Lend Lease Funds Management Limited and Golden Maple Pty Ltd
[2012] WASAT 119
•11 JUNE 2012
JURISDICTION : STATE ADMINISTRATIVE TRIBUNAL
STREAM: COMMERCIAL & CIVIL
ACT: COMMERCIAL TENANCY (RETAIL SHOPS) AGREEMENTS ACT 1985 (WA)
CITATION: LEND LEASE FUNDS MANAGEMENT LIMITED and GOLDEN MAPLE PTY LTD [2012] WASAT 119
MEMBER: MR T CAREY (MEMBER)
MR A MACNAGHTEN (SESSIONAL MEMBER)
HEARD: 11 MAY 2012
DELIVERED : 11 JUNE 2012
FILE NO/S: CC 1736 of 2011
BETWEEN: LEND LEASE FUNDS MANAGEMENT LIMITED
Applicant
AND
GOLDEN MAPLE PTY LTD
Respondent
Catchwords:
Retail shop lease Market rent review Referral to Tribunal for determination Retail shop 'to let on similar terms as are contained in current retail shop lease' Whether residue only or whole of lease term to be assumed as available Comparison with other tenancies' rentals
Legislation:
Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA), s 11(2), s 11(2)(a), s 11(5), s 15
Result:
Market rent determined
Category: B
Representation:
Counsel:
Applicant: Mr M FosterKey (Acting as Agent)
Respondent: Mr D Liggins (Acting as Agent)
Solicitors:
Applicant: Clayton Utz
Respondent: David Liggins (Valuer)
Case(s) referred to in decision(s):
Nil
REASONS FOR DECISION OF THE TRIBUNAL:
Summary of Tribunal's decision
The parties to a lease had been unable to agree on an amount for market rent for the purpose of a rent review, and their disagreement was referred to the Tribunal to determine the rent payable as a result of the market review.
The figure adopted by the lessee reflected its reliance upon the application of the statutory definition of market rental in such a manner that only the residue term of three years was available to the notional prospective tenant, which would result in the achievable rent figure being significantly deflated. By contrast, the lessor's higher adopted figure was predicated, among other things, upon the whole of the original lease term (seven years with a three year option) being available.
The Tribunal preferred the assumption of the longer lease term being available, in order to arrive at a consistent market rental for the entire lease duration. It noted, in any event, that similar limitations applying to the subject lease, including but not limited to its remaining duration, applied to a greater or lesser extent in other tenancies considered as the most closely comparable in the same shopping precinct.
The Tribunal went on to make its market rental determination, having regard to all available comparison evidence, and in particular to the evidence of the three premises considered by both parties to provide the closest comparisons. Even then, factors such as larger size and inferior location resulted in a rental, in square metreage terms, some 20% lower than the most directly comparable tenancy.
Introduction
The respondent, Golden Maple Pty Ltd (lessee), leases premises from the applicant, Lend Lease Funds Management Limited (lessor). The premises are situated at 'Harbour Town', a twolevel retail shopping precinct in West Perth described as a retail factory outlet centre. The lessee conducts a licensed Japanese restaurant/café from the leased premises on the second level.
The parties have been unable to agree a figure for the rent payable upon a market review as at 25 June 2011. This date is the commencement date of the further term arising upon the lessee's exercise of an option for renewal of the lease after the expiry of the original term of seven years. The further term is for three years.
The parties have each appointed their own licensed valuer and rely upon their respective valuers' assessment of the market rent for the premises at the relevant date. The applicant's valuer assessed the current market rent to be $147,700 per annum, based upon a square metre rental of $1,000. The respondent's valuer, on the other hand, arrived at a figure of $118,160 per annum, at the rate of $800 per square metre. The valuations are both semigross and exclusive of GST.
The lessor referred the question as to the rent payable as a result of the market review due on 25 June 2011 to the Tribunal for determination under s 11(5) of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (CTRSA Act).
Issues
The differences between the parties are attributable to variations in their respective comparisons between the subject premises and the most directly comparable premises for the purposes of ascertaining the market rent. Those comparator premises are, essentially, the same three food and beverage retail shops operated at Harbour Town.
Whilst it is part of the Tribunal's task to extrapolate from, amongst other things, the data of other comparable premises to arrive at its determination, in the circumstances of this matter, the outcome will be influenced significantly by its attitude to the parties' competing propositions concerning the correct approach to the valuation task.
The lessee submitted that the statutory requirement for a market rental that the shop be assumed to be 'vacant and to let on similar terms as are contained in the current retail shop lease' means that the hypothetical prospective lessee is being offered a lease for three years with no options, with the permitted use of a licensed Japanese restaurant. Amongst other consequences, the fitout cost (high in the case of restaurants) would need to be amortised over the relatively short period of the lease. This would, it is argued, place a significant deflationary factor upon the rent that a lessee would be willing to pay. Such a factor is in evidence in the market value figure adopted by the lessee.
