Homebase Management Pty Ltd v City of Subiaco - [2013] WASC 419

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: HOMEBASE MANAGEMENT PTY LTD -v- CITY OF SUBIACO [2013] WASC 419

CORAM: BEECH J

HEARD: 22 OCTOBER 2013

DELIVERED : 27 NOVEMBER 2013

FILE NO/S: CIV 2393 of 2012

BETWEEN: HOMEBASE MANAGEMENT PTY LTD
Plaintiff
AND
CITY OF SUBIACO
Defendant

Catchwords:

Contract - Lease - Application for declaration as to proper construction of rent review clause - Turns on own facts

Landlord and tenant - Rent review clause - Proper construction - Turns on own facts

Legislation:

Nil

Result:

Declaration made as sought by plaintiff

Category: B

Representation:

Counsel:

Plaintiff: Mr S Penglis
Defendant: Mr J A Thomson SC

Solicitors:

Plaintiff: Herbert Smith Freehills
Defendant: Corrs Chambers Westgarth

Case(s) referred to in judgment(s):

ADC Buildings Pty Ltd v Barana Properties (No 1) Pty Ltd [2005] NSWCA 224; (2005) 12 BPR 23,717
BBC Hardware Pty Ltd v Payce Properties Pty Ltd [2000] NSWCA 2625; (2000) 50 NSWLR 66
Burns Philp Hardware Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 642
Programme Holdings Pty Ltd v Van Gogh Holdings Pty Ltd [2009] WASC 79
Re Michael; Ex parte Epic Energy (WA) Nominees Pty Ltd [2002] WASCA 231; (2002) 25 WAR 511
Red Hill Iron Ltd v API Management Pty Ltd [2012] WASC 323
Ricciardello v Caltex Oil (Australia) Pty Ltd [1991] ANZ Conv R 445
Singh v Minister for Immigration and Multicultural Affairs [2001] FCA 389; (2001) 109 FCR 152
BEECH J:

Introduction

The plaintiff (Homebase) leases land from the defendant (the City). The parties are in dispute as to the proper construction of the rent review clause in the lease.

Background

The City owns the land the subject of the lease. The land is situated on the corner of Salvado Road and Harborne Street, Subiaco, and is known as the Homebase Complex. The area of the land is 33,649 m².
The land was first leased by the City to Homebase by lease dated 20 May 1987. At that time, the land had abandoned and decaying buildings on it. The term of the original lease expired on 31 October 2056.
After entering into that lease, Homebase demolished and, at its cost, removed the structures, undertook extensive ground works and constructed new buildings. That took about 12 months and cost about $7 million.[1]
[1] Affidavit of Baron‑Hay 13 August 2012 [4(b)].
The buildings constructed by Homebase in 1987 to 1988 still remain on the land now.
Since 1987, Homebase has used the leased premises for showrooms, offices, and, by subletting, for retail.
In 2002, Homebase commenced an action relating to a rent review under the original lease. The proceedings were settled. As a term of the settlement, on 19 December 2003 a new lease was executed, replacing the original lease. It is that new lease (the Lease) that is the subject of this proceeding.

