Major Holdings Pty Ltd and Mustang Bar Proprietary Limited

[2007] WASAT 15

MAJOR HOLDINGS PTY LTD and MUSTANG BAR PROPRIETARY LIMITED [2007] WASAT 15

Jurisdiction:	STATE ADMINISTRATIVE TRIBUNAL	Citation No:	[2007] WASAT 15
Act:	COMMERCIAL TENANCY (RETAIL SHOPS) AGREEMENTS ACT 1985 (WA)
Case No:	CC:3289/2005	Heard:	30 JUNE 2006 WRITTEN SUBMISSIONS FILED 14 JULY, 11 AUGUST AND 30 AUGUST 2006
Coram:	JUDGE J CHANEY (DEPUTY PRESIDENT) MR M SPILLANE (MEMBER) MR D LIGGINS (SENIOR SESSIONAL MEMBER)	Delivered:	21/01/07
No of pages:	20	Judgment Part:	1 of 1
Result:	Rent determined as $121 440 plus GST per annum for 11 January 2005
Category:	B
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Parties:	MAJOR HOLDINGS PTY LTD MUSTANG BAR PROPRIETARY LIMITED
Catchwords:	Commercial tenancy ­ Rent review determination ­ Licensed premises ­ Tenant trading under special facility licence ­ Licence obtained by tenant not by landlord under lease ­ Whether rental valuation should be based on comparable restaurant premises or by reference to net profit of business
Legislation:	Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA), s 11, s 11(2), s 11(5), s 15(2) Commercial Tenancy (Retail Shops) Agreements Amendment Act 1998 (WA), s 17 Liquor Act 1912 (NSW) Liquor Licensing Act 1988 (WA) Valuation of Land Act 1916 (NSW) Valuation of Land Act 1971 (SA)
Case References:	Cooper v City of Perth (1960) 7 LGRA 369 Dobrel Pty Ltd v Valuer-General (1990) 71 LGRA 161 Dunedin City Corporation v Hames (1948) 67 NZLR 962 Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 Jenolin Pty Ltd v Joint Property Ownership Pty Ltd (Unreported, Supreme Court of Western Australia, Whyte AJ, 8 November 1991) Players Pty Ltd v The Corporation of the City of Adelaide [2001] SASC 369 Ricciardello & Anor v Caltex Oil (Australasia) Pty Ltd (1991) ANZ Conv.R 445 Townley Mill Co (1990) Ltd v The Oldam Assessment Committee (1937) AC 419 Nil
Orders	1. Pursuant to s 11(5) of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA), the rental for the premises known as the Mustang Bar and situated at 46 Lake Street, Northbridge for the term commencing 11 January 2005 is determined to be $121 440 per annum plus GST.

JURISDICTION : STATE ADMINISTRATIVE TRIBUNAL STREAM : COMMERCIAL & CIVIL ACT : COMMERCIAL TENANCY (RETAIL SHOPS) AGREEMENTS ACT 1985 (WA) CITATION : MAJOR HOLDINGS PTY LTD and MUSTANG BAR PROPRIETARY LIMITED [2007] WASAT 15 MEMBER : JUDGE J CHANEY (DEPUTY PRESIDENT)

MR M SPILLANE (MEMBER)
MR D LIGGINS (SENIOR SESSIONAL MEMBER)

HEARD : 30 JUNE 2006 WRITTEN SUBMISSIONS FILED 14 JULY, 11 AUGUST AND 30 AUGUST 2006 DELIVERED : 22 JANUARY 2007 FILE NO/S : CC 3289 of 2005 BETWEEN : MAJOR HOLDINGS PTY LTD

Applicant

AND

MUSTANG BAR PROPRIETARY LIMITED
Respondent

Catchwords:

Commercial tenancy ­ Rent review determination ­ Licensed premises ­ Tenant trading under special facility licence ­ Licence obtained by tenant not by landlord under lease ­ Whether rental valuation should be based on comparable restaurant premises or by reference to net profit of business

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Legislation:

Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA), s 11, s 11(2), s 11(5), s 15(2)

Commercial Tenancy (Retail Shops) Agreements Amendment Act 1998 (WA), s 17
Liquor Act 1912 (NSW)
Liquor Licensing Act 1988 (WA)
Valuation of Land Act 1916 (NSW)
Valuation of Land Act 1971 (SA)

Result:

Rent determined as $121 440 plus GST per annum for 11 January 2005

Category: B

Representation:

Counsel:

Applicant : Mr MJ McCuster QC and Ms YC Fang
Respondent : Mr KJ Martin QC and Mr AC Willinge

Solicitors:

Applicant : Tottle Partners
Respondent : Blake Dawson Waldron

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

Cooper v City of Perth (1960) 7 LGRA 369
Dobrel Pty Ltd v Valuer-General (1990) 71 LGRA 161
Dunedin City Corporation v Hames (1948) 67 NZLR 962
Federal Commissioner of Taxation v Murry (1998) 193 CLR 605
Jenolin Pty Ltd v Joint Property Ownership Pty Ltd (Unreported, Supreme Court of Western Australia, Whyte AJ, 8 November 1991)
Players Pty Ltd v The Corporation of the City of Adelaide [2001] SASC 369
Ricciardello & Anor v Caltex Oil (Australasia) Pty Ltd (1991) ANZ Conv.R 445

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Townley Mill Co (1990) Ltd v The Oldam Assessment Committee (1937) AC 419


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REASONS FOR DECISION OF THE TRIBUNAL:

Summary of Tribunal's decision

1 Mustang Bar Proprietary Limited is the lessee of premises at 46 Lake Street, Northbridge, known as the Mustang Bar. The premises trade pursuant to a special facility licence issued under the Liquor Licensing Act 1988 (WA). Major Holdings Pty Ltd is the lessor.

2 The lease of the premises provides for a rent review effective 11 January 2005. The parties were unable to agree upon the new rental, and the landlord referred the determination of the rental to the State Administrative Tribunal pursuant to s 11(5) of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA).

3 The principal issue between the parties was whether the new rent should be determined by reference to the profitability of the tavern (as the landlord contended), or by an amount per square metre based on rentals of similar premises in the Northbridge area (as contended by the lessee). Under the lease the tenant was obliged to obtain an appropriate liquor licence for the use permitted by the lease.

4 After examining the relevant statutory provisions, and the provisions of the lease, the Tribunal concluded that the appropriate valuation method was by reference to rentals paid for premises in the locality capable of use as a licensed tavern if an appropriate licence was obtained by the tenant.

Background

5 The applicant and the respondent are parties to a lease of premises at 46 Lake Street, Northbridge. Mustang Bar Pty Ltd carries on business from the premises as a tavern pursuant to a special facility licence. The premises are a retail shop for the purposes of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (CTA Act).

6 In 1996, the premises were leased by a company called Houndog Pty Ltd pursuant to a lease dated 10 June 1996 (the original lease).

7 On 11 January 1999, an extension and variation of the original lease was executed (the first variation). By the first variation, the term of the lease was extended and the lease was assigned by Houndog Pty Ltd to Highmoon Pty Ltd (Highmoon). There were a number of other variations to the lease, and in particular the provisions relating to rent review. A covenant in the original lease for the lessee to carry on the business of the

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restaurant in the premises was also varied to require the lessee to carry on the business of a "restaurant and licensed tavern" in the premises.

8 During 1999, Highmoon acquired, at its own expense, a tavern licence from its Director, Mr Michael Rasheed. The tavern licence had formerly been used to trade at other premises in East Perth. The tavern licence was transferred, with the applicant's consent, to the premises and Highmoon commenced operating the tavern business at the premises from 21 September 1999.

9 In about November 2000, Highmoon applied for a special facility licence at its own expense. The special facility licence was granted for the premises to Highmoon on 17 July 2001, at which point Highmoon commenced using that licence on the premises, and surrendered the tavern licence.

10 By a second variation and assignment which was undated, but stamped on 25 February 2002, Highmoon assigned the original lease as varied by the first assignment to Jenaya Pty Ltd (the second variation). The terms of the lease were varied, although the variations are not material for present purposes. Jenaya subsequently changed its name to Mustang Bar Pty Ltd, and is the respondent in these proceedings. Highmoon transferred the special facility licence to the respondent on or about 10 December 2001, and since that time, the respondent has carried on the business utilising the special facility licence at the premises.

11 By virtue of the variation of the original lease brought about by the first variation, rent reviews were due on the second anniversary of the date of the assignment to Highmoon, being 11 January 1999. Rent reviews were agreed as of 11 January 2001, and 11 January 2003, but the parties have been unable to reach agreement as to the amount of rent payable as of 11 January 2005. The rent payable in respect of the premises in the period immediately proceeding the rent review of 11 January 2005 was $110 352 per annum. Accordingly, Major Holdings referred the question of determination of the rent to the Tribunal pursuant to s 11(5) of the CTA Act.

