Redelman v State Property Authority

[2010] NSWSC 486

CITATION:	Redelman v State Property Authority [2010] NSWSC 486
HEARING DATE(S):	10/5/10
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	McDougall J at 1
EX TEMPORE JUDGMENT DATE:	10 May 2010
DECISION:	Plaintiffs entitled to recover overpaid rent. Defendant's cross-claim for interest fails.
CATCHWORDS:	LANDLORD AND TENANT - lease - rent review provisions - determination of value - whether personal valuation or exercise of skill required by Valuer General - express term specifying matters not to be considered - exercise of skill and judgment of valuer.
LEGISLATION CITED:	Valuation of Land Act
CATEGORY:	Principal judgment
CASES CITED:	Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 Payce Properties Pty Ltd v Harrison’s Timber Pty Ltd (14 December 1990, unreported; BC 9003195)
PARTIES:	Shya Redelman (First Plaintiff/Cross-Defendant) Philip Solomon Simons (Second Plaintiff/Cross-Defendant) Robert Nathan Simons (Third Plaintiff/Cross-Defendant) Robert Barry Gavshon (Fourth Plaintiff/Cross-Defendant) Robert Malcolm Goot as the Trustees of the Moriah College Building Fund (Fifth Plaintiff/Cross-Defendant) State Property Authority (NSW) (Defendant/Cross-Claimant)
FILE NUMBER(S):	SC 2008/290573
COUNSEL:	T F Bathurst QC / N L Sharp (Plaintiffs) E A Collins / C G Arnott (Defendant)
SOLICITORS:	Landerer & Company (Plaintiffs) DLA Phillips Fox (Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

McDOUGALL J

10 May 2010 (ex tempore – revised 14 May 2010)

2008/290573 SHYA REDELMAN v STATE PROPERTY AUTHORITY (NSW)

JUDGMENT

1 HIS HONOUR: These proceedings relate to the rent review provisions of a lease made on 19 April 1984, between the Minister for Public Works as lessor and a number of trustees, of the Moriah College Building Fund, as lessees. The lease as originally executed was for a term of 40 years with an option of renewal for a further 20 years. The term of the lease has been varied, but nothing turns on the variation.

2 The rental for the first five years of the lease was specified as an amount of money. Thereafter, rental was to be determined, every five years, at 8 per cent of the value of the leased premises calculated on a basis to which I shall have to return in detail. The value of the leased premises was to be determined by the Valuer General. The essential question in this case is whether a determination purportedly made by the Valuer General on 18 March 2005 (and purportedly varied on 4 August 2005) was effective to fix the rental of the premises for the five-year period commencing on 18 April 2004.

3 The plaintiffs (the trustees) are the present trustees of the Moriah College Building Fund, and are by assignment the lessees. The defendant (the Authority) is the successor to the Minister for Works.

The issues

4 In essence, the trustees' attack on the determination (as for convenience I will call what happened on 18 March and 4 August 2005) involved two basic issues. The first was the trustees' contention that it was for the Valuer General personally (that is to say, the person from time to time holding that office) to determine the value of the premises. In this case, the trustees say, the Valuer General did not do so.

5 The second broad ground of attack is based on the assertion that the valuations that were produced were not in accordance with the relevant provisions of the lease, because they did not take proper account of a "use restriction" to which, by reference to the rent review provisions, the Valuer General was required to have regard.

6 Against that background, the trustees stated the real issues for determination as follows (I adapt, slightly and inconsequentially, the language used):