The Lease

The Lease was subsequently extended and varied in December 2007.
The Lease commenced on 1 January 2004. After the extension and variation of the Lease, it runs for a term which ends on 1 January 2021.[2] There are two options to renew the Lease for periods of five years: cl 8.
[2] Affidavit of Baron‑Hay 13 August 2012, page 66.
The option periods are included within the definition of the Term.
Clauses 2.1, 2.2 and 2.3 provide as follows:
2.1Rent: 1.1.2004 - 31.12.2005
During the period from 1 January 2004 to 31 December 2005, the annual Rent shall be $520,000.00.
2.2Rent: 1.1.2006 - 31.12.2011
During the period from 1 January 2006 to 31 December 2011, the annual Rent shall on each Review Date be reviewed and, on and from each Review Date, shall be the highest of the following amounts:
(a)an amount calculated by multiplying the annual Rent payable immediately preceding the Review Date by a fraction obtained by dividing the CPI as determined at 30 June immediately preceding the Review Date by the CPI as determined three years earlier;
(b)an amount equal to 25% of the Sublease Payments in the year ended 30 June immediately preceding the Review Date; or
(c)an amount equal to the annual Rent payable immediately preceding the Review Date.
2.3Rent: 1.1.2012 ‑ 31.12.2020 and during Further terms
During the period from 1 January 2012 to 31 December 2020 (and, if an Option is exercised, during a Further Term), the annual Rent shall on each Review Date be reviewed and, on and from each Review Date, shall be the highest of the following amounts:
(a)an amount calculated by multiplying the annual Rent payable immediately preceding the Review Date by a fraction obtained by dividing the CPI as determined at 30 June immediately preceding the Review Date by the CPI as determined three years earlier;
(b)an amount equal to 25% of the Sublease Payments in the year ended 30 June immediately preceding the Review Date;
(c)an amount equal to the Fair Market Rent; or
(d)an amount equal to the annual Rent payable immediately preceding the Review Date.
Clause 2.4 provides a mechanism for the determination of rent reviews.
In broad summary, it provides that, in the absence of agreement between the parties, the rent payable will be determined by an Expert. 'Expert' is defined as a licenced valuer with at least five years' experience in retail valuation in commercial properties comparable to the Leased Premises within the metropolitan area of Perth. The Expert's determination is 'final and binding upon' the parties: cl 2.4(d)(v).
The issue in this case concerns the proper construction of the definition of 'Fair Market Rent', as that term is used in cl 2.3(c).
Taking into account the 2007 amendment, the definition of Fair Market Rent provides as follows:
Fair Market Rent means the rent which the Leased Premises would reasonably command at the Review Date in a free and open market taking into account all relevant factors, matters or variables used in proper land valuation practice on the basis that the Leased Premises were vacant and available to be let on the same terms as are contained in this document (includes its Term) and as if this document included a term that the Leased Premises were to be put to the same use (and could only be put to the same use) as the use to which the Leased Premises are in fact put by the Lessee at the Review Date (whether or not that is the highest and best use of the Leased Premises) and:
(a)without taking into account the Lessee's and any sublessee's trade fixtures and fittings;
(b)ignoring any value attaching to permanent structural or other improvements to the Leased Premises made at the Lessee's expense;
(c)ignoring any value attaching to:
(i)goodwill created by the Lessee's occupation of the Leased Premises; and
(ii)any licence or permit in respect of the business carried on by the Lessee or any sublessee on the Leased Premises.
The amendment made in 2007 to this definition was to replace subpar (b). Prior to the 2007 amendment, subpar (b) provided:
[T]aking into account permanent structural or other improvements to the Leased Premises made at the Lessee's expense and the actual use of those improvements by the Lessee.
By cl 2.7, notwithstanding any other provision of cl 2, the annual rent agreed or determined following a rent review date must not be less than the annual rent payable immediately prior to that review date.
Other relevant definitions are as follows:
Leased Premises means the land described on page 1 and all buildings and improvements thereon or hereafter erected thereon.
Rent means the rent specified in clause 2 and any variation or adjustment of that rent determined in accordance with the provisions of clause 2.
Review Date means each of 1 January 2006, 1 January in each and every succeeding third year during the Term (commencing 1 January 2009), 1 January 2021 and 1 January 2026.
Subleases means all leases and subleases and agreements to grant a lease or sublease of the Leased Premises and includes all licences and agreements to grant a licence to use or occupy the Leased Premises.
Sublease Payments means all payments actually made to and received by the Lessee pursuant to Subleases exclusive of property management fees, variable outgoings and rates and taxes.
Term means the term of this document and includes any renewals pursuant to clause 8.
Two subclauses of cl 4 are also relevant:
The Lessee ... agrees with the Lessor as follows:
…
(f)not without the previous consent in writing of the Lessor first had and obtained (such consent not to be unreasonably withheld) to erect or suffer to be erected any building or structure on the Leased Premises or any part thereof or to make or suffer to be made any alteration in or to any building or structure now or hereafter erected thereon or cut maim or injure or suffer to be cut maimed or injured any of the walls or timbers thereon or remove any building or structure;
…
(q)upon the expiration or sooner determination of the Term ... to deliver up the Leased Premises and all additions thereto and fixtures and fittings therein and the keys thereof to the Lessor in good and tenantable repair and condition.

A construction dispute emerges

In anticipation of the rent review to govern rent from 1 January 2012, each of the parties engaged a valuer to assess the Fair Market Rent.
The City engaged Mr Sean Ray of Knight Frank. Homebase engaged Mr Graham Kennedy of Jones Lang LaSalle. The main difference in their valuation approaches broadly reflects the central construction dispute between the parties.
Mr Ray relies primarily on an assessment of rent based upon a percentage return of unimproved land value. He says that although direct comparison would normally be the most suitable methodology, there is a lack of suitable comparators.[3] Mr Ray assessed the capital unimproved value of the land, having regard to the existing use of the land, and applied a notional yield to it that a lessor would require in order to lease the land.
[3] Affidavit of Baron‑Hay 13 August 2012, page 138.
Mr Ray assessed the value of the land at about $25.686 million.[4] He applied a yield of 5.5%.[5] That led to a Fair Market Rent of $1.412 million, rounded down to $1.4 million.
[4] Affidavit of Baron‑Hay 13 August 2012, page 148.
[5] Affidavit of Baron‑Hay 13 August 2012, page 154.
In his valuation, Mr Kennedy takes a similar approach, but with one major difference. He adopts a capital value of $27 million.[6] He applied a yield of 5%,[7] which would give rise to a Fair Market Rent of $1.35 million.[8]
[6] Second affidavit of Baron‑Hay 27 June 2013, page 30.
[7] Second affidavit of Baron‑Hay 27 June 2013, page 29.
[8] Second affidavit of Baron‑Hay 27 June 2013, page 32.
However, after reciting various provisions of the rent review clause, Mr Kennedy says:
To put the Leased Premises to the same use or as the use to which they are in fact put by Homebase will obviously require the same or similar improvements to the Leased Premises as have in fact been made by Homebase. The existence of the improvements, therefore add considerable value to the Leased Premises (as without them, the leased premises could not be used for the required purpose without incurring substantial capital expenditure).[9]
[9] Second affidavit of Baron‑Hay 27 June 2013, page 14.
Mr Kennedy estimated the cost of building the structures that are on the leased premises at $15 million. He says that if that capital sum is notionally written off over the remaining 19 years of the lease, that requires an annual writing off of $789,474. He says that amount should be deducted from the notional Fair Market Rent of $1.35 million, under par (c) of the rent review clause.[10]
[10] Second affidavit of Baron‑Hay 27 June 2013, pages 31 ‑ 32.
The essence of the dispute between the parties is that Homebase says, and the City denies, that in assessing Fair Market Rent, it must be taken into account that the notional lessee must construct the premises, at its cost, on the land to enable it to be put to the use to which Homebase puts the Leased Premises. There is also a dispute about the length of the term of the notional lease to be entered at a Review Date.
The parties have agreed on the identity of an expert to conduct the assessment of the Fair Market Rent. The parties also agreed that the formal appointment and conduct of that assessment should be delayed until after the resolution by these proceedings of the construction dispute.