The relevant lease provisions

12 As a consequence of the variations to the lease, the operative provisions relating to rent review are as follows.

13 Clause 4.2 provides:

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"On each Rent Review Date the Rent will be reviewed and will be increased by either:

(a) that amount determined by multiplying the existing Rent by the percentage increase between the Current CPI as compared to the Previous CPI, provided that the Rent calculated on CPI Rent Review Date will never be less than the Rent then existing; or

(b) the difference between the Rent payable as of any Rent Review Date and the Current Market Rent

whichever is the greater but being no less than the Rent payable as of any Rent Review Date."

14 The first variation inserted an additional cl 4.2A which reads:

"4.2A Any increase in Rent will be limited to a maximum of 10 per cent per annum compounded at the First and Second Rent Reviews which occur after the Date of Assignment to Highmoon only."

15 The 10% cap on rental increases applied at the reviews in 2001 and 2003. It does not apply to the review as of January 2005, the subject of this determination.

16 The permitted use of the premises is "restaurant and licensed tavern". By cl 7.10 the lessee covenants not to use, or permit the use of, the premises for any purpose other than the permitted use. By cl 7.27(a), the lessee covenants to carry on the business of a restaurant and tavern in the premises in accordance with the requirements of the Liquor Licensing Act 1988 (WA) (Liquor Act) and liquor licence.

17 Current market rent is defined in cl 4.1. Following the first variation, the clause provides that "current market rent" means:

"The annual current market rental which can reasonably obtained [sic] for the Premises on the basis that:

(a) [deleted];

(b) on the terms and conditions contained in this Lease;

(c) all of the Lessee's Covenants have been fully observed and performed as at the relevant Rent Review Date,

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and taking into consideration:

(d) current rent values of new tenancies of vacant premises similar to the Premises;

(e) current rent values in respect of rent reviews during current tenancies of premises similar to the current Premises; and

(f) [deleted]

but ignoring:

(g) the value of any goodwill created by the Lessee's occupation of the Premises;

(h) [deleted]; and

(i) any rent free period, financial, or other contribution, allowance or inducement, or any other concession offered to the Lessee or any prospective tenants of the Building."

18 The schedule to the original lease contained a special condition which rendered the lease subject to a condition subsequent that the lessee obtain a liquor licence to operate a business in terms of the permitted use. The first variation inserted a further special condition whereby the lessee granted to the lessor an irrevocable option to purchase the liquor licence upon the expiry or earlier determination of the lease at the "prevailing market price", which was defined. The first variation also introduced an additional special condition in the following terms:

"4.1 The Lessee will produce the annual financial statements used for the preparation of tax returns relating to operation of the tavern from the Premises within 7 days of lodging the relevant tax returns.

4.2 The Lessor may in its sole discretion arrange for the financial statements to be audited by a certified practising accountant provided, however, if the audit reveals material discrepancies the cost of the audit will be borne by the Lessee."

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The CTA Act

19 Section 11 of the CTA Act deals with rent reviews under retail shop leases. Section 11 was amended by the Commercial Tenancy (Retail Shops) Agreements Amendment Act 1998 (WA), but by virtue of s 17 of that Act the amended provisions applied only to leases coming into operation after the amendment.

20 Prior to the amendment, s 11(2) provided:

(2) Where a retail shop lease provides for the review during the currency of the lease of the amount of rent payable under the lease having regard to the market rent of the premises, the market rent shall, for that purpose, be taken to be the rent obtainable at the time of the review in a free and open market if the premises were unoccupied and offered for rental for a use permitted by, and on the same terms as are contained in, the current lease."

21 It was common ground that s 11(2) applies to the lease the subject of these proceedings in its terms prior to the amendment.

22 Section 15(2) of the CTA Act provides that a provision of a retail shop lease, to the extent that is contrary to or inconsistent with anything in the Act, or with anything that, by the Act, the lease is taken to provide, is void. The parties were agreed that s 11(2) governs the determination of the market rent for the purposes of the present proceedings.

The January 2005 review

23 As already observed, the rental preceding the review of 11 January 2005 was $110 352 per annum. In January 2005, the applicant engaged a valuer, Mr Graham Kennedy of the firm Jones Lange La Salle, to assess the rental value of the premises for the purposes of the rent review. He prepared a valuation dated 31 January 2005. In that valuation, Mr Kennedy expressed the opinion that, by reason of comparable rentals paid by a number of restaurant premises in the Northbridge area, the property "as a restaurant would command a lease rental of some $240 per square metre, equating to $127 680 per annum". He then considered the rental value of the premises as a tavern. He stated that "the rental evidence of tavern rents is quite limited and in any respect may offer some difficulty on a rate per square metre basis, as many are linked to trading performance". Consequently, he assessed rental based on "industry parameters of rentals applicable to the profitability of

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taverns" being "around 35–50% of net profit". On the basis of a net profit of $700 000-$800 000 per year, Mr Kennedy expressed the view that the rental value of the premises, as a tavern, would be between $245 000-$280 000 per annum. He then drew upon rentals paid by the Subiaco Hotel in Subiaco, the Mount Henry Tavern in Manning, Franklins Tavern in East Victoria Park, and the Deen Hotel in Aberdeen Street, Northbridge, for the purpose of comparison. Those hotels or taverns demonstrated a rental value ranging between 37% and 46.3% of net profit.

