Redgum Developments Pty Ltd v G8 Education Ltd
[2020] VSC 142
•30 March 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST
S ECI 2018 02947
| REDGUM DEVELOPMENTS PTY LTD (ACN 082 373 822) | Plaintiff |
| v | |
| G8 EDUCATION LIMITED (ACN 123 828 553) | Defendant |
---
JUDGE: | NICHOLS J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 25 November 2019 |
DATE OF JUDGMENT: | 30 March 2020 |
CASE MAY BE CITED AS: | Redgum Developments Pty Ltd v G8 Education Ltd |
MEDIUM NEUTRAL CITATION: | [2020] VSC 142 |
---
CONTRACTS – Construction – Interpretation – determination of market rent by expert valuer – Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd [2013] VSCA 17 – Legal & General Life of Australia v A Hudson Pty Ltd (1985) 1 NSWLR 314 – Adnow Pty Ltd v Greenwells Wollert Pty Ltd [2016] VSCA 282 – Boland v Yates Property Corporation Pty Ltd (1999) 74 ALJR 209 at 266 – Spencer v Commonwealth (1907) 5 CLR 418 – Challenger Property Asset Management Pty Ltd v Stonnington City Council (2011) 34 VR 445 at 456–7 – Strike Australia Pty Ltd v Data Base Corporate Pty Ltd [2019] NSWCA 205 – construction of provision of lease incorporating section 37(2) of the Retail Leases Act 2003 (Vic) – requirement of the valuer “having regard to” certain “criteria” – R v Hunt, Ex parte Sean Investments Pty Ltd (1979) 180 CLR 322 – Western Australian Trustees Ltd v Poon (1991) 6 WAR 72 – Origin Energy Electricity Ltd v Queensland Competition Authority [2012] QSC 414 – Rathborne v Abel (1964) 38 ALJR 293.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr L Virgona | MA Legal |
| For the Defendant | Ms R V Howe | Allens |
HER HONOUR:
The issue in this case is whether or not a determination of the market rental for a property at 40 Marlborough Road, Heathmont in Victoria, made by valuers appointed by agreement pursuant to the lease between the landlord and the tenant, was made in in accordance with the terms of the lease.
The plaintiff (Redgum) is the registered proprietor of the Heathmont property (the Premises), which is leased to the defendant (G8), for use as a child care centre. Redgum contends that the rental determination was not made in accordance with the lease, and it should be set aside. G8 defends the valuation.
For the reasons that follow, in my opinion the rental determination was made in accordance with the requirements of the lease and there is no basis for this Court to set it aside. It remains binding on the parties.
Background
Redgum originally leased the Premises to A & A Childcare Centre Pty Ltd, by a lease agreement dated 22 October 2007 (the Lease). The lease was varied by transfer to G8, on or about 28 September 2012. The transfer makes G8 liable as tenant to the terms of the Lease. This had the effect of bringing the Lease beyond the scope of the Retail Leases Act 2003 (Vic), which does not apply to retail premises leased to publicly listed companies.[1]
[1]The Retail Leases Act 2003 (Vic) applies to retail premises leases (s 11). The Act does not define “retail premises leases” but does define “retail premises”. That definition specifically excludes premises tenanted by companies listed on the Australian Stock Exchange: s 4(2)(d)(i).
The Lease relevantly provides for an initial term of 10 years[2] with two further terms of 10 years each;[3] commencement rent of $1,550 plus GST per licenced child care place,[4] being a total of $139,500 plus GST; rent to be reviewed annually and adjusted by reference to the Consumer Price Index (CPI);[5] and rent to be reviewed to market at the commencement of any new term.[6]
[2]Lease between Redgum and A & A Childcare Centre Pty Ltd (22 October 2007) (Lease), clause 1.1; schedule item 8.
[3]Lease, clause 12; schedule item 18.
[4]Lease, clause 1.1; schedule item 6.
[5]Lease, clauses 2.2.1, 18; schedule item 16.
[6]Lease, clauses 2.2.1, 11; schedule item 16.
The market rental review provisions (clause 11) provide as follows:
…
The review procedure on each market review date is –
11.1.1 each review of rent may be initiated by either party unless item 17 states otherwise but, if the Act applies, it is compulsory.
…
11.1.3 If –
(a)the Act does not apply and the party receiving the notice serves an objection to the proposed rent within 14 days and the parties do not agree on the rent within 14 days after the objection is served …
…
the parties must appoint a valuer to determine the current market rent.
…
11.1.4 In determining the current market rent for the premises the valuer must–
(a)consider any written submissions made by the parties within 21 days of their being informed of the valuer’s appointment, and
(b) determine the current market rent as an expert
and, whether or not the Act applies, must make the determination in accordance with the criteria set out in section 37(2) of the Act.