Statement of Issues
The Plaintiffs submit that the following issues arise for determination:
1. Does cl.1 of the Schedule of Rent to the Lease mean that the Valuer-General must personally determine the value of the Premises and act as an expert valuer in so doing?
2. In relation to:
(a) a valuation of the Premises made by Mr John Woods, a registered valuer employed by the State Valuation Office, around 16 February 2004 (“ First Determination ”);
(b) a valuation of the Premises made by Mr John Woods, a registered valuer employed by the State Valuation Office, in around September 2004 (“ Second Determination ”);
(c) a valuation of the Premises made by Mr Philip Lyons, a valuer with Landmark White, a private valuation firm, on around 23 December 2004 (“ Third Determination ”);
(d) a determination of value of the Premises purportedly made by the Valuer-General on 11 February 2005 (“ Fourth Determination ”); and
(e) a determination of value of the Premises purportedly made by the Valuer-General on 18 March 2005 (“ Fifth Determination ”),
were they withdrawn or further or alternatively, not valid determinations for the purpose of the Schedule of Rent to the Lease because:
(i) they were not a determination of value personally made by the Valuer-General acting as an expert valuer; or
(ii) further and alternatively, they were not a determination of value based upon the assumption that the Premises may only be used as a school for education of children up to and including secondary level and must always only be used for that purpose, being an assumption required to be made by cl.1 (iii) of the Schedule of Rent (“ Use Restriction ”).
3. In relation to a purported redetermination of value by the Valuer-General on 4 August 2005 (“ Redetermination” ), was it withdrawn or further or alternatively, not a valid determination for the purpose of the Schedule of Rent to the Lease because:
(a) the determination which it purported to redetermine (ie the Fifth Determination) was itself invalid;
(b) it was not a determination of value personally made by the Valuer-General acting as an expert valuer; or
4. Following from paragraph 2 and 3 above, is it the case that there was no “determination” for the purposes of the Schedule of Rent to the Lease by the end of the first year of the five yearly period commencing 19 April 2004 such that by cl.7 of the Schedule of Rent, the annual rent due for that period was the annual rent due in the immediately preceding period (being $6640,000 plus GST)?
5. Are the Plaintiffs entitled to be reimbursed for annual rental payments made on a “without prejudice basis” in the period 19 April 2004 to 18 April 2009 in excess of the annual rent of $640,000 plus GST which was payable in the period immediately prior to 19 April 2004?
6. If the Plaintiffs are entitled to be reimbursed for excessive annual rental payments, what interest rate should apply?

The rent review provisions

7 The relevant provisions are contained in a "Schedule of Rent" that forms part of the lease. As I have said, the rent for the first five years is fixed in monetary amounts. It is not necessary to refer to those amounts. What is relevant is the provisions of the schedule for the sixth and following years of the lease. I set out those provisions:

The annual rent for the sixth year and thereafter, including the term of any option granted pursuant to Part 18, will be eight per centum (8%) of the value of the demised premises, such value to be determined by the Valuer-General prior to the commencement of the sixth year and re-assessed by him at five-yearly intervals thereafter, provided always that in making such determination the Valuer-General shall:
(i) act as an expert valuer and not in any capacity under the the Valuation of the Land Act;
(ii) shall have no regard to the value of:
(a) any structures and improvements erected or constructed on the demised premises at the lessee’s expense or
(b) any improvements made to structures or improvements in existence at the commencement of this lease where such improvements are made at the Lessees expenses or
(c) the brick veneer house fronting Baronga Ave. and existing at the commencement of this lease.
(iii) base his determination on the value of the demised premises on the basis that the demised premises may only be used for the purposes permitted by Part 5 and may always only be used for that purposes.
2. Rental shall be paid by the lessees yearly in advance and the due date shall be the date of commencement and the anniversaries of the date of commencement of the lease provided that where any such anniversary falls on a weekend public holiday or bank holidays, the due date shall be the last working day immediately prior to that anniversary.
3. The Lessor will obtain any necessary determination from the Valuer-General and will notify the lessee in writing without delay as to the amount of such determination.
4. For the purposes of any determination of the value of the demised premises pursuant to Clause 1 the Valuer-General will determine the value:
(i) as regards the five (5) year period commencing at the commencement of the sixth year, as at the date of commencement of the sixth year: and
(ii) as regards any five (5) year period thereafter at the date of the commencement of that five (5) year period.
5. Should the Lessee or the Lessor object to any value determined by the Valuer-General under Clause 1, then the Lessees or the Lessor as the case may be may within 30 days of the notification of the determination request the Valuer-General to reconsider that determination and such request may be accompanied by any evidence upon which the party making the request bases the objection whereupon the Valuer-General will reconsider his determination and notify the parties of any change in his original determination. PROVIDED ALWAYS that nothing in this clause shall prevent the Lessees from pursuing, in any competent court, any action on the ground that the Valuer General has noted otherwise than in accordance with the principles stated in clause 1.
6. Notwithstanding the provisions of Clause 1 and 2 should the Valuer-General fail to determine the value of the demised premises prior to the commencement of any five (5) year period he may make such determination at any time within the first year of that five (5) year period whereupon the rent based upon that determination for the whole of that year will become due and payable immediately upon notification of that determination to the Lessee.
7. Where the Valuer-General fails to make a determination before the expiration of the first year of any five (5) year period the rent for that year and the subsequent four years shall be the rent applying in the immediately preceding year to that first year.
8. Where at the commencement of the first year of any five (5) year period the Valuer-General has failed to make a determination the Lessees shall pay the rent applying immediately before the commencement of that first year in accordance with Clause 2 and any necessary adjustment of rent shall be made upon notification to the Lessees of the Valuer-General’s determination.