24 By letter dated 28 February 2005, the applicant informed the respondent that the applicant proposed to increase the rent to $280 000 per annum effective from 11 January 2005. The respondent objected to the proposed increase by letter dated 4 March 2005. The respondent engaged Mr Greg Whyte, of Christie Whyte Moore, to prepare a rental valuation. Mr Whyte had regard to what he considered rental evidence of properties of a comparable nature within the surrounding commercial/retail precinct of Northbridge. He considered that to be "the best evidence of what this premises would lease for on a vacant position basis at 11 January 2005". He also considered some evidence from Leederville which he considered to be a reasonably comparable location. The comparable premises to which he had regard were restaurant premises. In his initial report dated 21 March 2006, Mr Whyte expressed the view that "the fact that licensed tavern is a permitted use under the lease is of no rental consequence to a knowledgeable tenant acting prudently without the landlord also providing a tavern licence or special facility licence to enable the tenant to give commercial effect to the permitted use". Based on the premises which he considered comparable, Mr Whyte assessed the rental value of the subject premises, applying the definition of market rent contained in the CTA Act (albeit the definition under the 1998 amendment of the Act) to be $115 500 per annum (including GST), which he said, equates to a net rental of $200 per square metre per annum (excluding GST).

25 In accordance with the Tribunal's usual procedures, the valuers were required to confer prior to the hearing, prepare a joint statement identifying matters of agreement and disagreement, and to give their evidence concurrently at the hearing. Following conferral, they agreed that the market rent for the premises having regard solely to the permitted use as licensed restaurant is $220 per square metre per annum (plus GST). They identified the essence of their difference as being what, if any, additional market rental value is attributable to the additional permitted use as a licensed tavern. In that regard, Mr Whyte contended that there is no additional market rental value attributable to the inclusion of the words "and licensed tavern" within the lease, unless a landlord provides a tavern

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licence to enable commercial effect to be given to the permitted use. Even if the landlord had provided the liquor licence for the facility, Mr Whyte considered that the market rental evidence indicated a market rental on that basis of $230 per square metre per annum (plus GST). Mr Kennedy on the other hand, considered that the proper approach in assessing market rent for the premises is to have regard to a proportion of the profit of the business conducted by the tenant, and on that basis the market rental value for the premises amounts to a range of $245 000 per annum (plus GST) to $280 000 per annum (plus GST). Mr Kennedy considered that it was immaterial whether the licence was provided by the landlord, or obtained by the lessee.

The appropriate methodology

26 Mr Kennedy's methodology for assessing the appropriate annual rental is to apply a percentage to the true net profit of the premises. Mr Whyte acknowledged that there are circumstances in which it is appropriate for a valuer to assess the market rent of a licensed tavern premises primarily based on the turnover or profitability of the business conducted therein. He contended, however, that those circumstances did not apply to the assessment of market rent for the Mustang premises. He said that, typically, the circumstances in which a turnover or profitability assessment would be appropriate are where:

"a) the premises has usually been specifically designed and purpose built for use as a licensed hotel or licensed tavern.

b) the rent has been established by way of the premises having been offered for lease, or the business therein having been purchased, with the benefit of a tavern licence so there is no question as to the tenant being able to give commercial effect to the permitted use of the licensed tavern. As these premises are typically purpose built as a hotel or tavern, the licence was almost always originally granted in conjunction with the construction of the hotel or tavern and the licence has remained with the property ever since. For these purpose built hotel and tavern premises, it is imperative the reversionary benefit of the licence remain with the landlord after expiry or earlier determination of the lease as the specialised nature of the improvements usually means they have very limited or no commercially viable alternative use.

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c) there are usually no alternative similar premises within the immediate vicinity.

d) as a result of (c) above, there is no rental evidence of very similar premises in the immediate locality or alternatively, an insufficient body of such evidence.

e) where the purpose built hotel or tavern building has been constructed in a different era and many aspects of the design are no longer functionally appropriate. It can sometimes be the case in valuing purpose built hotels and taverns from a different era that the building contains large areas of space that were functionally appropriate in that different era but are not functionally appropriate at present. Examples may include large live band entertainment lounges, formal dining rooms and guest accommodation rooms without en suite facilities. In these instances, the area of buildings is no longer directly related to the rental value of the premises."