11.1.5 The valuer must make the determination of the current market rent and inform the parties in writing of the amount of the determination and the reasons for it as soon as possible after the end of the 21 days allowed for submissions by the parties.
…
11.2 The valuer’s determination binds both parties.
…
(emphasis added).
On 27 November 2017 the option for a further term of the Lease was exercised, to commence on 17 March 2018. The parties were unable to agree upon the market rent. Redgum’s valuer assessed the rent at $270,000 per annum exclusive of GST; G8’s valuer assessed it at $198,000 exclusive of GST and recoverable outgoings.
Certified Practising valuers, Alan Bertacco and Mark Ferrier of Bertacco Ferrier Property Consultants Pty Ltd (the Valuers), were engaged by the parties to conduct the rental determination for the Premises, as at 18 March 2018. The determination was undertaken jointly by Messrs Bertacco and Ferrier and set out with supporting reasons in a report signed by them (the Determination).
The parties’ respective valuations were provided to the Valuers and treated as their submissions for the purposes of the Determination.
Redgum challenges the Determination on four grounds, namely that the Valuers did not fulfil the task required of them by the Lease, in that they:
(a) failed to have regard to rent concessions and other benefits offered to prospective tenants;
(b) failed to have regard to the manner in which CPI increases would affect the rent payable over the duration of the Lease, which amounted to a failure to have regard to the terms of the Lease;
(c) failed to have regard to certain comparable properties identified in Redgum’s valuation, which amounted to a failure to properly consider Redgum’s submissions;
(d) failed to have regard to the landlord’s outgoings for which the tenant was liable to contribute.
G8 says that the Valuers did in fact have regard to those matters but, having considered them, variously declined to permit them to affect the result of the Determination or discounted the weight to be given to them, properly in the exercise of their discretion.
The references in the parties’ submissions to the Valuers having had regard or having failed to have regard to those matters reflected (although not precisely) the language of s 37(2) of the Retail Leases Act 2003 (Vic) (the Act). As noted above, the Lease required the Valuers to make the determination of the market rental for the premises “in accordance with the criteria set out in s 37(2) of the Act”. The meaning of that requirement is discussed below.
Governing Principles
A court will only interfere with a valuation produced pursuant to an agreement between parties to refer a question of value or price to a valuer if the valuation has not been made in accordance with the terms of the contract.[7] Accordingly, the governing question is whether the expert has carried out the task which he or she was contractually required to undertake.[8]
[7]Adnow Pty Ltd v Greenwells Wollert Pty Ltd [2016] VSCA 282 (Adnow), [39].
[8] AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd (2006) Aust Contract Reports ¶90-241, [51].
As the Court of Appeal put it in Dura v Hue:[9]
[t]he question, first and last, is one of contract. What did the parties bargain for? If the determination does not satisfy the terms of the contract, then it is of no effect and, at the option of the parties, must be done again. If, on the other hand, the determination complies with the contract, the parties are bound by it.
[9]Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd [2013] VSCA 17, [15].
Ordinarily, mere error or mistake in the production of the valuation will not amount to a departure by the valuer from the terms of the contract. A mistake may be of a kind that demonstrates that the valuation has not in fact been made in accordance with the contract. For example, as McHugh JA said in Legal & General v Hudson,[10] a mistake concerning the identity of the premises to be valued could seldom, if ever, comply with the terms of the agreement between the parties. Similarly, in the case of fraud or collusion it may readily be concluded that there has been no valuation in accordance with the terms of the contract. A term that a valuation must be made honestly and impartially will be easily implied.[11] McHugh J explained the effect of the agreement to refer the question of value or price to a valuer, and to be bound by that determination, in the following way:[12]
By referring the decision to a valuer, the parties agree to accept his honest and impartial decision as to the appropriate amount of the valuation. They rely on his skill and judgment and agree to be bound by his decision. … [A] valuation which is the result of a mistaken application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case the critical question must always be: was the valuation made in accordance with the terms of the contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value.
[10] Legal & General Life of Australia v A Hudson Pty Ltd (1985) 1 NSWLR 314 (Legal & General v Hudson) at 255–6.
[11]Legal & General v Hudson at 355-6; Adnow, [40]–[41].
[12]Legal & General v Hudson at 355-6.
Construction of the Lease
The Lease determined the rent payable by the tenant by setting the rental amount for the first year of the term[13] and providing that rent is to be reviewed on each review date, namely, annually for adjustment to CPI and on a “market review date”.[14]
[13]Lease, clauses 1.1; schedule 1 item 6.
