Macerlean v Notfair Pty Ltd (No 2) - [2013] SADC 109

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
MACERLEAN v NOTFAIR PTY LTD (No 2)
[2013] SADC 109
Judgment of His Honour Judge Tilmouth
15 August 2013
LANDLORD AND TENANT - RENT - PROVISIONS AS TO RENT IN AGREEMENT FOR LEASE OR LEASE - RENT REVIEW CLAUSES
A lease between the parties reserving to one party, the lessee, the right to seek a market review of rent was held in the primary judgment to infinge s 22 of the Retail and Commercial Leases Act 1995 (SA).
Held: 1. The balance of the infringing clause remained intact to provide a mechanism for the review of rent according to current market value.
2. On the proper constitution of s 23 of the Retail and Commercial Leases Act, the right of rent review according to current market value was available to both parties to a lease which itself provides for review on the basis of current market value.
Retail and Commercial Leases Act 1995 (SA) s 5, s 22, s 23, s 68(2)(j); Amadio Pty Ltd v Henderson (1998) 81 FCR 149; Hirst v Vousden [2002] NZCA 143, referred to.
CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384, applied.
Macerlean v Notfair Pty Ltd [2013] SADC 80, discussed.

MACERLEAN v NOTFAIR PTY LTD (No 2)
[2013] SADC 109
The issues

In reasons for judgment delivered on 20 June 2013, the court made certain declarations with respect to the rights of the parties pursuant to a retail shop lease entered into by them.[1] After taking further submissions it became obvious the court did not go far enough so as to completely clarify the rights and responsibilities of the parties under the subject lease. These reasons deal with those remaining issues. The appellant is the landlord and the respondent the tenant under the lease. The case came before this court as an application for the review of a decision made in the minor civil jurisdiction of the Adelaide Magistrates Court.
[1] Macerlean v Notfair Pty Ltd [2013] SADC 80
The primary judgment
In essence the view was taken in the primary judgment that a provision in the subject lease reserving to one party (the lessee) a discretion to decide the basis of calculating the base rent due thereunder, infringed s 22(3)(a) & (b) of the Retail and Commercial Leases Act 1995 (SA). As a consequence the following declarations were made:[2]
3.(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.
[2] [2013] SADC 80, [32]
The deficiency in these orders is that the court did not specify which part or parts of clause 4.3 of the subject lease were void. It is to be recalled clause 4.3 is in these terms:
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.
A further issue identified by the parties was that although s 23 of the Retail and Commercial Leases Act 1995 provides for the basis on which current market rent is to be valued, it does not provide a procedural mechanism as to how that is to be done. In particular s 23 provides no machinery requiring either party to give notice of an application to review the rent, or a timeline for reaching an agreement before a valuation could proceed.
A third difficulty articulated by counsel for the landlord is that s 23 does not of itself confer rights to either the lessor or the lessee to apply for a market review of the rent. According to the submission, clause 4.3 fails completely unless rights to rent review are confirmed equally on both parties. Therefore the result is that such rights must be provided for in the lease itself. To reiterate s 23 of the Retail and Commercial Leases Act 1995 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 mechanisms for market rent review
It should be emphasised once again that s 22(3) of the Retail and Commercial Leases Act 1995 serves to void infringing provisions in retail shop leases only ‘to the extent that’ they so infringe. What is not voided remains intact. There is no reason to suppose that clause 4.3 of the subject lease is invalid in so far as it provides a mechanism for the review of ‘current market rent’ in the first place, in so far as it provides for giving notice upon forming the pre-requisite opinion that the rent fixed by reference to the Consumer Price Index ‘is unduly onerous’ requiring the rent to be fixed according to current value, and in so far as it provides time restrictions on giving such notice and the further appointment of a valuer in the absence of argument as to the current market value.
Clause 4.3 fails to the extent only that it reserves the right to current market rent reviews to the lessee, to the exclusion of the lessor. That is to say it is void only to the extent that it reserves ‘to one party’ such rights, contrary to s 22(3)(a) & (b) of the Retail and Commercial Leases Act 1995.