8 As will be seen, the determination is required to take into account the permitted uses under part 5 of the lease. Clause 5.01 of the lease reads as follows:

5.01 USE: The lessees will not use or permit to be used the demised premises or any part thereof for any purpose other than as a school for the education of children to and including secondary school level and for all ancillary and associated activism.

Factual background

9 The Authority's attempts to engage the rent review provisions of the lease for the period of five years commencing on 18 April 2004 involve a number of what might be called false starts. First of all, the Authority commissioned an entity known as the State Valuation Office (SVO) to undertake that task. The SVO was something quite distinct from the office of the Valuer General. A Mr John Woods, a registered valuer in the employ of the SVO, produced a valuation of the freehold as at 16 February 2004. He determined the value to be $18 million. That led to a rent (I think, excluding GST) of $1,440,000.

10 That valuation was provided to the trustees. Through their solicitors, they objected to it on a number of grounds. The grounds essentially raised the broad issues to which I have referred.

11 The Authority then sought to persuade the Valuer General to "engage a valuer employed within the Valuer General's (not tendered or contracted out) to provide a valuation report". It seems that the Valuer General at the time was unable or unwilling to comply with that request. Ultimately, in July 2004, Mr Philip Western (who was then and is now the Valuer General) contracted a body known as State Property and Regional Services (SPRS - as I understand it, the successor to the SVO) to prepare a current market valuation and rental assessment for the leased land.

12 Mr Woods, who was then employed by the SPRS, provided a further valuation on 3 September 2004. That valuation, which stated that it was undertaken as at the rent review date 19 April 2004, deduced a valuation for the freehold of $15,480,000 and a rental of $1,238,400.

13 Again, that valuation was provided to the trustees. Again, through their solicitors, they objected to it. Again, the objections reflected the broad issues to which I have referred.

14 Mr Western considered the trustees' position, and also two separate valuations obtained for them which (perhaps not surprisingly) valued the leased land at a substantially lower sum than Mr Woods had done in either of his valuations. Accordingly, he determined to commission yet another valuation, this time from a firm known as LandMark White (NSW) Pty Ltd. On 4 November 2004 Mr Western wrote to Mr Philip Lyons of that company and asked him to provide a quotation to assess current market rental in accordance with the lease. Mr Lyons provided a quotation, which was accepted. He was commissioned to produce, and did produce, a valuation. Mr Lyons determined that the market value of the leased land was $16,770,000 as at 19 April 2004.

15 That valuation was provided, as were the previous ones, to the trustees. The trustees, through their solicitors, objected. The objections took the grounds to which I have referred.

16 It is to be noted that at no stage up until the time the LandMark White valuation was prepared did the Valuer General (Mr Western) in terms provide anything called a "determination". On any view of the evidence, that had not happened up until 11 February 2005. On that date, Mr Western wrote to the trustees stating as follows:

…

I received your letter of 10 February 2005, objecting to the valuation report prepared by Landmark White. I have not at this point, issued a formal determination as required by the lease, but will do so today.
As discussed with you earlier this week, I support your request for the valuers to discuss their respective valuations.
…

17 Shortly thereafter, Mr Western learned that there might be a problem with his determination, because although he was a qualified valuer, he was not a registered valuer in the State of New South Wales. Accordingly, on 1 March 2005, he withdrew the determination set out in the letter of 11 February 2005.

18 On 18 March 2005, having by then become registered as a valuer, Mr Western provided a "formal determination" in the following terms:

As required under the terms of the lease, I hereby provide my formal determination of value.
I, Philip John Western, Valuer General of New South Wales (Registration Number 7206) determine the value of Lot 3 DP701512, in accordance with Paragraph 1 of the Schedule of rent at page 22 of the said lease, as at 19 April 2004 at $16,770,000 exclusive of GST (Sixteen Million Seven Hundred and Seventy Thousand Dollars, exclusive of GST).