[14]Lease, clauses 2.1.1; 1.1. schedule 1 item 16.
The requirements for a review of rent to market are stipulated by clause 11 which states, at the outset, “the review procedure on each market review date is …”. Clause 11 goes on to specify who may initiate a review of rent to market and that where market rent is not agreed or determined by a party giving notice, that the market rent is to be determined by a valuer.[15]
[15]Lease, clauses 11.1.3; 11.1.4.
The parties’ intention to be bound by any rental determination conducted by a valuer pursuant to clause 11 was stated expressly by clause 11.2 of the Lease.
Clause 11.1.4 directs that the valuer must consider any written submission made by the parties; must determine the current market rent as an expert, and (whether or not the Act applies), and must “make the determination in accordance with the criteria set out in s 37(2) of the Act”.
It is accepted that valuation practice requires the exercise of judgment and the forming of opinions. The valuation process, which has been likened to an art, as opposed to a science, admits of variation in approach and permits the valuer to rely on his or her own investigations, skill and experience.[16] A consequence of the nature of the valuation process and depending upon the subject matter of the valuation, an exact exposition of reasons supporting the valuation may be not be possible and thus cannot always be fairly required.[17]
[16]Boland v Yates Property Corporation Pty Ltd (1999) 74 ALJR 209 at 266 [277] (Callinan J); Spencer v Commonwealth (1907) 5 CLR 418 at 442–3; Legal & General Life of Australia v A Hudson Pty Ltd (1985) 1 NSWLR 314 at 336 (per McHugh JA); Challenger Property Asset Management Pty Ltd v Stonnington City Council (2011) 34 VR 445 at 456–7 [24] (per Croft J). And see Strike Australia Pty Ltd v Data Base Corporate Pty Ltd [2019] NSWCA 205 (Strike v Data Base), [9]–[22].
[17]Strike v Data Base, [12]; Secretary of State for Foreign Affairs v Charlesworth, Pilling & Co [10901] AC 373 at 391.
The valuer was to determine the current market rent “in accordance with” the nominated criteria. By its ordinary meaning, if something is directed to be done in accordance with a particular rule or system, it is done in the way that that rule or system says it should be done.[18] The context in which the expression is used in the Lease does not necessitate a different reading. The expression, “in accordance with” should be construed by reference to, and not in isolation from, its object. A requirement to do something in accordance with someone’s wishes, for example, might require the achievement of a particular outcome. Here, the valuer is to make the determination in accordance with the “criteria set out in section 37(2)”. The section does not itself use the expression, “criteria”. The ordinary meaning of criterion is a principle, standard or test by which a thing is judged, assessed or identified.[19] There is no contextual reason to depart from that meaning.
[18]See for example Collins Dictionary (online at 30 March 2020) ‘in accordance with’.
[19]The New Shorter Oxford English Dictionary on Historical Principles (1993) ‘criterion’ (def 1); Macquarie Dictionary (online at 30 March 2020) ‘criterion’.
Accordingly, the stipulation by clause 11.1.4 of the Lease, that the valuer “must make the determination in accordance with the criteria set out in s 37(2) of the Act” directs the valuer to make the determination in the way that s 37(2) provides that current market rent should be determined.
The valuer’s task is defined by the Lease, and not by the statute directly, and the question is not what s 37(2) means but what it means when incorporated into the Lease by reference, when read consistently with the Lease.[20] That said, the statutory text is not incorporated into the Lease in a way that relevantly alters its meaning. The function of s 37(2) in Part 5 of the Act is the same as its function when incorporated into the Lease – namely to specify what it is an expert valuer is to determine when determining market rent.
[20] See Brett v Brett Essex Golf Club Ltd (1986) 52 P & CR 330 at 338, 341; Coopers Brewery Ltd v Lion Nathan Australia Ltd (2005) 93 SASR171, [26]-[29]; Godecke v Kirwan (1973) 129 CLR 629 at 637 (per Wash J).
What, then, does s 37(2) of the Act, as incorporated into the Lease, require of the valuer?
Sections 37(1) and (2) of the Act provide:
37 Rent reviews based on current market rent
(1) A retail premises lease that provides for a rent review to be made on the basis of the current market rent of the premises is to be taken to provide as set out in subsections (2) to (6).