It was further submitted on behalf of the landlord that clause 4.3 infringes ss 22(3)(c) and (4) of the Retail and Commercial Leases Act 1995, in that it provides for review ‘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, and because it prevents the landlord from obtaining a decrease in the rent.
Analysis
It may be acknowledged that standing alone, clause 4.3 infringes s 22(3)(a) & (b). However s 23 prevails over clause 4.3 to the extent necessary to give effect thereto and on account of s 5 which provides that the Retail and Commercial Leases Act 1995 “operates despite the provisions of a lease”.
Although s 23 does not in so many words confer on the landlord a right to review current market rent, it does not exclude that prospect. Even then, the right of either party to a retail shop leases to invoke s 23, can be inferred by necessary implication from the words ‘if the lessor and the lessee do not agree’ contained in s 23(1)(c), and in the liability of ‘the parties to the lease’ to bear equally the costs of valuation in the absence of an agreement with respect thereto, in s 23(1)(e).
Such a construction is not only open, but is one that will avoid inconvenience and more closely conform with the legislative intent: CIC Insurance Ltd v Bankstown Football Club Ltd.[3] As mentioned in the primary judgment, that conclusion does ‘no injustice to the lessor as it only enhances his rights’.[4] If necessary such a result would also be justified by s 68(2)(j) of the Retail and Commercial Leases Act 1995 as being ‘necessary and desirable to resolve’ this dispute between the parties.
[3] (1997) 187 CLR 384 at 408
[4] [2013] SADC 80, [23]
As to the complaint by the landlord that the lease continues to infringe s 22(3)(c) of the Retail and Commercial Leases Act 1995, the fact of the matter is that neither the section nor clause 4.3 provide for rent to be changed on a ‘particular occasion’. Rather they permit episodic review at anytime the requisite opinion is formed by either party that the rent has become ‘unduly onerous’ to that party. Particular occasions that infringe s 22(3)(c) would for example, occur when a lease expires, on reaching a nominated fixed period of time, at specified rent reviews, and to take the subject lease as an example, at the end of each fixed rent period.
Clause 4.3 of the subject lease which provides an alternative mechanism to CPI increases does no such thing. The operation of the words ‘particular occasion’ contained in s 22(3)(c), lies in the fulfilment of a stated, fixed or identified occasion in point of time, whereas the giving of a notice under clause 4.3 comprises no such occasion. On that view of matters s 22(3)(c) simply does not apply.
Finally as to the complaint that clause 4.3 infringes s 22(4) of the Retail and Commercial Leases Act because it has the practical effect of preventing the landlord from seeking a decrease in the rent, the submission overlooks the capacity of the landlord to apply for rent to be assessed at current market value. Whether that is ever likely to occur or not is simply irrelevant to the proper construction of the lease, read in conjunction with s 23 of the governing statute.
The Parliamentary intent lying behind s 22(4) is to prevent ratchet clauses which have the effect of increasing rent successively and in the process preventing any rent decrease: Amadio Pty Ltd v Henderson,[5] and Hirst v Vousden.[6] This lease does not have that effect. On the contrary, it is open for either party to obtain a decrease in market rent if and when the current market rent valued in accordance with s 23 produces that result.
[5] (1998) 81 FCR 149 at 160, 210, 215
[6] [2002] NZCA 143, [5]
Conclusion and orders
In the result the tenant succeeds in upholding the decision of the Magistrate at first instance, for the reasons advanced in the primary judgment and for the additional reasons articulated above. The orders and declarations made in the primary judgment are therefore affirmed.[7]
[7] [2013] SADC 80, [32]
In addition thereto the court makes the following further orders and declarations in light of the subsequent issues referred to above:
3(4) Declare that so much of clause 4.3 of the said lease is valid and remains in force to the extent that:
(i) either party may give notice requiring the rent to be current market rent in the period provided for therein, and
(ii) if the current market rent is not agreed within the period referred to therein, the rent should then be determined by a valuer agreed upon by the parties, or failing such agreement, in the period provided for therein by a valuer appointed in accordance with clause 4.3(b) of the said lease.
The parties are entitled to be heard as to costs.