The competing claims for declaration

By its amended originating summons dated 26 July 2013, Homebase claims a declaration in the following terms:
1A declaration that upon the proper construction of the lease between the plaintiff as lessee and the defendant as lessor dated 19 December 2003, as amended (Lease), alternatively upon the proper construction of the Lease and taking into account relevant matters, factors and variables used in proper land valuation practice, when determining 'an amount equal to the Fair Market Rent' for the purpose of clause 2.3 of the lease:
(a)the 'Term' means the period from the Review Date to 31 December 2020 and any extension thereof consequent upon the exercise of the first, alternatively the first and second options pursuant to clause 8;
(b)the effect of paragraphs (a), (b) and (c) of the definition of 'Fair Market Rent' in clause 1.1 of the Lease is to require the Fair Market Rent to be determined on the basis that the Leased Premises referred to in the definition of 'Fair Market Rent' is vacant land, being the land described on page 1 of the Lease (Land);
(c)regard must be had to the fact that:
(1)a hypothetical willing but not anxious prospective lessee would have to incur the costs of constructing permanent structural and other improvements to the Land that are necessary to put the Land to the same use as it was put by the plaintiff at the relevant Review Date under the Lease; and
(2)such permanent structural and other improvements would revert to the lessor upon the Lease ending.
The City seeks a declaration in the following terms:
1.A declaration that upon the proper construction of the lease between plaintiff as lessee and the defendant as lessor dated 19 December 2003 (Lease), as amended that:
(a)the effect of paragraphs (a), (b) and (c) of the definition of 'Fair Market Rent' in clause 1.1 of the Lease is to require the Fair Market Rent to be determined on the basis that the Leased Premises referred to in the definition of 'Fair Market Rent' is vacant land, being the land described on page 1 of the Lease (the 'Land'); and
(b)the determination of 'an amount equal to the Fair Market Rent' for the purpose of clause 2.3 means the rent which the Land would reasonably command at the Review Date in a free and open market taking into account all relevant factors, matters or variables used in proper land valuation practice on the basis that the Land was vacant and available to be let on the same terms as are contained in the Lease (including its Term) and as if the Lease included a term that the Land were to be put to the same use (and could only be put to the same use) as the use to which the Land is in fact put by the Lessee at the Review Date (whether or not that is the highest and best use of the Land).
(c)The determination of 'an amount equal to the Fair Market Rent' for the purpose of clause 2.3 does not require that regard must be had to the cost that a willing but not anxious prospective lessee would have to incur to construct the permanent structures on and other improvements to the Leased Premises (as defined in the Lease) in order to use the Leased Premises for the same purpose for which they are used by the plaintiff.
There is some common ground in these proposed declarations. What is in contention are pars (a) and (c) of Homebase's declaration, and par (c) of the City's declaration.

