Macerlean v Notfair Pty Ltd - [2013] SADC 80

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil: Minor Civil Review)
MACERLEAN v NOTFAIR PTY LTD
[2013] SADC 80
Judgment of His Honour Judge Tilmouth
20 June 2013
LANDLORD AND TENANT - RENT - PROVISIONS AS TO RENT IN AGREEMENT FOR LEASE OR LEASE - RENT REVIEW CLAUSES
APPEAL AND NEW TRIAL - APPEAL - PRACTICE AND PROCEDURE - SOUTH AUSTRALIA
A Motel lease between the parties contained a clause that reserved to the lessor the right to seek a market review of the rent.
HELD: (1) The clause was invalid under s 22 of the Retail and Commercial Leases Act 1995 (SA) to the extent that it reserved to one party a discretion to decide a method of calculating rent.
(2) Since the lease provided for the rent to be reviewed according to current market value, s 23 of the Retail and Commercial Leases Act applies and therefore supplies a statutory mechanism for such review.
Retail and Commercial Leases Act 1995 s 3, s 20A, s 22, s 23, s 25, s 35, s 68; Magistrates Court Act 1991 s 38(4), s 38(6), s 38(7); District Court (Civil) Rules 2006 Rule 6R 117(2)(b), 6DCR 279A; Acts Interpretation Act 1915 s 21, s 22, referred to.
Thomas Brown & Sons Ltd v Fazal Deen (1962) 108 CLR 391; McFarlane v Daniell (1938) 38 SR (NSW) 337; Forlyle Pty Ltd v Tiver (2007) 252 LSJS 387; [2007] SASC 464; Lindner v Murdock's Garage (1950) 83 CLR 628; NZI Insurance Australia Ltd v Baryzcka (2003) 85 SASR 497; Khuu and Lee Pty Ltd v Corporation of the City of Adelaide (2010) 108 SASR 277; Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355, considered.

MACERLEAN v NOTFAIR PTY LTD
[2013] SADC 80
The proceedings

This is an application for the review of a judgment given in a minor civil action in the Magistrates Court on 13 February 2013. The applicant is the lessor of a Motel located on the shore of Lake Albert at Meningie in the south east. The respondent is the lessee. The lessee applied to the landlord for a rent review according to current market value. As the parties could not agree, the lessee brought proceedings in the Magistrates Court seeking orders obliging the lessor to execute instructions to a valuer so that the rent could be reassessed. The learned Magistrate who heard the matter effectively granted the application.[1] The landlord now seeks an order that this decision be overturned and the application dismissed.
[1] Notfair Pty Ltd v Brian Benedict Macerlean and Ann Macerlean, AMCCI-12-4212.
Statutory framework
The jurisdiction to try such actions is vested in the Magistrates Court by s 68(1) of the Retail and Commercial Leases Act 1995 (SA). The right of review to the District Court is found in s 38(6) of the Magistrates Court Act 1991 (SA). Section 38(7) thereof furnishes the District Court with powers of affirmation and rescission as well as the capacity to ‘substitute a judgment that … [it] … considers appropriate’. There is no power of remission except in respect of reviews against default or summary judgments (s 38(7)(d)(iii)).
Rule 6 DCR 279A of the District Court (Civil) Rules 2006 (SA) provides that such reviews must be commenced within 21 days of the date of judgment. The notice of appeal herein was filed on 7 March 2013. Under Rule 6R 117(2)(b) of the District Court (Civil) Rules, the court retains the power to extend the time for taking any step in a proceeding. As the notice was filed just out of time, and given the importance of the issue to the parties and the wider issues involved concerning the proper construction of certain provisions of the Retail and Commercial Leases Act – as will appear later – the respondent’s concession that an extension of time was warranted is entirely appropriate.
As mentioned, the subject lease is in respect of the Waterfront Motel. The nomenclature employed by the Retail and Commercial Leases Act is that of ‘retail shop leases’. As a ‘retail shop’ is defined in s 3 thereof as ‘business premises at which services are provided to the public’, there can be no doubt that the subject lease falls within the ambit of the Retail and Commercial Leases Act.
The lease
The lease was entered into originally in July 1995 for a period of five years. It was once assigned and has been renewed several times since. It has a potential life span expiring in June 2019.