(2)The current market rent is taken to be the rent obtainable at the time of the review in a free and open market between a willing landlord and willing tenant in an arm’s length transaction having regard to these matters –
(a) the provisions of the lease;
(b) the rent that would be reasonably expected to be paid for the premises if they were unoccupied and offered for lease for the same, or a substantially similar, use to which the premises may be put under the lease;
(c) the landlord’s outgoings to the extent to which the tenant is liable to contribute to those outgoings;
(d) rent concessions and other benefits offered to prospective tenants of unoccupied retail premises –
but the current market rent is not to take into account the value of goodwill created by the tenant’s occupation or the value of the tenant’s fixtures and fittings.
The parties’ arguments were focused on the meaning of the phrase, “having regard to”. In substance, the dispute between them concerned whether in fact the matters set out in sub-sections (a) to (d) of s 37(2) had adequately informed the rental determination (to express the matter neutrally). There was no contention in this case that the Valuers had taken into account any consideration excluded by s 37(2).
Read in the context of s 37(1), s 37(2) (as incorporated into the Lease) defines the valuer’s task by stipulating what current market rent is “taken to be”. It delimits the valuer’s task by directing what it is the valuer is to determine when he or she determines “current market rent”. Clause 11.1.4 also mandates that the valuer perform that task as an expert, from which requirement it follows that the valuer is entitled (and indeed required) to exercise his or her own judgment and experience in order to form an opinion about what factors would determine or influence the rent obtainable for the property, and what weight should be given to those factors.[21]
[21]See footnote 16 above.
The effect of clause 11.1.4 is, accordingly, that in determining market rent “having regard to” the factors enumerated in sub-sections 37(2)(a)–(d), the valuer is required to consider those factors and in that way have regard to them. He or she is not required to accord them weight in the assessment of rent regardless of whether, in his or her opinion, they would in fact influence or affect the rent obtainable for the premises in a free and open market, between willing parties in an arm’s length transaction.
Redgum contended in its written submissions that in making a rental determination conducted “having regard to” specified factors, the Valuers were required to give weight to those factors as a fundamental element in making the determination. The contention was founded on the analysis by Mason J (as his Honour then was) of the statutory provision in issue in R v Hunt, Ex parte Sean Investments Pty Ltd.[22]It was then contended that the matters that Redgum submitted had not informed the Valuers’ assessment, had not been given weight or treated as fundamental considerations in the assessment of market rent. I will return to R v Hunt momentarily.
[22](1979) 180 CLR 322 (R v Hunt).
In oral argument Redgum tempered its position, accepting that it would be necessary for the valuer to be satisfied that there was a factual basis for any matter given weight in the valuation. The implication of that submission was that where the valuer considered that there was no factual basis on which a particular factor could be assessed as having relevance to the determination of market rent for the property in question, that factor could not be given weight. Redgum’s counsel said that there would be “considerable scope” for no weight to be given to a factor which, in the valuer’s opinion was not, on the facts of the case, relevant to the assessment of market rent for the property in issue.
The gravamen of Redgum’s submission was, then, that the Valuers did not consider or turn their minds to the factors enumerated in sub-sections 37(2)(a), (c) and (d). G8’s position was that the Valuers had done so.
The parties variously emphasised the construction given to like phrases in a number of statutory contexts, noting that the provision in question has not been the subject of relevant judicial consideration. Although much of the parties’ argument concentrated on the meaning of the expression, “having regard to”, their differences in fact turned on an analysis of the facts and not on any question of principle. Ultimately the parties each correctly understood that the Lease required the Valuers to consider, meaning turn their minds to, the factors enumerated in sub-sections 37(2)(a)-(d) when making the determination of market rental.
Nevertheless, given the attention focused on the issue in submissions I will consider the parties’ submissions that were directed to prior judicial consideration of similar statutory language.
To state the obvious, statutory language must be construed according to its context. Previous interpretations of cognate language in cognate contexts may be instructive, and the closer the language and context to the present case, the more instructive the earlier interpretation. The cases construing like or apparently like expressions may be considered for such guidance as they may provide, on the premise that the construction exercise is not to be resolved by applying a rule of interpretation derived from earlier cases considering different statutes.
Redgum relied upon Western Australian Trustees v Poon[23] in which the Supreme Court of Western Australia considered whether a provision in a rental agreement that current market rental value was to be determined by the valuer acting as an expert was void because it did not specify a basis or formula upon which the rent review could be made. The relevant clause defined “current market rental value” as the best annual rent that could be reasonably obtained for the premises assuming a number of specified circumstances and, “having regard to the current rental value of comparable premises in the metropolitan area”. Malcolm CJ, having first observed that the determination whether a given sale is comparable involves making an expert judgement or the formation of a professional opinion in accordance with the accepted principles of valuation, said that the valuer “cannot disregard current market rental values of comparable premises”, and that the weight to be given to other current market rental values would necessarily depend upon the degree of comparability which was a matter for expert assessment.[24] The circumstances in Poon are similar to those in this case. As discussed above, I construe s 37(2) as requiring the valuer to consider the matters specified in sub-sections (a) to (d). There may be little if any difference between a requirement to consider a matter and a requirement not to disregard it, in the context of a determination by an expert.