Construction of rent review clauses: legal principles

The parties' submissions did not debate the relevant general principles.
Both parties invited adoption of what I said in Programme Holdings Pty Ltd v Van Gogh Holdings Pty Ltd:[11]
[11] Programme Holdings Pty Ltd v Van Gogh Holdings Pty Ltd [2009] WASC 79 [36] - [41], [45], [48] ‑ [50].
The primary duty of the court in construing an instrument is to endeavour to discover the intention of the parties as embodied in the words they have used in the instrument: Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99, 109 ‑ 110; Permanent Building Society (in liq) v Wheeler (1992) 10 WAR 109, 119.
In Australian Broadcasting Commission v Australasian Performing Right Association Ltd Gibbs J set out the following general principles relevant to construction (109 ‑ 110):
'It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, "even though the construction adopted is not the most obvious, or the most grammatically accurate", to use the words from earlier authority cited in Locke v Dunlop (1888) 39 Ch D 387, 393, which, although spoken in relation to a will, are applicable to the construction of written instruments generally; see also Bottomley's Case (1880) 16 Ch D 681, 686. Further, it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument. Finally, the statement of Lord Wright in Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503, 514, that the court should construe commercial contracts "fairly and broadly, without being too astute or subtle in finding defects", should not, in my opinion, be understood as limited to documents drawn by businessmen for themselves and without legal assistance (cf Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429, 437.'
The interpretation of a written contract involves 'the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract': Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181 [11].
The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That normally requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and of the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 [40]; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 [8], [53].
An instrument should be construed so as to avoid it making commercial nonsense or giving rise to commercial inconvenience: Zhu v Treasurer of the State of New South Wales [2004] HCA 56; (2004) 218 CLR 530 [82]; Maggbury [43]. However, as Gleeson CJ, Gummow and Hayne JJ observed in Maggbury [43], what comprises 'business commonsense' in respect of a particular contract, as an apparently objectively ascertained matter, may itself be a topic upon which minds may differ and in respect of which an imputed consensus is impossible.
Where different parts of a contract appear to be inconsistent, a court will attempt to construe the contract in a way that avoids any inconsistency and renders those parts harmonious: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (109 ‑ 110); Queensland Alumina Ltd v Alinta DQP Pty Ltd [2007] QCA 387 [51] (citing Goldmile Properties Ltd v Lechouritis [2003] 2 P & CR 1 [8]).
…
In oral and written submissions, some attention was given to cases involving questions of construction of rent review clauses in various terms. These included Burns Philp Hardware Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 642; Horwitz Grahame Books Pty Ltd v Mid-City Centre Pty Ltd [1991] ANZ ConvR 139; BBC Hardware Ltd v Payce Properties Ltd [2000] NSWCA 262; (2000) 50 NSWLR 66; ADC Buildings Pty Ltd v Barana Properties (No 1) Pty Ltd [2005] NSWCA 224; and Plinth Property Investments Ltd v Mott, Hay & Anderson (1979) 38 P & CR 361. Ultimately, however, both parties accepted that consideration of the decision in questions of construction in these cases is of limited assistance. Each case must be considered in its own circumstances, especially the language and context of the clause in question. None of the cases to which reference was made involved a clause in which 'highest and best use' was specifically identified as a matter to which the valuer must have regard. Thus, to my mind, the observations of Olsson J in Bank of South Australia v SA Health Commission (1996) 65 SASR 409, 416 are apposite:
'In the course of debate I was referred by counsel to a series of dicta in cases reported in both England and Australia. They were sought to be called in aid of one contention or another. However, it must be said that all such materials must be viewed with considerable caution. Inevitably each decision has been very much the product of both the precise mode of expression of the relevant clause and also the context in which it appears.'
…
More generally, it seems to me that the nature and purpose of a rent review clause means that consideration of whether a particular construction is unjust or unreasonable will often be of little assistance. The reasons for that were explained by Ipp JA in ADC Buildings as follows [21] ‑ [23]:
'In United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 (cited by Gleeson CJ in GR Mailman and Associates Pty Ltd v Wormald (Aust) Pty Ltd (1991) 24 NSWLR 80 at 86) Lord Salmon said (at 948):
"[A rent review clause] is for the benefit of the tenant because without such a clause he would never get the long lease which he requires; and under modern conditions, it would be grossly unfair that he should. It is for the benefit of the landlord because it ensures that for the duration of the lease he will receive a fair rent instead of a rent far below the market value of the property which he demises. Accordingly the landlord and the tenant by agreement in their lease provide that at stated intervals during the term, the rent should be brought up to what is then the fair market rent. The revision clause itself lays down the administrative procedure or machinery by which the fair market rent shall be ascertained."
I accept that fairness, to the extent described by Lord Salmon, would ordinarily be the general purpose underlying a rent review clause. Nevertheless, the competing interests of ADC and Barana, as lessor and lessee, as to whether or not the land is to be valued without regard to encumbrances or restrictions on use, are irreconcilable. It is difficult - if not impossible - to attempt to resolve their opposing submissions on this issue by reference to fairness. The focus must be, rather on the actual meaning of the words used in their particular context.
As Giles JA in BBC Hardware Pty Ltd v Payce Properties Pty Ltd (2000) 50 NSWLR 66 at 72 noted, the normal commercial purpose of rent review provisions in long term leases is:
"to keep the rent in line with current property values. Changes in the locality, in the planning instruments relevant to the land, and in the economically advantageous use of the land could be expected. No doubt the lessee would want to be protected from paying a greatly increased rent while still restricted in the use of the land. But the lessor would not want to be left with an inadequate return from land of greatly increased value. Their bargain must be found in the words they used." '
As both Ipp JA in ADC Buildings and Giles JA in BBC Hardware observed, it is to the language of the clause in its context that attention must be directed.
For corresponding reasons, resort to the evident purpose of a rent review clause will often be of little assistance in resolution of a construction issue. Viewed from the tenant's perspective one might ask why rent should be paid calculated on the basis of a use not permitted by the tenant. From the landlord's perspective, however, the considerations are different. A landlord has a legitimate commercial interest in ensuring that its return on a long‑term lease reflects the market value of the land based on the (possibly changing) most advantageous use of the land.

The definition of 'Fair Market Rent' is not to be construed in isolation. Rather, it should be inserted into the operative clause, namely cl 2.3, and that clause construed in light of the insertion of the definition and in the context of the instrument as a whole.[12]
[12] See, for example, Red Hill Iron Ltd v API Management Pty Ltd [2012] WASC 323 [127].