27 Mr Whyte contended that none of the circumstances he outlined apply to the Mustang premises.

28 The applicant relied on a number of authorities as support for the proposition that the appropriate valuation methodology was that preferred by Mr Kennedy. Three of those cases, Players Pty Ltd v The Corporation of the City of Adelaide [2001] SASC 369, Cooper v City of Perth (1960) 7 LGRA 369 and Dobrel Pty Ltd v Valuer-General (1990) 71 LGRA 161, concerned assessments of annual value for rating purposes.

29 The Players decision concerned old adjoining buildings in the central business district of Adelaide. Players Pty Ltd had purchased a hotel licence from a nearby tavern and a gaming machine licence, both of which had been removed to the subject premises. Players carried out extensive alterations and improvements to the eastern building and undertook extensive refurbishment of the western building. It carried out works on the buildings to an estimated cost of $1.8 million. The completed building comprised bars, a nightclub, a restaurant and areas set out for gaming. The valuers in that case diverged on the question of whether it should be assumed that a hypothetical tenant would hold a hotel licence and a gaming machine licence in respect of the premises. "Annual value" for the purposes of the Valuation of Land Act 1971 (SA) was defined as "three quarters of the gross annual rental that the land might reasonably be

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expected to realise if leased upon the condition that the landlord were liable for all rates, taxes and other imposts on the land and the insurance and other outgoings necessary to maintain the value of the land, or as five percent of the capital value of the land … " subject to certain qualifications not relevant for present purposes. Debelle J referred at [56] to Townley Mill Co (1990) Ltd v The Oldam Assessment Committee (1937) AC 419 at 436-437 where Lord Maugham said "but the hypothetical rent which the tenant could give was estimated with reference to the heridadiment in its actual physical condition (Rebus sic stantibus), and a continuance of the existing state of things was prima facie to be presumed". Debelle J said of that observation:

"I believe that his Lordship's observation that a continuance of the existing state of things was a prima facie presumption expresses more accurately the task confronting the valuer and the court in that it allows for those instances where the tenant might possess attributes or assets which are personal to the tenant and do not form part of the hereditament, and should therefore be excluded when assessing what a hypothetical tenant would pay as rent. I would therefore restate the manner in which the assessment of rental is made in these terms:

'The rent is calculated with reference to the hereditament in its existing physical condition and a continuance of the existing state of things is prima facie to be presumed.' "

30 At [63], Debelle J said:

"It is an interesting question whether the principle that, when assessing the hypothetical rental of a hotel, regard should be had to the premises as they stand necessarily requires the further assumption that the hypothetical tenant holds an hotel licence in respect of those premises. As a general rule, it will be appropriate to make that assumption. The practical reality in the circumstances of this case is that the valuer should proceed on the footing that the hypothetical tenant would hold both an hotel licence and a gaming machine licence."

31 In this case, the market rental is to be assessed having regard to the provisions of s 11(2) of the CTA Act as it stood at the relevant time. That section requires the assumption that the premises are unoccupied, and are offered for rental for a use permitted by, and on the same terms as are contained in, the current lease. The terms of the current lease contain a
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condition subsequent that the lessee obtain a liquor licence. The terms on which the lease is offered are contrary to an assumption that, at the time the rental is to be agreed, the tenant holds the relevant licence.

32 Cooper v City of Perth involved a dispute between valuers as to whether the appropriate measure of rent was a percentage of bar takings, or alternatively an assessment of the net profit which the business was capable of generating. Jackson SPJ said (at 373) "in the case of licensed premises I suppose, in the first place, a valuer would seek to base his valuation on actual rent paid or comparable rents in the locality if that information were available". The particular rent paid by the tenant was, it was agreed between the parties, not a reliable index of annual value because of the particular benefits enjoyed by the tenants. There were no comparable rentals available. Jackson SPJ accepted that the authorities support the proposition that the ultimate net profit that might be earned by a hotel is a highly relevant consideration to a hypothetical tenant. The case does provide authority for what the valuers agreed, namely that in certain circumstances the financial performance of licensed premises will provide a basis upon which to assess annual rental. It was, however, a case were there were no comparable rentals available, and the issue between valuers was simply whether turnover or net profit was the relevant factor to be considered.