[23]Western Australian Trustees Ltd v Poon (1991) 6 WAR 72 (Poon).
[24]Poon at 80–1.
As noted above, Redgum appeared to place heavy reliance on R v Hunt. It was not, however, able to sufficiently identify how the valuation ought to have differed in substance, had a rule of interpretation derived from that case, been applied here. The provision in issue in R v Hunt was meaningfully different from the provision in issue here. There, the High Court determined an application for a writ of mandamus directed to the Commonwealth Minister for Health, requiring him to determine according to law, the prosecutor’s application for approval of an increase in fees charged for care in a particular nursing home. Section 40AA(7) of the National Health Act 1953 (Cth) provided that, “the permanent Head shall, in determining the scale of fees in relation a nursing home … have regard to the costs necessarily incurred in providing nursing home care in the nursing home”. The section’s mandatory language was trained on a single consideration to which regard must be had when determining a scale of fees.
Mason J said of this provision, that, “when section (7) directs the Permanent Head to ‘have regard to’ the costs, it requires him to take them into account and to give them weight as a fundamental element in making his determination”, and that there were two reasons for saying that costs ought be a fundamental element in making the determination, namely that they were the only matter explicitly mentioned as a matter to be taken into account, and that according to the scheme of the provisions, the nursing home proprietor would be bound not to exceed the scale of fixed fees.[25] Mason J was, evidently, not laying down a general rule of construction for the expression, “shall have regard to” (or indeed, “having regard to”), for the purpose of statutory decision-making.
[25]R v Hunt at 329.
As Jackson J observed in Origin Energy[26] (in the course of determining an application for judicial review of a price determination where the Act in question required the pricing entity to “have regard” to the costs of producing the goods), subsequent references to R v Hunt; ex parte Sean (in various contexts) have not established a principle of general application that a matter required to be taken into account must be given “weight as a fundamental factor” if (as Jackson J put it), that proposition is intended to convey more than that the matter must be regarded.[27] His Honour observed that it does not assist much in the resolution of what is required by a “must have regard to” direction under a particular statutory provision, to analyse the meaning of that expression divorced from a particular context.[28] I agree with and respectfully adopt Jackson J’s analysis of the authorities on this point.
[26]Origin Energy Electricity Ltd v Queensland Competition Authority [2012] QSC 414 (Origin Energy).
[27] Origin Energy at 231 [80]–[86]; 233 at [88]–[90].
[28]Origin Energy at 231 [81].
Subsequent to Origin Energy, in M64/2015[29] the High Court considered whether a delegate of the Minister for Immigration made a jurisdictional error in construing regulations which provided for a grant of a visa if the Minister was satisfied that there were compelling reasons for giving special consideration to the grant of a visa “having regard to” four enumerated considerations. The plurality read the provision as requiring the Minister’s state of satisfaction to be informed by the listed factors. He was to take them into account when making his decision.[30] Gageler J said that the requirement that the Minister “have regard to” those factors was a requirement to take them each into account and to give them weight as a fundamental element of the decision made, citing R v Hunt.[31] Those observations, in their context, do not detract from the correctness of Jackson J’s analysis in Origin Energy.
[29]Plaintiff M64/2015 v Minister for Immigration and Border Protection (2015) 258 CLR 173 (M64/2015).
[30]M64/2015 at 187, [30] (per French CJ, Bell, Keane and Gordon JJ).
[31] M64/2015 at 197, [65] (per Gageler J).
Redgum also placed some reliance on Stuart v Treleaven.[32] That case, too, is distinguishable. There, Santow J applied R v Hunt; ex parte Sean as establishing the proposition that the board which had made the decision in issue was required to take the specified matters into account “as a fundamental element in the making of its decision”.[33] The strata titles board had made an order to re-allocate unit entitlements under a strata plan pursuant to the Strata Titles Act 1973 (NSW) which relevantly directed that, “an order may be made only if the [Board] considers, after having regard to the respective value of the lots and … To such other matters as the board considers relevant, that the allocation of the unit entitlements among the lots … was unreasonable when the strata plan was registered…”. The board had based its order on averaging valuations without any evidence that such averaging would result in an accurate valuation of specific lots. The board’s decision did not ascertain or even discuss the market values of each of the lots. In those circumstances the Court considered that the board had not had regard to those values and had not performed its statutory task. The application in Stuart, of the analysis in R v Hunt, of a direction to “have regard to” stated factors, does not establish, for this case, that in reaching a view about the market rent for the Premises, the Valuers were required to accord any particular weight to the factors enumerated in sub-sections 37(2)(a) to (d).