The proper construction of 'Fair Market Rent' in cl 2.3

It should be noticed that, under cl 2.3, the Fair Market Rent is not necessarily the annual rent upon a review. Fair Market Rent is one of four amounts relevant to the determination of the annual rent on review dates from 1 January 2012 onwards. The annual rent will be the highest of the four amounts calculated or determined in accordance with pars (a) to (d) of cl 2.3. Further, the annual rent cannot be reduced upon a review: cl 2.7.
I turn to the definition of Fair Market Rent itself.
The definition involves the determination of a market rent on a specified notional basis. Its opening words refer to the rent which the premises would reasonably command in a free and open market. The ascertainment of a notional market rent involves an objective assessment of what a hypothetical willing but not anxious lessor and a hypothetical willing but not anxious lessee would agree as the rent for the premises under a lease the terms of which are determined by reference to the criteria set out in the clause.[13]
[13] Burns Philp Hardware Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 642, 644, 657 ‑ 658; Ricciardello v Caltex Oil (Australia) Pty Ltd [1991] ANZ Conv R 445.
The rent is to be determined 'taking into account all relevant factors, matters or variables used in proper land valuation practice'. It should be noticed that cl 2.4 provides a mechanism for the determination of rent reviews, of which an experienced licensed valuer makes a final and binding determination.
The definition of Fair Market Rent sets out in detail the basis on which the rent is to be determined. That rent is under a notional lease. The elements of that notional lease, using the words of the definition, can be broken up in the following way. The rent is to be determined on the review date on the basis that the Leased Premises are:
(1)vacant and available to be let;
(2)to be let on the same terms as are contained in the Lease, including its Term;
(3)as if the Lease included a term that the Leased Premises were to be put to the same use, and could only be put to the same use, as the use to which the Leased Premises are in fact put by Homebase at the review date, whether or not that is the highest and best use of the Leased Premises;
(4)without taking into account Homebase's and any sublessee's trade fixtures and fittings;
(5)ignoring any value attaching to permanent structural or other improvements to the Leased Premises made at Homebase's expense; and
(6)ignoring any value attaching to:
(a)goodwill created by Homebase's occupation of the Leased Premises; and
(b)any licence or permit in respect of the business carried on by Homebase or any sublessee on the Leased Premises.
Homebase submits, and I accept, that in this context, the reference to the Leased Premises being 'vacant' is a reference to the premises not being tenanted, rather than a reference to the land being unimproved.[14]
[14] ts 28.
Nevertheless, it is common ground that the rent is to be determined on the basis that the land is unimproved vacant land. Homebase submits, and I accept, that that is part of the effect of subpar (b) of the definition (set out in [15] above).
The City submits that in the definition of Fair Market Rent, the Leased Premises does not bear the defined meaning in cl 1.1 of the Lease - as the land and all buildings and improvements - but refers only to the land.[15] I agree that the notional lease is of unimproved land. In my view, that arises from the proper construction of the definition as a whole (inserted into cl 2.3) and, in particular, from subpar (b) of the definition. One way of expressing that construction may be to say that in cl 2.3, Leased Premises refers only to the land and not to the improvements.
[15] ts 66 ‑ 67, 80.
It is also not in dispute that the words outlined in [39(3)] above have the effect that:
(a)the Fair Market Rent is to be determined by reference to a hypothetical lessee who or which is limited to using the Leased Premises for the use to which the Leased Premises are in fact being put by Homebase at the Review Date; and
(b)that notional lessee is positively obliged to put the premises to that use.
That will be so regardless of whether the premises could otherwise potentially be put to a higher and better use (which could, by definition, have led to a higher rental valuation).
Under the terms of the Lease, the City has no obligation to make any structural or other improvements to the premises. Consequently, if under a notional lease, the lessee wanted or needed a structural improvement to the premises, according to the terms of the lease, it would have to erect the improvement itself. Under cl 4(f), it would need prior written consent of the City to do so.
At the time of entering the Lease, there were buildings and improvements on the land, constructed by Homebase from 1987 to 1988, and Homebase had been using those buildings for the purpose of bulky goods display rooms, offices and showrooms. Without buildings and improvements, the land could not be used for those purposes. It can be inferred that that was known to the parties when they entered the Lease.
Under cl 4(q) of the Lease, imported into the notional lease, any permanent structural or other improvements made by the lessee would revert to the City at the end of the Lease.
Thus, in the notional lease to be used to assess Fair Market Rent as at 1 January 2012:
(a)the land is taken to be unimproved vacant land, and the value of the actual improvements on the land is to be ignored;
(b)the lessee is obliged to use the premises in the way being used by Homebase at the review date, namely for bulky goods display rooms, offices and showrooms;
(c)the lessor is not obliged to construct any buildings or improvements;
(d)it would be necessary for structures to be constructed on the notionally vacant land in order for it to be used for the sole permitted and required purpose; and
(e)any permanent structural or other improvements made by the lessee would revert to the City at the end of the lease.
To my mind, it follows from these features that it is necessarily a further element of the context in which the notional rent is to be determined that the hypothetical willing but not anxious prospective lessee would have to incur the cost of constructing the permanent structures and other improvements to the land that are necessary to put it to the same use as it was being put by Homebase at the relevant review date, and, at the end of the lease, those improvements would belong to the City. That further element is a matter to which a valuer must have regard, in the same way as the valuer must have regard to the elements summarised in (a) ‑ (e) of the previous paragraph.
That conclusion supports the making of a declaration in terms of par (c) of Homebase's amended originating summons.
One element of the notional lease is that it is on the same terms as are contained in the Lease, 'including its Term'. The parties are in dispute as to what is meant by the Term in that context. The City submits that the Term means the period of 17 years from the review date, together with two option periods of five years. Thus, the City submits that the Term means the period of 27 years from the review date. Homebase submits that the Term means the period of 27 years commencing from 1 January 2004, and thus ending on 1 January 2031.
For the reasons that follow, I accept Homebase's submission.
The notional lease picks up the terms of the Lease 'including its Term'. The use of the word 'its' makes plain that it is the Term (as defined) of the Lease that is imported into the notional lease, and suggests that the single identifiable term of the Lease is to be imported into the notional lease.
The City emphasises that the definition of Fair Market Rent refers to the Term, not to the remainder of the Term. However, the significance of that must be viewed in the context of how the Term is described and defined in the Lease. The Term is defined in cl 1.1 to mean 'the term of this document and includes any renewal pursuant to clause 8'. That definition of the Term picks up the term of the Lease stated on page 1 of the Lease instrument, together with the term of any options exercised. Page 1 states in note 5 that the term of the Lease is 'seventeen (17) years commencing from the 1^st day January 2004'. Thus, the term is stated as a period of years commencing on a stipulated date, not simply a specified period of years. The structure and language supports the view that what is stated in note 5 should be read as all being part of the term, rather than as being a statement of the term coupled with an identification of the commencement of the term.
The Further Terms under any options are also defined and expressed in terms of a period of years commencing on a stipulated date, not simply as a period of years.[16]
[16] Clause 8.1 of the Lease.
In my view, that meaning of the word Term (seventeen years commencing on 1 January 2004) applies not only in the definition of Fair Market Rent (when inserted in cl 2.3), but also in other places in the Lease where the Term is referred to. See, for example, cl 4(q), cl 8.3, cl 8.5, cl 8.7 and cl 8.8. In those other clauses, that meaning of the Term seems to me to fit more naturally than the meaning advanced by the City. While it would be open to construe the defined term 'the Term' differently when it is inserted in different clauses, given that 'the Term' is given a single definition, a consistent construction of the Term is preferable.
For these reasons, and taking into account what follows, in my opinion, on a proper construction, Fair Market Rent is to be determined by reference to a lease, the term of which expires on 2 January 2021, subject to two options which, if exercised, will mean the Term expires on 2 January 2031.
The City submits that the use of the word 'were' in two places of the main part of the definition of Fair Market Rent, in contrast to the use of the word 'are' in the phrase 'the use to which the Leased Premises are in fact put by the Lessee at the Review Date', reveals an intention that the Term of the Lease is to be assessed as from the date of commencement of the Lease, not from the review date.[17] I do not accept that submission. To my mind, the decision to use the words 'were' and 'are' in those contexts is explicable for different reasons, of a linguistical or grammatical character. The word 'were' is used in the conditional or subjunctive tense. The word 'are' is used in the definition because it describes the present state of things as at the review date.