The lease itself provides a ‘multiple method’ mechanism for rent review in clauses 4.2 and 4.3 thereof which provide as follows:
The Rent Review
4.2The Rent payable during each new Fixed Rent Period shall be reviewed as at the beginning of the new Fixed Rent Period by multiplying the Rent payable during the first Fixed Rent Period at the beginning of the Term (“the Base Rent”) by a fraction, being the index number of the Consumer Price Index for Adelaide (All Groups) (“the C.P.I.”) for the last quarter which was published before the commencement of the new Fixed Rent Period over the index number of the C.P.I. for the last quarter which was published before the date of commencement of the Term.
4.3Notwithstanding the provisions of clause 4.2 of this lease, if the Lessee considers that the Rent varied by reference to the Consumer Price Index is unduly onerous, the Lessee by notice in writing to the Lessor not later than six (6) weeks before the first day of the forthcoming Fixed Rent Period, may require the Rent to be the current market rent and, if the current market rent is not agreed within one (1) calendar month before the first day of the forthcoming Fixed Rent Period, then the Rent shall be determined by a valuer:-
(a) agreed upon by the Lessor and the Lessee or, failing agreement by twenty-one (21) days before the first day of the new Fixed Rental Period,
(b) appointed for that purpose at the request of either or both of the Lessor and the Lessee by the President or Acting President for the time being of the Australian Institute of Valuers (South Australian Division) or its successor, and the costs of the valuation shall be borne equally by the Lessor and the Lessee.
It can be seen that clause 4.2 applies automatically for each rent period, whereas clause 4.3 only becomes operative once the Lessee gives the requisite notice in writing. The rent review provision provided for in clause 4.3 of the lease was invoked by the respondent on 4 April 2012. There is no contest that the respondent gave other than a compliant notice to this effect.
It claims to be financially straightened and that the current annual rent of $52,052 represents 50 per cent of the gross turnover of the Motel business. The respondent has formed the opinion that the rent should be $22,550 per annum rather than $58,771.20, as it is at the present time. It has the opinion of a valuer which regards the rent as unduly onerous. The respondent additionally points out that the lease was entered into on the understanding that there would be a mechanism to bring the rent into line with market rent.
The main cause of contention as between the parties arises from the confinement of the right to seek an adjustment of rent in clause 4.3, which is said to offend s 22 of the Retail and Commercial Leases Act. That section provides as follows:
PART 5 – Rent and Outgoings
22—Restrictions on adjustment of base rent
(1)In this section—
base rent means rent, or that component of rent, that comprises a specified amount (whether or not there is provision for the amount to change).
Note—
Turnover rent (rent determined by reference to the lessee's turnover) is not base rent because turnover rent is not a specified amount of money (it varies according to the lessee's turnover).
(2)A retail shop lease must not provide for a change to base rent less than 12 months after the lease is entered into and must not provide for a change to that rent less than 12 months after any previous change to that rent, but this subsection does not apply to a change to base rent by a specified amount or specified percentage. For example, subsection (2) prevents a lease providing for an increase to current market rent more than once in 12 months. It does not prevent a lease providing for the rent to increase by $100 every six months. Nor does it prevent a lease providing for the rent to be increased to current market rent after 12 months and then to be increased by two per cent every six months after that.
(3) A provision of a retail shop lease is void to the extent that it—
(a) reserves or has the effect of reserving to one party a discretion to decide
which of two or more methods of calculating a change to base rent is to apply on a particular occasion; or
(b)provides for a method of calculating a change to the base rent but reserves or has the effect of reserving to one party a discretion to decide whether or not the base rent is to be changed in accordance with that method on a particular occasion; or
(c)provides for base rent to change on a particular occasion in accordance with whichever of two or more methods of calculating the change would result in the higher or highest rent.
(4)If a retail shop lease provides for a change to base rent in a way that may result in a decrease of rent1, a provision of the lease is void to the extent it prevents or enables the lessor or any other person to prevent the decrease.
Example—
1A provision for the rent to change to current market rent.
Amongst other things, the evident purpose of these provisions is to prohibit ‘ratchet’ clauses whereby the rent can rise but not fall,[2] to prohibit multiple rent review clauses resulting in the highest rent selected and to prohibit lease agreements that reserve rights to review to one party but not the other. There are analogous provisions in most other jurisdictions around the country: s 18 Retail Leases Act 1994 (NSW), s 35 Retail Leases Act 2003 (Vic), s 36 Retail Shop Leases Act 1994 (Qld), s 11 Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA), s 49 Leases (Commercial and Retail) Act 2001 (ACT), and s 28 Business Tenancies (Fair Dealings) Act (NT).