33 Similarly, in Dobrel, Bignold J, in the Land and Environment Court of New South Wales, was concerned with whether profitability, rather than turnover or liquor purchasers should form the basis of a valuation for the purpose of assessing the annual value of land under the Valuation of Land Act 1916 (NSW). That decision concerned "typical suburban hotel premises". His Honour held that, in determining the assessed annual value of land comprising hotel premises, the fact that the premises are licensed under the Liquor Act 1912 (NSW) is to be taken into account. In reaching that conclusion, His Honour placed reliance upon the decision in Dunedin City Corporation v Hames (1948) 67 NZLR 962 where O'Leary CJ said (at 984-985):

"The argument is further answered by this: that, in ascertaining the hypothetical rent, the licence is not valued as property. It is no more valued as such than is, say, the situation of the property in a particular street. But in appropriate cases this last factor is taken into account as an enhancement of the rental value, so also can the existence of a license [sic] and the goodwill attached be considered an enhancement increasing the rental value, although the license [sic] as such is not itself valued.

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I have therefore come to the conclusion that there is no difference in the law applicable in England and in New Zealand.

It follows that I am of the opinion that, in ascertaining the rateable value of hotel premises in the City of Dunedin, regard must be had to the existence of the license [sic] and the goodwill attached thereto."

34 As observed, the context of a dispute was whether net profit was a preferable guide to the assessment of annual value rather than taking a percentage of the value of liquor purchases. In preferring the valuer whose approach was to have regard to net profit, Bignold J rejected the competing valuers' opinion that there were comparable hotels to the subject hotel or that comparable rentals could be applied to the subject hotel. He said "accepting the evidence of the significantly different levels of profitability applying to different components of hotel trade I do not think it can be meaningfully concluded that one hotel is comparable to another without a proper analysis of the components of the trade of each hotel and of the profitability of each hotel".

35 The applicant also relied on Jenolin Pty Ltd v Joint Property Ownership Pty Ltd (Unreported, Supreme Court of Western Australia, Whyte AJ, 8 November 1991). In that case, a lessee sought a declaration that for the purposes of a rent review under the relevant provision of the lease, the turnover and/or financial accounts of the plaintiff's business conducted at the leased premises is an irrelevant consideration. The premises concerned were licensed premises in Subiaco. The definition of "current market rental" for the purposes of the lease in the Jenolin matter substantially reflected the terms of s 11(2) of the CTA Act. Although His Honour recited at some length the respective submissions of the parties (which the applicant in its written submissions wrongly attributed as statements by Whyte AJ), His Honour declined to make the declaration simply on the basis of the adoption of a statement by Rowland J in Ricciardello & Anor v Caltex Oil (Australasia) Pty Ltd (1991) ANZ Conv.R 445 at 449 that:

"It is not for this Court to decide what matters should be taken into account in reaching a proper valuation. That may well be a matter on which experts will not agree."

36 In a context where it did not fall to Whyte AJ to determine the actual rental value of the premises concerned, his decision that turnover figures
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could not be said to be irrelevant in the context of the particular case provides little assistance in the present case.

37 In our view, the various authorities cited go no further than to say that, in appropriate cases, regard can be had to profitability of licensed premises for the purpose of assessing what a hypothetical tenant may be prepared to pay by way of rental. The authorities do not support any proposition that it is only by reference to profit that market rental of licensed premises can be assessed. It is clear from the authorities that the context of a rental assessment, and any applicable definition of the rental to be assessed, constitute the starting point for the assessment. The essence of the assessment in this case is found in the words of s 11(2) of the CTA Act, namely that it must be assumed that "the premises were unoccupied and offered for rental for a use permitted by, and on the same terms as are contained in, the current lease".

38 Mr Whyte considered that, in undertaking an assessment of market rent for tavern premises such as the Mustang premises, it is necessary to have regard to:

"(a) the physical characteristics of the premises being valued including whether or not they have been purpose built for tavern use;

(b) the availability of other similar premises in the same locality;

(c) the availability of rental comparison evidence for similar premises in the same locality; and

(d) the circumstances in relation to the tavern licence, given that a permitted use of a licensed tavern under a lease is of no commercial relevance to a tenant without having a tavern licence to give commercial effect to that permitted use."

39 Mr Kennedy considered that the physical characteristics of premises need to be considered, not having regard to whether they have been purpose built for a tavern, but rather whether they are suitable for tavern use. He considered that it is not sufficient or adequate to confine a determination to a consideration only of identical comparable premises since there may not be any, or enough, similar premises to provide a reliable comparison, and it is rare to find tavern premises which are identical in the same street or adjacent to subject premises. He considered
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rental evidence of taverns in other locations to be highly relevant if the rentals have been struck or can be identified to reflect relativity to net profitability.