Contrary to commercial common sense?

[17] ts 88 ‑ 90.

The City submits that Homebase's preferred construction leads to a result that offends commercial common sense, or is otherwise unlikely to have been intended by the parties. The City makes that submission in respect of the proper construction of 'Term' in the definition, and also, more generally, as to the question of whether regard must be had to the fact that a prospective lessee would need to construct improvements at its own cost.
The City submits that the combined effect of Homebase's construction is that deductions from the ground rent to take account of the notional costs of construction by the lessee would need to be made, and those deductions would increase at each review date, because the costs of construction would need to be recovered over increasingly shorter periods. This would lead to an ever‑reducing Fair Market Rent.[18] The defendant further submits that this could result in the lessee paying less than the 'ground rent', which no lessee could expect.[19]
[18] Defendant's written submissions 23 July 2013 [35], ts 91 ‑ 92.
[19] Defendant's written submissions 23 July 2013 [39].
The City further submits that:[20]
(a)Homebase's construction of the defined term 'Fair Market Rent' departs from any reasonable conception of a fair market rent;
(b)absent clear words to the contrary, when the parties define a term the parties should be taken to have intended a meaning reflecting the core concept or meaning of the term used and defined; and
(c)consequently, the City's construction should be preferred over Homebase's construction.
[20] ts 92 ‑ 93.
Homebase's construction may appear to be capable of producing outcomes that would seem, on the face of it, to be surprising. However, as I have said, the nature and purpose of a rent review clause means that any consideration of whether a particular construction leads to a result that is unjust or unreasonable will often be of little assistance. The competing interests of the lessor and the lessee are irreconcilable. The Lease was entered into in the context of an existing lease between these parties, in different terms, including as to rent and term, in respect of which there was a dispute about a rent review. The parties' opposing contentions should not be resolved by what seems fair or just or reasonable, but by reference to the language of the clause in its context.[21]
[21] ADC Buildings Pty Ltd v Barana Properties (No 1) Pty Ltd [2005] NSWCA 224; (2005) 12 BPR 23,717 [21] ‑ [23]; BBC Hardware Pty Ltd v Payce Properties Pty Ltd [2000] NSWCA 2625; (2000) 50 NSWLR 66, 72, applied in Programme Holdings [48] ‑ [50].
Further, it is to be borne in mind that Fair Market Rent does not necessarily constitute the annual rental in this Lease. Rather, it is only one of four methods, the highest of which will determine the annual rent.
Further, the adoption of any particular valuation methodology by a valuer cannot be assumed. Nor can an assumption be made about the means by which a valuer might have regard to the fact that a notional prospective lessee must incur construction costs, or about the weight, if any, to be ultimately accorded to that fact in the valuation. Those are matters for the valuer to determine, exercising his or her skill based on his or her experience.
Acceptance of these submissions would lead to the adoption of the City's preferred definition of the Lease's Term, as incorporated in the notional lease. To my mind, for the reasons given in [52] ‑ [55], that would involve departure from what is indicated by the text, language and structure of the definition (when inserted in cl 2.3), read in light of the instrument as a whole. Taking into account what I have said in [61] ‑ [63], I am not persuaded that such a departure is justified.
That conclusion supports the making of a declaration in terms of par (a) of Homebase's amended originating summons.
For these reasons, I do not accept the City's submissions that Homebase's construction should be rejected on the ground that it offends commercial common sense or departs from a reasonable conception of fair market rent.