[2] See for instance Connor Hunter (A Firm) v Keencrest Pty Ltd & Ors [2009] QCA 156 at [14], [30], [53], [58]
The decision of the Magistrate
The landlord contends that clause 4.3 of the lease is void. The position of the respondent is that it can be read down. It is the latter proposition which the Magistrate accepted. His honour came to that conclusion because of the qualifying words to s 22, ‘is void to the extent that,’ and secondly because there would otherwise be no method of reviewing the rent for the remainder of the lease, other than the CPI based adjustment provided for in clause 4.2 of the lease.
The Magistrate reasoned:[3]
The evil which s 22 seeks to address is the imbalance of power which would result between tenant and landlord if one but not the other was able to say how the amount of rent increase should be determined.
and he concluded his judgement in this way:[4]
I therefore hold that the applicants are entitled to a market review of the rent for the Waterfront Motel. The lease provides a mechanism for how that review should take place there is no reason why the parties cannot follow that mechanism. If problems occur in due course, either party has liberty to apply for further directions and further orders.
[3] At [7]
[4] At [8]
The Magistrate did not expressly state how this conclusion translated in terms of severance. However it is tolerably clear that what he must have had in mind, was for practical purposes, the insertion of the words ‘or lessor’ immediately after the word ‘lessee’ in the first and third lines of clause 4.3 and the word ‘lessee’ immediately after the word ‘lessor’ in the third thereof, so that it effectively conferred an equivalent right on the lessor, as had been formerly reserved to the lessee to seek rent review on the basis of current market value.
Submissions on appeal
Both parties were permitted representation by counsel given pursuant to s 38(4)(a) & s 7(a) of the Magistrates Court Act 1991 and Rule 13(4) of the Magistrate Court (Civil) Rules 1992. The appellant submitted that s 22 of the Retail and Commercial Leases Act operates to invalidate clause 4.3. Mr Lazarevich emphasised the point that s 22 invalidates offending provisions, rather than rendering them merely voidable. He further contended that the Magistrate impermissibly rewrote the lease and that he misunderstood the purpose of s 22 in the passage quoted earlier.
It was accepted by the respondent that clause 4.3 was invalid to the extent that it purported to confer on the lessee an exclusive discretion to decide upon a method of calculating the base rent. That concession was plainly correct. No concession was given however that it infringed s 22(3)(c) or s 22(4) of the Retail and Commercial Leases Act.
Severance
The respondent further maintains that clause 4.3 of the lease can be read down so as to comply with s 22(3) of the Retail and Commercial Leases Act and that it should be read as giving both the lessee and lessor the right to seek a market rent review. Ms Clarke also pointed out that the lease itself provided for severance in clause 15.2, which reads:
Severance of Offending Provision
15.2 If any covenant or provision or part thereof of this lease is or becomes unlawful or invalid or infringes the Trade Practices Act 1974 as amended, the Landlord and Tenant Act 1936 as amended or any other statutory provision, the offending provision shall be severed herefrom without affecting the validity and enforceability of the remainder hereof.
The test of severance at common law was whether the offending provisions were ‘in substance so connected with the others as to form an indivisible whole which cannot be taken to pieces without altering its nature’: Thomas Brown & Sons Ltd v Fazal Deen,[5] applying McFarlane v Daniell.[6]As a general rule, severance was not possible when the objectionable parts involve illegality as opposed to merely void promises: Forlyle Pty Ltd v Tiver.[7] It is significant that the prohibition contained in s 22(3) of the Retail and Commercial Leases Act does not make it an offence or make it otherwise illegal to enter into an agreement which infringes the provision. It does no more than declare infringing terms void to the extent of the infringement. Clause 4.3 of the lease is not therefore unenforceable on grounds of illegality.
[5] (1962) 108 CLR 391 at 410
[6] (1938) 38 SR (NSW) 337 at 345
[7] (2007) 252 LSJS 387; [2007] SASC 464 at [20]
It was conceded by Ms Clark that the response of the common law to void clauses was to strike out the offending part or parts: Lindner v Murdock’s Garage.[8] Accordingly she accepted that the authority to proceed in the way the Magistrate did must be found other than in the common law.
