dispute resolution and avoids the potential for significant costs and delays to the parties if the Rental Determination were set aside; and with the additional possibility of further proceedings following from a further valuation.[140] This approach is both commercial and sensible, and provides a cost-effective way of obtaining a valuer’s determination in complete and unambiguous form; which, in turn, enables a new rent to be fixed in circumstances where an omission occurred in, or clarification was required with respect to, the determination.
[139]See Plaintiff’s Outline of Submissions (24 December 2014) [45]; Serene Hotels Pty Ltd v Epping Hotels Pty Ltd (Retail Tenancies) [2014] VCAT 97 (7 February 2014) [62].
[140]Retail Leases Act 2003 s 1(b).
Serene also sought to rely on s 37(7)(a) of the Act which provides:[141]
(7)The specialist retail valuer—
(a)must carry out the valuation within 45 days after accepting the appointment, or within such longer period as may be agreed between the landlord and tenant, or if there is no agreement, as determined in writing by the Small Business Commissioner … .
[141]Transcript, p 94, lines 13 to 31, p 95, lines 1 to 12.
I am not satisfied that this sub-section precludes the application of the English approach. The Act does not provide for any penalty or other consequence in the event that a valuer fails to carry out the valuation within the specified timeframe. In Dovastand Pty Ltd v Mardasa Nominees Pty Ltd,[142] Marks J considered a landlord’s failure to comply with timeframes set by ss 15(1)(b) and (c) of the Retail Tenancies Act 1986 in relation to the provision of estimates and statements of shared operating expenses. Like the Retail Leases Act 2003, the Retail Tenancies Act 1986 was silent on the consequences of non-compliance with these statutory requirements. At 290, Marks J considered the effect of this silence:
[142][1991] 2 VR 285.
The only argument available to the tenant is, I think, that the Act on its proper construction makes a claim under the lease unenforceable where the time frames of the Act have not been met. Of course the Act does not say so. The question is whether it should be so construed.
…
The tenant can only succeed if it is what the statute expressly or by necessary implication provides. In my opinion, it does neither.
Marks J continued at 291:
As has been emphasised, the Act is silent as to the consequences of non-compliance. This does not mean that the law does not recognise any. But if Parliament intended that as a result of non-compliance there were to be the consequences for which the tenant here contends it is to be expected that it would have said so in clear and unmistakable language.
His Honour went on to find that the timeframes in question were directory and not obligatory in nature.[143] In my view, the same may properly be said of the requirements set out in s 37(7)(a) of the Retail Leases Act 2003. There is nothing in the Act to suggest that a failure to carry out the valuation within 45 days vitiates the valuation or any part of the valuation. To find otherwise would be contrary to the purposes of the Act for the reasons set out above. Consequently, s 37(7)(a) does not preclude the application of the English approach, and the Valuer’s apparent failure to comply with s 37(7)(a) does not affect the validity of the Rental Determination or any part of the Rental Determination, including the Supplementary Report.
[143]Dovastand Pty Ltd v Mardasa Nominees Pty Ltd [1991] 2 VR 285 at 292.
This is not to say that a tribunal or a court must have regard to supplementary correspondence, or material provided outside the timeframe set by s 37(7)(a), in every case. Indeed, there may be cases where the supplementary material is provided so late that to consider it would deprive a party of procedural fairness. This is, however, not such a case. I am not satisfied that Serene has suffered any prejudice as a result of the Valuer’s delay in furnishing the complete Valuation or the impermissibility of cross-examining the Valuer. In my view, the relevant paragraph in the Supplementary Report is neither ambiguous nor deficient in the context of the Act. This view is supported by counsel for Serene’s concession during argument that, had the relevant paragraph been included in the Rental Determination when it was first prepared, it would have been unimpeachable.[144]
[144]Transcript, p 94, lines 2 to 6.
While the Valuer clearly provided the Supplementary Report in response to a request from Epping, nothing in the request suggests or requires any particular answer. It is an entirely open request — not “leading” in any respect. Indeed, the letter in question simply requests “further details of … [the Valuer’s] consideration of rent concessions and other benefits”. There is no suggestion in these words that particular material should be added and there has been no allegation of collusion or fraud.[145] Moreover, the language used in the Supplementary Report does not suggest that the Valuer formed a view on anything other than the information before him at the time he prepared the Rental Determination.
[145]Plaintiff’s Reply Submissions (20 March 2015) [9].
The Supplementary Report was provided eight months after the Valuation was first prepared. It is unfortunate that it was not delivered earlier; however, the Supplementary Report was provided before the Tribunal hearing in any event. As such, Serene had the opportunity prior to the Tribunal hearing to consider all of the information which the Valuer considered relevant to the determination of current market rent. The result is that the parties received a complete valuation report (at least to the extent that it addresses all elements of s 37(2) of the Act) and the totality of the Valuer’s reasoning was before the Tribunal.
Having regard to the preceding reasons, it is not necessary to embark upon consideration of Epping’s submission that authorities about funtus officio are not relevant. Serene did not formally renew or press its submissions regarding funtus officio made before the Tribunal, either in its written submissions or in the course of argument, despite making some passing comments about what had been submitted before the Tribunal.[146] In any event, any analysis or approach on this basis would be at odds with the approach taken in the English authorities to which reference has been made.
[146]Transcript, p 85, lines 21 to 26, p 94, lines 10 to 31, p 95, lines 1 to 12.
In light of the above, it is also unnecessary to consider Epping’s alternative arguments expressed in the event that Question 4 were considered as an evidentiary question.[147]
[147]Plaintiff’s Outline of Submissions (24 December 2014) [64]–[72].
Finally, contrary to Serene’s submission, there is no need to remit the proceeding to the Tribunal under s 148(7)(c) of the VCAT Act.[148] The Court has in these reasons determined all the relevant issues and there are no outstanding matters. Moreover, to remit the proceeding to the Tribunal would simply result in unnecessary delay and expense to the parties.
[148]Defendant’s Outline of Submissions (4 March 2015) [82]–[84]; Transcript, p 92, line 17 to 30.
Conclusions and orders
For the preceding reasons, I am of the opinion that the Court should make orders which include the following:
(1)The Orders of Associate Justice Mukhtar made on 20 October 2014 in this proceeding be affirmed.
(2)The Defendant’s appeal against the Orders of Associate Justice Mukhtar made on 20 October 2014 in this proceeding be dismissed.
(3)The Plaintiff’s appeal against the orders of Member M. Farrelly in Serene Hotels Pty Ltd v Epping Hotels Pty Ltd (Retail Tenancies) [2014] VCAT 97 (7 February 2014) be allowed in full.
The parties are to bring in orders to give effect to these reasons. I otherwise reserve the question of costs and will hear the parties on this issue.
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