The purpose of the clause

The City submits that:[22]
(a)the opening main part of the definition of Fair Market Rent reveals the purpose of the clause;
(b)the purpose of the definition is to ensure that the rent is assessed on the basis that the land is vacant (in the sense of unimproved) and available to be let on the same terms as the Lease;
(c)the subparagraphs which follow the main part of the definition are intended to give effect to that purpose; and
(d)to use valuation terminology, the purpose of the definition of Fair Market Rent is to cause the Fair Market Rent to be assessed on the basis that the Lease is a ground lease, not a lease of improved land.
[22] Defendant's written submissions 23 July 2013 [28] ‑ [30].
As I have said, I agree that Fair Market Rent is to be assessed on the basis that the land is vacant and unimproved. I do not consider that that is brought about by the first part of the definition. In its context, the word 'vacant' means untenanted, not unimproved. It is subpar (b) of the definition that means that Fair Market Rent is to be assessed on the basis that the land is unimproved.
In any event, I do not accept the City's fourth proposition summarised above as a complete statement of the purpose of the definition of Fair Market Rent. In my view, that proposition involves attempting to identify the purpose of the clause at too high a level of generality, and does not sufficiently accommodate the various detailed elements of the basis on which the rent is to be assessed under the clause. In the context of a detailed provision such as the definition of Fair Market Rent, care is needed in attempting to discern a general purpose to ensure that any such general purpose properly reflects and accommodates the detailed language and elements of the clause. Identification of a general purpose without sufficient regard to those detailed elements, and then attempting to fit and construe the detailed elements so as to be consistent with the general purpose, may be conducive to error.
I agree that part of the purpose of the definition of Fair Market Rent, and in particular par (b) of that definition, is to ensure that the lessee does not have to pay an increased rent derived from the value attaching to the structures and improvements that the lessee had made, before entry into of the Lease, at its own expense. But that is not the whole of the purpose of the clause. Regard must be had to all of the elements of the definition, including that the notional lessee must use the land for the purpose for which it is being used by Homebase at the review date.

Other submissions of the City

The City's written submissions analyse the valuations that have been carried out to date by Mr Ray of Knight Frank and Mr Kennedy of Jones Lang LaSalle, and focus on the question of whether the adjustment made by Mr Kennedy on account of the need for the notional prospective lessee to recover the cost of constructing improvements is justified.[23] Although the differing valuations by Mr Kennedy and Mr Ray led to the dispute that gives rise to the occasion for these proceedings, the determination of these proceedings does not require or involve expressing a choice or preference between these two valuations. Rather, these proceedings relate to, and will determine, the proper construction of the Lease, in particular, the definition of Fair Market Rent when inserted in cl 2.3, in a way that will inform, in a binding way, the valuation that is to be done by the valuer agreed between the parties. That valuer will not be bound to adopt the approach taken by either Mr Ray or Mr Kennedy, and it cannot be assumed that the valuer will take the same or similar approach as either of them.
[23] Defendant's written submissions 23 July 2013 [31] ‑ [36].
The City submits that Homebase's construction is inconsistent with the express contractual requirement that Fair Market Rent be determined on the basis that the Leased Premises are vacant and that the value attaching to any permanent structures or improvements is to be ignored.[24] I do not accept that submission. I see no conflict or collision between these requirements and the construction advanced by Homebase, which I accept. To the contrary, that construction seeks to give effect to both requirements, together with the other elements of the definition of Fair Market Rent.
[24] Defendant's written submissions 23 July 2013 [33], ts 80 ‑ 81.
The City also submits that Homebase's construction should be rejected because it is evident that the costs of notionally constructing improvements to the land will not in fact be incurred again by Homebase. As such, Fair Market Rent should not be determined on the basis that Homebase will incur further costs which both parties know will not in fact be incurred.[25] I reject this submission. The fact that Homebase will not incur the costs of constructing improvements again is beside the point. The definition of Fair Market Rent does not invite attention to Homebase's position. It invites attention to the position of the hypothetical prospective lessee.

Is the declaration based on an impermissible assumption?

[25] Defendant's written submissions 23 July 2013 [40].