[8] (1950) 83 CLR 628 at 654
Thus she pointed to s 68 of the Retail and Commercial Leases Act, relevant portions of which provide as follows:
Division 3—Jurisdiction of the Magistrates Court
68—Jurisdiction of the Magistrates Court
(1)An application for an order under this section may be commenced by application to the Magistrates Court by a party (or former party) to a retail shop lease or a collateral agreement.
(2) The Magistrates Court may on application under this section, by order—
....
(b) require a person to comply with an obligation under this Act, a retail shop lease or a collateral agreement; or
...
(f) reinstate rights under a retail shop lease that have been forfeited or have otherwise terminated; or
…
(j) do anything else necessary or desirable to resolve a dispute between the parties to the retail shop lease.
Thus it was contended that s 68(2)(j) permitted the court to reword the lease in the way the Magistrate apparently intended.
No doubt s 68(2)(j) of the Retail and Commercial Leases Act is facultative in the sense that it permits the court to give full effect to the other powers of intervention conferred by s 68(2). It is well settled that a court in construing a statutory provision must strive to give meaning to every word: Project Blue Sky Inc v Australian Broadcasting Authority,[9] s 21 of the Acts Interpretation Act 1915 (SA). It is also well settled that an Act should be construed consistently with the language and purpose of its provisions: Project Blue Sky Inc v Australian Broadcasting Authority[10] and s 22 of the Acts Interpretation Act.
[9] (1998) 194 CLR 355 at [71]
[10] Above
An initial purpose of s 68(2)(j) appears to ensure that all disputes under the Retail and Commercial Leases Act are dealt with and finalised at the one time and in the one hearing. These are the objectives of economy and expedition. The wider objectives within the Retail and Commercial Leases Act are to regulate retail shop leases (long title), to provide that clauses inconsistent therewith are rendered invalid (s 5), as well as those set out in s 20A(2):
Part 4A—Term of lease and renewal
Division 1—Preliminary
20A—Objects
(1) The Parliament recognises that conflicts sometimes arise between a lessor's expectation to be able to deal with leased premises subject only to the terms of the lease and a lessee's expectation of reasonable security of tenure.
(2) The objects of this Part are to achieve an appropriate balance between reasonable but conflicting expectations and to ensure as far as practicable fair dealing between lessor and lessee in relation to the renewal or extension of a retail shop lease.
The Full Court noted in NZI Insurance Australia Ltd v Baryzcka,[11] that s 68(2) of the Retail and Commercial Leases Act ‘vests quite a wide jurisdiction in the Magistrates Court in respect of retail and commercial leases’. On the other hand s 68(2)(j) itself was considered by Anderson J in Khuu and Lee Pty Ltd v Corporation of the City of Adelaide[12] to be as ‘a section of last resort’.
[11] (2003) 85 SASR 497 at [22]
[12] (2010) 108 SASR 277 at [100]
Bearing in mind the wider objectives of the Retail and Commercial Leases Act and more particularly that offending provisions in the lease are rendered invalid only “to the extent that” they infringe s 22(3) thereof, the effective addition of the words ‘the lessor’ into clause 4.3 could be considered ‘necessary or desirable’ and therefore justified under s 68(1)(j). Such a conclusion would serve the utility of resolving the current dispute between the parties, restore them to the position closest to the mutually shared intention of providing a mechanism for market based rent review, and do no injustice to the lessor as it only enhances his rights. To determine otherwise would produce harsh, impractical and unintended consequences. However for reasons to follow it is unnecessary to form a concluded view on this question.
Does the lease provide for changes of current market rent?
There is an independent means of reaching substantially the same result, one with slightly different consequences. There are a number of provisions in the Retail and Commercial Leases Act providing for the incorporation of mandatory statutory terms into retail and commercial leases. Amongst them is s 23. This provides for reviews of current market rent. Section 35 provides for determinations of current market rent when options to renew are exercised. Then s 36 which furnishes the opportunity for current market rent to be determined before the option to renew or extend a lease arises. Each provision comes into effect in similar fashion, in as much as the retail shop lease must provide for the rent to be changed to current market rent in the case of s 23, or provide for options to renew or extend in the case of ss 35 and 36.