19 The usual process of objection followed. However, in this case, Mr Western met the valuers concerned and discussed matters with them. He raised a number of questions with Mr Lyons of LandMark White. He went to the leased land and inspected it for himself. Having done so, he issued a reconsidered determination on 4 August 2005. That determination reads as follows:

Following the issue of the determination of $16,770,000 (exclusive of GST) notified to you by letter dated 18 March 2005, the Trustees of Moriah College Building Fund, being the Lessees, lodged an objection dated 14 April 2005 to the determination.
As required by the Schedule of Rent, paragraph 5, page 23 of the said lease I have reconsidered the determination.
Following this review, the determination is amended to $15,093,000 exclusive of GST (Fifteen Million and Ninety Three Thousand Dollars, exclusive of GST).
…

20 In relation to the LandMark White valuation (which explicitly formed the basis of both the withdrawn determination and the determination of 18 March 2005) Mr Western said, in his affidavit, only that he "reviewed it". In cross-examination, he said that he "read it". Mr Western agreed in cross-examination that he took no part in the preparation of the LandMark White valuation. Specifically, he accepted that there were a number of steps that a valuer would take in determining the value of a property and that in this case he had taken none of those steps.

21 So far as the evidence goes, it was not until Mr Western undertook the task of reconsideration that he seems to have applied his mind to the issues and brought his expertise to bear. However, it will be necessary to deal with some submissions for the Authority which suggested that he had done so at an earlier date.

The parties’ submissions

22 Against that background, Mr TF Bathurst QC who appeared with Ms NJ Sharp of counsel for the trustees, submitted that there had been no exercise of the kind for which the Schedule of Rent called. He submitted in substance that the task was entrusted to the Valuer General from time to time personally, and that it was not open to the Valuer General to delegate.

23 In any event, Mr Bathurst submitted, such steps as the Valuer General took, leading up to the determination of 18 March 2005, involved no relevant application of expertise.

24 It followed, Mr Bathurst submitted, that the determination made on 18 March 2005 was not in accordance with the contract between the parties and, hence, was a nullity. He relied on the decision of McHugh JA in Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314, in particular at 335-336.

25 Ms E A Collins of counsel, who appeared with Mr C G Arnott of counsel for the Authority, submitted that it was open to Mr Western to delegate, in the way that he had done, the task of performing a valuation of the freehold. Ms Collins relied on the decision of Cole J in Payce Properties Pty Ltd v Harrison’s Timber Pty Ltd (14 December 1990, unreported; BC 9003195).

26 Alternatively, Ms Collins submitted, it was open to Mr Western to determine the procedure that he, as expert, followed. In this case, she submitted, he had decided to adopt the procedure of contracting out, to an expert, the task of valuation of the freehold.

27 Ms Collins submitted, conformably with what Cole J had said in Payce Properties, that it was sufficient if the valuation was one for which the Valuer General took responsibility. In this case, she submitted, Mr Western had done so.

Decision

28 It seems to me that there is a relatively simple answer to this question. It will be remembered that the relevant provisions of the Schedule of Rent require, or state, that the Valuer General shall act as an expert valuer and not in any capacity under the Valuation of Land Act.

29 That is a twofold requirement. The first part of it is an affirmative requirement. The Valuer General, in making his determination, is to act as an expert valuer. That seems to me to involve at least two things. The first is that, as Ms Collins submitted, it calls into play the principles enunciated by McHugh JA in Legal & General. The second, however, is that it indicates that the Valuer General must apply his expertise to the question referred to him. I shall return to this.

30 The second half of the requirement has the effect that it excludes the possibility that, in carrying out the function that the parties have agreed the Valuer General should undertake, the Valuer General is in some way acting pursuant to, or in exercise of, the powers given to him by the Valuation of Land Act. To that extent, it seems to me, the second part of the requirement is somewhat inconsistent with the position considered by Cole J in Payce Properties. In that case, the rent review clause does not appear to have included any requirement that the Valuer General should act as an expert valuer and not in any capacity under the Valuation of Land Act. In those circumstances, Cole J concluded that a valuation prepared within the office of the Valuer General and for which the Valuer General took responsibility answered the description of the rent review clause with which he was concerned.

31 I said that it would be necessary to return to the question of what is involved in acting as an expert valuer. As always (and as McHugh JA pointed out more than once in Legal & General) it is necessary to look to the terms of the particular bargain. In this case, relevantly, the rent is to be 8 per cent "of the value of the demised premises...determined by the Valuer General". What the Valuer General is required to do, acting as an expert valuer, is to determine the value of the demised premises. In doing so, he is to exclude from consideration the matters specifically set out in subpara (ii) of the Schedule of Rent.

32 In other words, it seems to me, the Valuer General is required to bend his expertise to a decision on the question that the parties have agreed to entrust to him. Of course, as Ms Collins submitted, the Valuer General is not a party to the lease. Nonetheless, if he undertakes it (as in this case he did), the task that he is to perform is the one described by the lease.