The City submits that the declaration sought by Homebase should be refused because the declaration, if made, would preclude the valuer, who is to determine the Fair Market Rent and the annual rental, from using a direct comparison method. For the reasons that follow, I reject that submission. In short, I do not accept that the declaration sought by Homebase would preclude a valuer from using the direct comparison method.
Before making any declaration about the proper construction of cl 2.3 and the definition of Fair Market Rent, the court must be careful to ensure that the declaration does not intrude into a domain that is properly for the valuer. If I were satisfied that the declaration would preclude a valuer from using the direct comparison method, the making of the declaration would, on that account, be inappropriate.
I am satisfied that the declaration sought by Homebase does not preclude a valuer from using the direct comparison method of valuation in assessing the Fair Market Rent. More generally, the declarations sought do not prescribe in any way the valuation methodology to be adopted by the valuer. That is a matter for the valuer, and the declaration would leave it to the valuer.
By definition, if the valuer used the direct comparison method, the valuer would need to assess the extent of the comparability of any possible comparable lease with the subject notional lease. In making that assessment, the valuer would be required to take into account that under the subject notional lease, the lessee would have to incur the costs of construction of the necessary improvements, but the existence of that requirement would not preclude the adoption of the direct comparison method.
The City submits that the declaration sought by Homebase would compel the valuer determining the Fair Market Rent to make a deduction of an unspecified amount, on account of the notional construction costs, from what would otherwise be the ground rent. The City submits that the language of the declaration 'regard must be had' requires the valuer to give effect to the fact that the notional lessee would have to incur construction costs by making a discount. On that submission, it would not be enough to satisfy the terms of the declaration to take the construction costs into account, in the sense of considering it, before deciding not to give any discount on account of it. Further, the City submits that that submission is reinforced by consideration of the way in which the dispute between the parties emerged. Mr Ray has done a valuation based on ground rent without any deduction. The City submits that the declaration is not to be construed as, in effect, permitting a valuer to take the approach taken by Mr Ray.
In support of its submission, the City referred to the decision of the Full Court in Re Michael; Ex parte Epic Energy (WA) Nominees Pty Ltd.[26] That case involved the construction of a statement in a statute that the regulator 'must take … into account' enumerated matters in assessing a proposed access arrangement with a view to reaching a decision whether or not to approve it. The court found the statement required the regulator to take the stipulated matters into account and give them weight as fundamental elements.
[26] Re Michael; Ex parte Epic Energy (WA) Nominees Pty Ltd [2002] WASCA 231; (2002) 25 WAR 511 [55].
The meaning to be given to phrases such as 'must take into account' or 'have regard to' depends on context. 'Have regard to' is capable of conveying different meanings depending on its context.[27] It can simply mean to give consideration to something.[28] Re Michael was decided in its statutory context. It does not assist the City's submission.
[27] Re Michael [55]; Singh v Minister for Immigration and Multicultural Affairs [2001] FCA 389; (2001) 109 FCR 152 [54].
[28] Singh [54]; Re Michael [55].
I do not accept these submissions of the City. As I have said, the declaration proposed does not require the adoption of any valuation methodology. It requires the valuer to have regard to certain identified matters. It does not say anything about the means by which the valuer might have regard to those matters, or about the weight, if any, to be ultimately accorded to those matters in the valuation. Those are for the valuer to determine, applying the valuer's experience and skill.
It would not be open to a valuer to adopt the approach taken by Mr Ray in the face of the declaration sought by Homebase. Mr Ray's valuation of 3 June 2011 did not make any mention of the fact that a hypothetical willing but not anxious prospective lessee would have to incur the costs of constructing the permanent structural and other improvements to the land that are necessary to put that land to the same use as it was put by Homebase at the relevant review date under the Lease. In his letter of 26 April 2012, Mr Ray explained why he did not agree with the discount that had been made by Mr Kennedy of Jones Lang LaSalle on account of the costs of construction.[29] In essence, he said that the costs of construction needed to be disregarded in light of the definition of Fair Market Rent. In other words, his view was based upon his construction of the Lease. That was further made apparent by his evidence in cross‑examination.[30] The result of the declaration sought by Homebase would be to preclude a valuer from proceeding on the construction adopted by Mr Ray.
[29] Affidavit of Baron‑Hay 13 August 2012, pages 89 ‑ 92.
[30] ts 61 ‑ 62.
I have been mindful of the need to ensure that no declaration is made that is based on any impermissible assumption about what approach is to be taken in the process of the valuation. I have dealt with and rejected all such assumptions as were identified by the City in its submissions. I am satisfied that the declarations sought do not entail any such impermissible assumption.
In Burns Philp Hardware v Howard Chia, Mahoney JA said that it is a proper use of the declaratory jurisdiction to declare whether a particular fact is or is not to be taken into account in determining rent under a rent review clause.[31] In the circumstances of this case, and for the reasons I have given, I consider it appropriate to make a declaration in the terms sought by Homebase.
[31] (1987) 8 NSWLR 642, 644.

Expert evidence

Expert evidence adduced by Homebase was provisionally admitted over the City's objection. Homebase relied on expert reports prepared by Mr David Liggins and Mr Robert Richmond, both of whom are experienced valuers. Homebase relied on the evidence if, and only if, the issues of construction raised by the competing declarations could not be resolved by the court as a matter of proper construction.
The City provisionally led some expert evidence on which it relied if its objection to Homebase's expert evidence was overruled.
Homebase proposed and the City agreed that the expert evidence should be provisionally received. Cross‑examination of the experts proceeded on that basis.
For the reasons I have given, I consider that the questions the subject of the competing declarations can be resolved as a matter of proper construction of the Lease. There is no occasion for having regard to the expert evidence.
More generally, I am unable to identify a scenario in which the questions raised by the competing declarations would not be resolved as a matter of construction of the instrument. Consequently, I uphold the City's objection to Homebase's expert evidence.
If I were wrong in that respect, I would uphold the further objection to Mr Richmond's evidence on the ground that it is based on an assumption that the Lease is to be construed in accordance with Homebase's construction.[32]
[32] Expert Report of Robert Richmond 28 June 2013 (exhibit 1) [9(2)], ts 43 ‑ 44.

Conclusion

For these reasons, I would make a declaration substantially in the terms sought by Homebase.