[32]Anderson Stuart v Treleaven (2000) 49 NSWLR 88 (Stewart).
[33]Stewart at 106.
G8 submitted that s 37(2) should be construed substantially in the same way that the provision in issue in Rathborne v Abel[34] was construed by the High Court. Rathborne was an appeal from a determination under the Landlord and Tenant (Amendment) Act 1948-1961 (NSW). That Act provided that the decision maker “shall have regard to” the factors enumerated in determining or varying the fair rent for a dwelling house. The particular issue for the Court was whether, where one factor enumerated was the capital value of the premises on a prescribed date, the Fair Rents Board was entitled to have regard to the current capital value.[35] As to the effect of the direction that the board “shall have regard to” the specified factors the court made the following observations:
[34]Rathborne v Abel (1964) 38 ALJR 293 (Rathborne).
[35]Rathborne, 293.
Kitto J said that:[36]
To require that regard be had to a particular matter in making a discretionary judgment is not to require that the matter shall be allowed an actual influence upon the ultimate result. The matter is to be considered for such bearing as it may have upon the question to be decided, and it is to be allowed such weight (if any) as the tribunal thinks it ought to be given; but if the tribunal things it ought to have no weight, then no weight is required to be given to it.
[36]Rathborne, 301; see also at 295 (per Barwick CJ).
G8, rightly, did not contend that Rathborne established a rule of interpretation for this case, accepting that there the Court was considering a statutory provision which directed that the decision maker “shall have regard to” particular factors; and the content of the matters to which the board was directed to have regard (including the justice and merits of the case) influenced the Court’s construction of the decision maker’s obligation.[37] I accept G8’s submission, however, that the language used to describe the effect of the requirement in Rathborne is also apt to describe the effect of the requirement in s 37(2) that current market rent is taken to be the rent as defined, having regard to the matters specified.
[37]Rathborne, 296, 299, 300, 303.
Plaintiff’s first ground – Rental Concessions
Clause 11.1.4 of the Lease (by reference to s 37(2)(d)) required the valuer to determine the rent obtainable for the premises in a free and open market between willing parties in an arm’s length transaction having regard (among other things) to rent concessions and other benefits offered to prospective tenants of unoccupied retail premises.
Redgum contended that the Valuers did not have regard to rental concessions at all; that that matter was simply excluded from the Determination and to the extent that rental concessions were referred to in the Determination, the reference amounted to mere “lip service” to the contractual task.
I reject those contentions. The Determination in fact reveals that the Valuers positively turned their minds to the issue and formed the opinion that, as a matter of fact, such concessions and other benefits did not bear on the rent obtainable at market.
The Determination set out the criteria to which regard “must be given”, extracting in its entirety, clause 11.1.4 of the lease and s 37(2) of the Act, which include rental concessions and like benefits, at sub-section (d).[38] The Determination then records the Valuers’ analysis of and opinion concerning the factors influencing rents in the child care property sector. In that context the Valuers state (on page 25 of the Determination) that:[39]
Incentives in our view are not considered to be widespread or a driving factor in negotiations, therefore there has been no provision for concessions in our rental determination”.
[38] Determination, page 23.
[39]Determination, page 25.
Immediately before setting out the rental valuation at $216,000 per annum, the Determination (on page 27) includes an “acknowledgment” in these terms:[40]
[40]Determination, page 27.
I re-affirm that the following matters have been considered and applied in the assessment of current market rent for the purposes of acting as the Determining Valuer.
I have taken into account:
·the terms of this lease
·the permitted use
·current annual rentals of comparable use premises
·written submissions received from each party
·any other relevant matters.
Redgum submitted that the statement on page 25 of the Determination should be construed as evidencing a “complete excision” and disregard of rental concessions from the Valuers’ consideration and that the fact that the list appearing on page 27 made no reference to rental concessions is a further indication that the Valuers did not have regard to that factor.
The proper construction of the statement at page 25 of the Determination is that, having considered whether incentives or concessions would influence the rent obtainable for the Premises at market, it is the Valuers’ opinion that they would not. As a result, the Valuers did not make “provision” for concessions in their rental determination; they did not determine that the market rental figure arrived at would be either higher or lower than it otherwise would have been, because of the presence or absence of rental concessions or like benefits. The statement does not mean (as the plaintiff argued) that the Valuers excluded concessions and benefits from the set of issues to which they turned their minds. The Valuers’ treatment of this issue was consistent with their obligations under clause 11.1.4.