40 It is apparent that the physical characteristics of the Mustang Bar premises are similar, in many respects, to premises within the Northbridge locality utilised as restaurants. Mr Kennedy acknowledged that the Hogs Breath Café at 21 Lake Street, Northbridge, the Jade Dynasty Chinese Seafood Restaurant, the Plaka Shishkebab at 87 James Street, Northbridge, Vino Vino restaurant in Northbridge and Villa Rustica in Northbridge were all good evidence for comparison on the basis of restaurant use, but not for tavern use. He considered that Novak's Tavern in Northbridge was not good comparable evidence because of the absence of trading information and relativity to profitability. He had the same objection to Harbourside Hotel, Restaurant and Blackswan Deck in Fremantle. He considered the Subiaco Hotel, Mount Henry Tavern, Franklins Tavern and the Deen Hotel were suitable comparators for a tavern use because of his access to information concerning the relationship between rental and profitability. Mr Whyte did not consider those four premises suitable for comparison because of the physical dissimilarities from the Mustang premises, their different locations, and dated evidence. He acknowledged that the Deen Hotel was on the edge of Northbridge, and noted that the rental for the Deen Hotel, if assessed by reference to the effective area of the premises, gave a figure of $226 per square metre, which he did consider provided a general indicator of market rental for the Mustang premises.

41 As Bignold J observed in Dobrel, a meaningful conclusion that one hotel is comparable to another requires a proper analysis of the components of the trade of each hotel and the profitability of each. In our view, it must also involve consideration of the physical nature of the premises, their location and the availability of similar premises in their locality. In our view, the four premises relied upon by Mr Kennedy for comparison purposes are not reliable in the assessment of the market rent of the Mustang premises. Although the detail in Mr Kennedy's report of the physical attributes of the premises is limited, it is apparent from photographs tendered in evidence that each of them is a purpose built, old style hotel building. According to Mr Kennedy, the majority of trade for the Subiaco Hotel is through the bars and restaurant producing a high gross profit with food trading from early morning breakfast through to 11 pm at night. High wages are said to affect profit, but the relationship of the business activity at the Subiaco Hotel compared to the Mustang bar is not explained. Mr Kennedy relies on rental review figures apparently

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established in February 2002. The Mount Henry Tavern is said to achieve approximately 36% of its turnover derived from bottle shop trade. The rental figure relied upon was established in July 2000. Franklins Tavern figures relied upon by Mr Kennedy were established in April 1999. The rental then established is said to reflect 5.52% of revenue, 14.4% of gross profit and 40.5% of net profit. Annual reviews are set at CPI or 5% increase whichever is the higher. Mr Kennedy's premise is that the rent has been set by reference to trading figures, but the percentages he refers to, not being round numbers, suggest that they are simply the function of the agreed rental rather than a basis for its calculation.

42 Mr Whyte also relied on Novak's Tavern in Northbridge as comparable premises. Of the premises relied upon by Mr Whyte, Novak's Tavern was the only one trading as a tavern rather than a restaurant. He considered the premises fairly similar although smaller than Mustang Bar, and relevant because of their close proximity to the Mustang Bar, and because of a market base rent review in June 2004. Although Mr Kennedy made reference to Novak's Bar and Grill in his initial report, he did not rely on it because "of absence of trading material and relativity to profitability". Novak's Bar and Grill has an area of 237 square metres and the rental set in June 2004 equated to $320 per square metre. The parties were agreed that the premises are in a prominent corner location. It is accepted that the rental for those premises was struck on an arms length basis. In our view, Novak's Tavern does provide good comparable evidence. Mr Kennedy's rejection of it as comparable evidence demonstrates the singularity of his approach, namely that rental of tavern premises should be set only having regard to net profit, and without regard to other factors.

43 The hypothetical tenant in relation to this lease is one who, at the time of negotiation, either has, or has responsibility to obtain, a licence to trade as a tavern, or special facility. The hypothetical tenant would consider other premises in the locality suitable for use in the way contemplated under the appropriate licence. The photographs of the various comparable premises relied upon by Mr Whyte, which were tendered in evidence, suggests that those premises would lend themselves to a business of the nature carried on as the Mustang Bar. In particular, the Hogs Breath Café, Jade Dynasty Chinese Restaurant, Novak's and the former Vino Vino premises fall into that category. Although, with the exception Novak's, the businesses carried on in those premises are restaurants, we consider that, were they unoccupied, their landlords would be likely to agree a use as a tavern or special facility to a prospective tenant prepared to bring, or obtain a licence for the premises.

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44 Mr Whyte accepts that, if the proposed use of the premises is as a licensed tavern or special facility, a prospective tenant would be prepared to pay something more than the rent which he would pay to use premises as a restaurant. In an area where there are numerous premises capable (perhaps with expenditure on fitting out, as occurred with the Mustang Bar) of use with a special facility licence, we consider it likely that the additional rental above the restaurant rental would not be of a large magnitude.