The lessor's response is that its adopted rate is fair and reasonable, given the comparison with the most pertinent leasing transactions in Harbour Town, both on a passing rental and occupancy cost basis. It rejects the notion that the figure for market rental is to be assessed by reference to only the remaining three years of the lease, and points out that at least one of the comparator leases is for an identical total duration with a similar remaining term.
We will commence by considering whether, as a general proposition, the statutory requirement relied upon by the lessee has the deflationary impact for which it asserts. We will then make some observations on how we consider the requirement applies in the circumstances of the present case. Finally, we will state our concluded view of the market rent, having regard to the comparator evidence.
Implications of the statutory definition of market rent
Section 11(2) of the CTRSA Act is to the following effect:
If a retail shop lease provides for the review during the currency of the retail shop lease of the amount of rent payable under the retail shop lease having regard to the market rent of the retail shop concerned
(a)that market rent shall, for that purpose, be taken to be the rent obtainable at the time of that review in a free and open market as if, all the relevant factors, matters or variables used in proper land valuation practice having been taken into account, that retail shop were vacant and to let on similar terms as are contained in the current retail shop lease;
…
The subject lease does contain provision for review of the rent payable having regard to the market rent (in the definition of 'Current Market Rent' in cl 3.1 and the lessor's right to a market review contained in cl 3.2). That being the case, the statutory definition prevails over the definition in the lease: s 15 of the CTRSA Act. The lease definition itself acknowledges this by making its definition expressly subject to the CTRSA Act, if (as it does) that Act applies.
The statutory definition is similar, although not identical, to those in analogous legislation in other States. Whereas some legislation speaks of the lease providing for similar use of the premises as the subject lease, with or without reference to the provisions of the lease, the CTRSA Act refers simply to the subject premises being 'to let on similar terms'. Although it might be thought that such a wide expression supports the lessee's contentions that the assumed term is limited to the residue of the term subsequent to the review, we believe that caution is required.
The problem arising from including the actual balance of the lease term at the review date as one of the terms of the lease to be considered by the notional prospective lessee is discussed by the learned author of Lang's Commercial Leasing in Australia Volume 1 (CCH Australia Limited) (Lang) in the following passage (at 26420):
It is well established by judicial decisions that the duration and the terms and conditions of a commercial lease are relevant for, and should be taken into consideration in, a rent review. Factors such as the existence and duration of options for renewal, the existence and frequency of rent review, the existence of severe limitations on user and on assignment, are all relevant when current market rent is determined on a rent review, as rendering the premises more or less attractive for prospective lessees. This author firmly holds the view that the parties and valuers should take the lease terms and conditions as they actually are for the purpose of a rent review and no assumptions should be made relating to them.
There is an important exception to that with regard to the duration of the lease. The purpose of a rent review is to keep the level of the rent up to (say) current market rent throughout the lease term. However, the duration of the balance of the lease term and options for renewal are relevant to the lessee's security of tenure and the gradual reduction of the lease term throughout its duration tends to reduce the rent on review, particularly in later reviews as the lease is coming to an end within a relatively short period of years. That may not be the position with all commercial premises, but is likely to be the situation in many commercial leases, relating to a variety of uses. It is suggested that this justifies some assumptions to be made relating to the balance of the lease term, to cancel out the depreciating effect on successive rent reviews of the decreasing duration of the lease term.
We concur with the comment in Lang that the purpose of a rent review is to keep the level of rent at the level of an assessed market rent for the entirety of the review period. To the extent that analogous legislation in other States is primarily concerned that a comparison based upon similar usage of the subject premises, such a result would follow. Although the draftsman of the Western Australian legislation has used language which is, on its face, wider, the expression 'similar terms' should not be interpreted as though it were 'identical terms'.
Surprisingly, there is no case authority to assist with interpretation of the words used in s 11(2)(a) of the CTRSA Act. In those circumstances, we accept a suggestion in Lang subsequent to the passage reproduced above by adopting an assumption that the hypothetical prospective lessee has on offer a lease with a term of the original lease, including any options. In the context of the subject lease, this means a lease of seven years with a three year option. This will, in our view, promote the theoretical objective of a consistent market rental for the entire duration of the lease.
Application of the statutory definition in the circumstances of the subject lease
Although we will descend to the details of the evidence of the comparator leases, and the extent to which they are similar to, or different from, the subject lease, under the next heading, it is worth noting that the most closely pertinent comparator tenancy is of similar limited duration. In addition, they all share similar imposts, such as percentage rental, outgoings and promotional levy.