As to the statement at page 27 of the Determination, it does not evidence a failure by the Valuers to have regard to rental concessions or other benefits offered to prospective tenants. It is a mere summary of the matters considered, set out in a list which includes, “other relevant matters”. That language does not suggest that it is an exclusive list of the matters to which the Valuers’ have turned their minds. The statement must be read in the context of the Determination as a whole, which includes the positive statement on page 25. Finally, the statement is that the matters identified have been “considered and applied” in the assessment of current market rent. Rental concessions were not in fact “applied” because they were considered not to be a factor influencing rental values.
Plaintiff’s Second Ground – Terms of the Lease (CPI)
Clause 11.1.4 of the Lease (by reference to sub-section 37(2)(a)) required the Valuers to determine the rent obtainable for the premises having regard (among other things) to the provisions of the Lease. Clauses 2.1, 18 and item 16 of the schedule to the Lease provide that the rent is to be reviewed annually and adjusted by reference to CPI, according to the formula set out at clause 18 (the CPI Review Term)
Redgum contended that the Valuers failed to have regard to the CPI Review Term. It put this contention in a various ways: that the term was mentioned but the Valuers paid mere “lip service” to it; that the Valuers did not explain how the CPI Review Term affected the valuation; and that the Valuers ought to have engaged in an exercise of comparing the rent obtainable over the life of the Lease with annual adjustment to CPI, with the rental obtainable over the life of the Lease with fixed annual increases.
Redgum has not established that the Valuers failed to perform the task required by the Lease.
The Determination reveals that the Valuers engaged with the CPI Review Term in the following way:
(a) They described rental review as a “salient” term of the Lease and noted that the Lease provides for annual reviews to CPI;[41]
[41]Determination, page 9.
(b) They considered, in some detail, the submissions (that is, the valuations) prepared by each party. The submissions each observed that the Lease provides for rent reviews annually to CPI. [42]
[42]Determination, pages 19–22.
(c) They identified four properties (separately from those described in the parties’ respective valuations) that they considered to be relevant to the assessment of the relevant rental market.[43] The Valuers set out the relevant features for each property and its associated lease. For each, the rental review provision is noted. Three of the four properties are said to provide for fixed reviews.
(d) Notably, for the property that the Valuers considered the most comparable (294 Whitehorse Road, Mitcham) the lease provided for annual review to CPI. The Whitehorse Road property attracted a rental rate of $2,400 per child care place.[44] The Valuers applied that same rate to the Premises as the basis for their assessment of total annual market rent.
(e) They identify as worthy of notation, Redgum’s submissions about annual review clauses in potentially comparable properties, specifically on the question of the difference between fixed percentage reviews and reviews to CPI (as to which, see below).
[43]Determination, page 24.
[44]Determination, page 24.
It may be inferred from the above that the Valuers considered that the annual rental review provisions informed the market rental obtainable for the Premises. It is true that the Valuers do not explain how or to what extent the fact that the Lease provided for review to CPI affected their valuation. But they were not obliged to do that. If the Valuers’ reasons could be described as limited in that respect, that would not be a criticism that would warrant interference with the valuation by this Court. Redgum’s counsel said in submissions that Redgum did not intend to critique to Valuers’ reasons. This aspect of its case in truth amounted to such a critique.
The Valuers observed, of Redgum’s valuation, that:[45]
[45]Determination, page 21.
Within the rationale,[46] statements and observations worthy of notation include:
[46]The “rationale” is a reference to the relevant part of Redgum’s valuation.
·The majority of annual review clauses are fixed between $3% – 4% whereas the subject is annual to CPI that has underperformed compared to fixed increases. Therefore the commencing rent should be higher to reflect the same effective rent over the term.
…
And that:[47]
Whilst the statement appears regarding the subject’s CPI reviews lagging fixed 3% - 4% reviews, the valuer’s assessment appears to have ignored that point when applying his opinion to the market rent assessment.
[47]Determination, page 22.
In Redgum’s valuer’s opinion, leases with the same starting rent that allowed for fixed annual reviews of 3 – 4% on the one hand, and annual reviews to CPI on the other, would, over the term of the Lease, impose different effective rents. As the Valuers observed, Redgum’s valuers did not in fact apply that adjustment when assessing market rental.