33 The significance of the words "acting as an expert" include, as McHugh JA pointed out in Legal & General at 336, that "they enable [the expert] to rely on his own investigations, skill and judgment". Further, his Honour said, "they reinforce the view that the parties, as between themselves, rely on the honest and impartial skill and judgment of the valuer".

34 I wish to make it perfectly plain that in this case there has been no attack on the honesty or impartiality of Mr Western, nor should anything that I have said, or am about to say, be construed as implying any criticism of Mr Western; far less any adverse reflection on his honesty and impartiality. On the contrary, having regard both to what he did and to how he described it, I am satisfied that he sought to the best of his ability to act honestly and impartially. But it does not follow that, acting honestly and impartially, he carried out the task required to be undertaken.

35 In this case, taking into account what McHugh JA said, Mr Western was required to make his own investigations and to exercise his own skill and judgment in determining "the value of the demised premises". It was not, in my view, open to him to abdicate that responsibility by contracting the whole of that task out to an independent valuer. I accept, of course, that any expert empowered under a clause such as the one presently under consideration is open to choose such method of proceeding as he or she thinks fit. But it does not follow that the expert is entitled to give the task to another, and, after a process of "review" or "reading" the work of that other, to adopt it and make a determination based upon it.

36 In this case, it seems to me, the exercise undertaken by Mr Western leading up to the production of his determination of 18 March 2005 was not in accordance with the relevant provisions of the Schedule of Rent. It follows that the purported determination was not a determination that could have the effect ascribed to it by the Schedule of Rent.

37 Ms Collins submitted that, even if that were so (and of course she denied the premise) nonetheless the reconsideration undertaken, which culminated in the further determination, or reconsidered or amended determination, of 4 August 2005 satisfied the contractual test. However, when one looks at cl 5 of the Schedule of Rent it is based upon the assumption that there is a valid determination to which, for some reason or other, a party objects. If there is no determination within the meaning of the Schedule of Rent then some purported reconsideration of it pursuant to cl 5 could not in my view improve the position.

38 But even if that were wrong, the reconsideration culminating in the letter of 4 August 2005 occurred outside the time limit fixed by cls 4 (ii) and 6 of the Schedule of Rent. In those circumstances, it seems, the redetermination (a convenient although inaccurate term) was in any event ineffective. It may well be that, if there had been an original determination that did comply with the requirements of the contract, then a reconsidered determination would relate back to the date of the original determination. But where the original determination is not in accordance with the requirements of the contract, it seems to me that the further determination, occurring outside the relevant time limit, cannot cure the situation.

39 In saying that, I am not to be taken as expressing a view that Mr Western's reconsideration, or redetermination, did involve the application of expertise for the purposes of the Schedule of Rent. That question was in issue, but since a decision on it one way or the other would not affect the conclusions to which I have come, it is unnecessary to deal with it further.

40 Those reasons alone are sufficient to justify the conclusion that the trustees are entitled to the relief that they seek. They are also sufficient to mean that the Authority's cross-claim for interest on arrears of rent must fail.

Alternative challenges

41 I have not dealt with the alternative challenges based on the proposition that Mr Lyons of LandMark White did not conduct his determination leaving out of consideration the matters specified in para (ii) of the Schedule of Rent. In circumstances where Mr Lyons expressly directed his attention to the relevant clauses of the lease (and did so more than once) that seems to me to be a difficult argument to sustain. Mr Bathurst submitted that some of the comparable sales on which Mr Lyons relied could not properly be regarded as comparable, having regard to the matters set out in para (ii). But it seems to me that a valuer is entitled to have regard to sales that are not strictly speaking comparable, and to apply his or her expertise to them to see if, notwithstanding the lack of direct comparability, they provide some basis for the assessment of an appropriate value. It is a matter for the valuer, exercising his or her skill and judgment, to take into account the comparability or lack of it, and thus the guidance that the other sales furnish in carrying out the task of valuation.

42 In circumstances where Mr Lyons reminded himself of the use restrictions, and where he considered the market evidence thoroughly and gave reasons for the selection of his rate, I do not think that any error (if there be error) in the choice of comparable sales means that his valuation is, for that reason alone, outside the relevant requirements of the schedule of rent.

Conclusions and orders

43 Nonetheless, as I have said, the conclusions to which I have come mean that the plaintiffs are entitled to succeed and the defendant's cross-claim must fail.

44 I direct the parties to bring in short minutes of order to give effect to these reasons. I stand the proceedings over to 9.30 am on Monday, 17 May 2010.

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