Bearing in mind the imprecise nature of market valuation, the perceived disadvantages facing the hypothetical prospective lessee of the subject premises were largely present when the rental in each of the three most pertinent premises (Pure and Natural, Burger Edge and Croissant Express) was negotiated. In addition, the presumption, favourable to the lessee, that the premises for lease are vacant was the case in two of them.
What follows, then, is our analysis, based upon comparisons with, and distinctions drawn regarding, the comparable rental evidence, in order to arrive at a figure for market rent within the meaning ascribed by s 11(2) of the CTRSA Act.
Rental evidence comparison
We have had regard to all of the comparison evidence upon which both valuers have commented. The comparison evidence is most neatly encapsulated in a schedule in the Savills Report for the lessor, where 13 tenancies are shown. Some additional comments appear in the report of Mr David Liggins for the lessee.
We accept, as the most directly comparable evidence for market review purposes, the market review of Pure and Natural occurring in September 2010. The rental, settled by agreement, was determined at $1,102 per square metre, in total, $92,000 per annum. Of particular significance for present purposes, the Pure and Natural tenancy is located on the ground floor mall area; is 83.5 square metres; and occurred on the exercise of the only option of four years, upon the expiry of the original six year term. As we have indicated, we consider the terms to be so similar as to have the effect that if, contrary to what we have concluded, only the remainder of the term at the review date is to be considered, the lessee of Pure and Natural was confronted with a similarly limited remaining tenure.
We believe that, when compared with the subject premises and lease, the Pure and Natural result is impacted by three distinct inflationary factors. Firstly, we regard the location as being superior to the subject premises. Although the lessor pointed out that the premises are located in a prominent corner location and that the first floor is served by a direct access throughway to the upper car park, we are satisfied that the natural advantage flowing from a street level location applies. Secondly, consistent with conventional planning principles, we regard a premium attaches to the per metreage outcome, based upon the significantly smaller area when compared with the subject premises' 147.7 square metres. Thirdly, the rent was negotiated with an existing tenant, giving rise to a presumption that a distortion occurred by reason of the special value placed by the tenant on the premises (it is for this reason that the statutory definition makes reference to the premises being vacant).
Taken cumulatively, we consider the three factors we have identified justify a discount of approximately 20% on the per square metre rental figure for the subject tenancy in comparison with Pure and Natural.
The next most closely comparable case is that of Burger Edge. The rent was set in August 2011, at the commencement of the lease of six years, with no options, at $1,278 per square metre, in total, $125,000. At 97.8 square metres, the Burger Edge premises are again smaller than the subject premises, and are located on the ground floor with frontage to the main entrance of Harbour Town: a superior location. The striking of the rent of the Burger Edge premises occurred at a time most proximate to the relevant market review date for the subject premises of all the tenancies in the centre.
The third most comparable other tenancy is that of Croissant Express. The Croissant Express lease is for five years, with the first and only market rent having been set in 2009 on commencement. The commencement rent was $1,068 per square metre, in total, $65,582 per annum. The tenancy is considerably smaller than the subject premises at 61.4 square metres, and, like it, is situated on the first floor. The age of the striking of the rent in this case contributes to its lower relative comparison value (although, in per square metre terms, it most closely proximates our determination for the subject premises).
In arriving at the figure we have for the lessee's rent, we have had regard to all of the comparator evidence, but, in particular, to the three most pertinent comparators listed above.
We accept the lessor's submission that market rentals for Harbour Town have increased significantly since the lessee commenced in occupation as a tenant in June 2004. We do so based on the evidence of rentals struck on the basis of the market in recent times.
We have, however, noted the superior locations of Pure and Natural and Burger Edge, and the smaller areas of each of the three most comparable tenancies.
We reiterate that the task of the Tribunal is to arrive at an appropriate figure for the market rent by applying the statutory definition. We have not therefore had regard to any valuations arrived at by reason of the accrual of CPI or other nonmarket review mechanisms. Nor have we had regard to the fact that the subject tenancy and other comparable tenancies are liable for percentage rental on a particular basis. We have also not taken into account the relative outcomes of the various tenancies on an occupancy cost analysis, as urged upon us by the lessor. Although perhaps providing a measure of comfort that a particular outcome falls within what is regarded as an acceptable rental from the perspective of the longterm viability of a tenant, the Tribunal must be concerned with the different question of ascertaining a marketderived figure for rent.
We have concluded, based on all the evidence, that the appropriate figure for market rent for the subject premises as at the market review date of 25 June 2011 is $131,453 semigross inclusive of GST, calculated at the rate of $890 per square metre.
Order
The Tribunal shall issue an order in the following terms:
1.The rent payable as a result of the review as at 25 June 2011 is $131,453 semigross inclusive of GST, calculated at the rate of $890 per square metre.
I certify that this and the preceding [34] paragraphs comprise the reasons for decision of the State Administrative Tribunal.
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MR T CAREY, MEMBER
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