45 The valuers agree that, if the premises were to be used solely as a licensed restaurant, a rental of $220 per square metre per annum, plus GST, would be appropriate. That proposition is demonstrated by the prior rent paid for the Novak's premises compared to the premises used as restaurants. The question is, what is the appropriate loading to take account of the potential use under a special facility licence.

46 The Novak's rental equated to $320 per square metre, according to Mr Kennedy, or $348 per square metre according to Mr Whyte. Mr Whyte considers, and we accept, that the Novak's Tavern premises are likely to command a higher rental per square metre because of the prominent corner location and the significantly smaller floor area than the Mustang Bar.

47 Mr Whyte considers that even if a licence were provided with the premises the appropriate rental for Mustang Bar would be $230 per square metre (plus GST) equating to a sum of $120 750 per annum (plus GST). This compares to the suggested $460 per square metre per annum (plus GST) suggested by Mr Kennedy.

48 Given our conclusions as to the comparability of the premises relied upon by each of the valuers, we prefer the evidence of Mr Whyte. Although he considered that the figure of $230 per square metre would be the rate if a licence were provided by the lessor, we consider it a reasonable conclusion that a lessee proposing to carry on business pursuant with a special facility licence, would be prepared to pay something more than were he proposing to carry on business as a licensed restaurant. In the absence of any other figure suggested by either valuer, we think that the figure of $230 per square metre (plus GST) is appropriate.

Requirement to provide financial information

49 As already noted, the first variation introduced a special condition which required the lessee to produce annual financial statements to the

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lessor, and gave the lessor the right to have the statements audited. Those provisions are relied upon by the applicant as indicating that the parties intended that the financial statements should provide a basis for future rent reviews. However that submission relies upon an implication, from the inclusion of the special condition, that it relates to the interpretation of "current market rent". The definition contained in cl 4.1 of the lease was not, however, amended in any way which suggests that the market rental should be assessed taking the profitability of the business into consideration. That is notwithstanding that the lease definition of "current market rent" does specify particular matters to be considered. If it was intended to fundamentally affect the method of striking a rent by the introduction of the requirement to provide trading figures, it might be expected that the parties would have reflected that in the definition of current market rent. There are, conceivably, other reasons for inclusion of the special condition relation to trading figures, such as providing information related to the "prevailing market price" to be determined on the exercise of the option in favour of the lessor to purchase the licence at the conclusion of the lease. Given that special conditions 4.1 and 4.2 were added in the clause of the first variation which immediately follows the clause which introduced the option, that implication is at least as strongly drawn as an implication that the provision of financial statements was intended to relate to the rent reviews.

50 We note as well that that the definition of "current market rent" in the lease requires that the value of any goodwill created by the lessee's occupation of the premises be ignored. In our view, that requirement is reflected in s 11(2) of the CTA Act, as it stood prior to the amendment. The reference in that section to the premises being "unoccupied" suggests that the profitability of a business carried on prior to the review should not be, as Mr Kennedy treats it, the primary consideration in assessing the market rent. We accept the respondent's contention that the profitability of the business derives from its goodwill, that is, as the High Court said in Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 "the attractive force that brings in custom and adds to the value of the business". That attractive force is, in the case of the Mustang Bar, the manner in which the business is conducted pursuant to its licence (which the lessee brought to the premises at very considerable expenses), its theme, its fit out (involving renovations by the lessee at a cost of $475 000), management experience and expertise and its location. It is only the location which is an attribute of the premises rather than an attribute brought to the premises by the lessee. The contribution to rental
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value of location is brought to account by comparing the premises with rent achieved by other premises of a similar character within the location.

Conclusion

51 For the foregoing reasons, we consider that the market rental of the premises as at 11 January 2005 is $230 per square metre (plus GST). There was some disagreement between the parties as to whether the area of the premises was 525 or 532 square metres. The parties agreed, at the hearing, that that was a matter of little consequence, and in the circumstances it is appropriate to assume a figure of 528 square metres, approximately halfway between the two figures proffered. On that basis, market rent for the premises as at 11 January 2005 should be set at $121 440 per annum plus GST.

Orders

1. Pursuant to s 11(5) of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA), the rental for the premises known as the Mustang Bar and situated at 46 Lake Street, Northbridge for the term commencing 11 January 2005 is determined to be $121 440 per annum plus GST.

I certify that this and the preceding [51] paragraphs comprise the reasons for decision of the State Administrative Tribunal.

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JUDGE J CHANEY, DEPUTY PRESIDENT