Section 23 itself of the Retail and Commercial Leases Act provides:
23—Reviews to current market rent
(1)A retail shop lease that provides for rent to be changed to current market rent is taken to include provision to the following effect:
(a)the current market rent of the retail shop is the rent that, having regard to the terms and conditions of the lease and other relevant matters, would be reasonably expected for the shop if it were unoccupied and offered for renting for the use to which the shop may be put under the lease;
(b)the value of goodwill created by the lessee's occupation and the value of the lessee's fixtures and fittings on the retail shop premises are to be ignored for the purposes of the assessment of current market rent;
(c)if the lessor and the lessee do not agree, the amount of the rent is to be determined by valuation carried out by a person appointed by agreement between the parties to the lease or, failing agreement, appointed by the person for the time being holding or acting in the office of President of the Australian Institute of Valuers and Land Economists (SA Division) Inc.;
(d)if a valuation is made to determine the rent, the valuer must give detailed reasons for the determination and must specify the matters (including, if relevant, incentives and concessions) taken into account in making the determination;
(e)the parties to the lease are liable for the costs of a valuation under this section in equal shares.
(2)However, there is no need for a valuation if the parties to the lease agree on the amount of the rent.
The subject lease clearly provided for rent to be changed according to current market value in clause 4.3. Elsewhere it provided for extension and renewal, but those contingencies are irrelevant for the present purpose. In order to succeed, the appellant must demonstrate that the offensive provision is not only void, but that it is, in effect, completely erased from the lease. The flaw in this submission is that s 22(3) of the Retail and Commercial Leases Act serves to invalidate clause 4.3 of the subject lease to the extent only that it infringes any of s 22(3)(a)-(c) or s 22(4). It does not serve to erase completely the reference to the review of current market rent.
Accordingly, even assuming clause 4.3 cannot be altered in the manner suggested above, the due application of the principles of severance referred to above, results in the retention of the words providing for rent to be ‘changed to current market rent’, even if the mechanism for doing so is otherwise ineffective or inoperative. To do otherwise would be to give effect to a manifest fiction. It would also contain the secondary effect of potentially violating s 23(4) of the Retail and Commercial Leases Act in as much as it would have the practical effect of enabling the lessor to prevent a decrease in the rent payable.
It follows that the operation of s 23 of the Retail and Commercial Leases Act is picked up by what validly remains of clause 4.3 of the subject lease. Accordingly the respondents are entitled to seek a rent review thereunder. In the absence of an agreement between them as to that value the other mechanisms contained in s 23 would then apply.
This conclusion attracts a further consideration. Section 5 of the Retail and Commercial Leases Act provides:
5—This Act overrides leases
(1)This Act operates despite the provisions of a lease.
(2)A provision of a lease or a collateral agreement is void to the extent that the provision is inconsistent with this Act.
It must necessarily follow that the extent to which clause 4.3 of the lease is inconsistent with s 23, it is void and the procedures for valuation set out therein must prevail over the lease. It must further follow that the re-working of clause 4.3 in the manner proposed earlier becomes redundant, so that it is for practical purposes the provisions of s 23 of the Retail and Commercial Leases Act which governs the rights and responsibilities between the parties so far as reviews of market rent are concerned.
Conclusion and orders
For the above reasons the application for review would ordinarily stand to be dismissed. However in order to create certainty in the legal relationship between the parties and at the same time give effect to the intention of the Magistrate, the parties would be best served by rescinding the judgment and substituting the following judgment pursuant to s 38(7)(d)(ii) of the Magistrates Court Act.
The following orders are therefore proposed:
1.   The appellant be granted an extension of time in which to bring the application to review to 7 March 2013.
2.   The judgment given on 13 February 2013 in the minor civil action of the Adelaide Magistrates Court is rescinded.
3.   The following orders be substituted for those made on 13 February 2013:
(1)Declare that clause 4.3 of the lease between the parties originally dated 26 July 2005 is invalid to the extent that it infringes s 22(3) of the Retail and Commercial Leases Act.
(2)Declare that the said clause 4.3 is void to the extent that it is inconsistent with s 23 of the Retail and Commercial Leases Act.
(3)Declare that s 23 of the Retail and Commercial Leases Act applies to the said lease.
The parties are entitled to be heard on the precise terms of the proposed orders and on the question of costs.