What this discussion indicates is that the nature of the annual rental reviews available during the term of the Lease (whether to CPI or otherwise) was a factor that was understood as bearing on the assessment of which properties were comparable to the subject property and therefore indicative of the rent that would be obtainable for the Premises. As discussed above, in reaching a view about which “rental evidence” was informative on the question of what the market would be prepared to pay for the subject property, the Valuers specifically had regard to the terms of the leases for comparable properties, concerning annual rental reviews (to CPI or at fixed percentages). In doing so they performed their contractual task. They were not required to go further and to adopt the same reasoning as the landlord’s valuer on the question of how the Premises should be compared to other potentially comparable properties, or to further explain their reasoning.
Redgum’s submission that the Valuers ought to have undertaken an exercise of comparing the rent obtainable over the life of the Lease assuming annual CPI increases, with the rent obtainable with fixed annual increases, was mis-directed. It assumed that the Valuers were bound to adopt a methodology that entailed projecting CPI values 10 years into the future. The precise purpose and effect of such an exercise was not explained in Redgum’s submissions.
Plaintiff’s Third Ground - Comparable Properties
Clause 11.1.4 of the Lease required the valuer, in determining the market rent for the Premises, to consider written submissions made by the parties. Redgum contended that the Valuers failed to properly consider its submissions, by failing to have regard to four properties[48] that it had contended were comparable to the Premises. It submitted that the Valuers “excluded” those properties from its consideration and that they did not provide a proper explanation as to why they “ignored” those properties.
[48]The four properties are itemised in the plaintiff’s particulars of claim.
I reject the contention that the Valuers did not properly consider Redgum’s submissions in this regard.
In relation to properties said to be comparable to the subject Premises for the purposes of determining market rental, Redgum’s valuation lists 14 properties said to comprise some of the “rental evidence” considered for the purposes of their valuation.[49] Redgum’s valuer observes that comparison of the property with other rental evidence is difficult because of the age of the Premises and the number of places offered by the Premises.[50] He states that he has had particular regard to two properties (those at Boronia Road, Wantirna South and Middleborough Road, Blackburn) which he considers particularly comparable to the Premises.
[49]Redgum’s valuation, page 11. The rental evidence is said to include, but not to be limited to, the 14 listed properties.
[50]Redgum’s valuation, page 11.
The Valuers treat Redgum’s submissions in the following way:
(a)They observe that the valuation lists 14 “pieces of rental evidence”. The Determination then sets out each of the 14 properties identified in Redgum’s valuation, noting the address, the number of child places offered, the commencement date for the lease and the rental amount on a per place basis, for each property. The list includes the four properties submitted by the landlord to have been excluded from the Valuers’ consideration.[51]
(b)They state that in relation to Redgum’s valuer’s “rationale” (that is, his assessment of market rental) several of their observations are worthy of notation, among them, specifically, the fact that the landlord’s valuer has given particular regard to the properties at Boronia Road, Wantirna South and Middleborough Road, Blackburn.[52]
(c)They consider the properties said by the landlord’s valuer to be the most comparable to the Premises (Boronia Road, Wantirna South and Middleborough Road, Blackburn). They give the opinion, with reasons, that each of those properties can support higher rents than the Premises.[53]
(d)The Valuers’ analysis of Redgum’s submissions concerning the 14 pieces of rental evidence reveals that the Valuers have considered the entirety of that evidence. They consider, for example, which of the 14 properties are either not constructed or leased off the plan and which of the 14 properties, said by the landlords to be comparable to the Premises, offer a number of childcare places that is 20% more than those offered at the Premises. They consider the features of those properties that offer approximately the same number of childcare places.[54]
[51]Determination, page 20–1.
[52]Determination, page 21.
[53]Determination, page 22.
[54]Determination, page 22.
I reject Redgum’s submissions that the Valuers have provided an inadequate explanation for ignoring four of the properties mentioned in their valuation. Those properties are specifically mentioned in the Determination and are considered as part of the totality of the evidence identifying potentially comparable properties. The Determination reveals that the Valuers have carefully considered which properties (including those identified by the parties in their submissions and those separately identified by the Valuers) are sufficiently comparable to the Premises to inform their assessment as to the market rent obtainable for the Premises. Detailed reasons for their opinion are given.
There is no general requirement that a valuer acting as an expert must provide reasons for agreeing or disagreeing with each or any part of the parties’ submissions. In any case, the contractual requirement here was only to consider any written submissions made by the parties. It is evident that that requirement was met.
Plaintiff’s Fourth Ground – Landlord’s Outgoings
Clause 11.1.4 of the Lease (by reference to sub-section 37(2)(c)) required the valuer to determine the rent obtainable for the Premises having regard (among other things) to the landlord’s outgoings to the extent to which the tenant is liable to contribute to those outgoings.
Redgum submitted that the Determination refers to outgoings payable under the lease, but the manner in which those outgoings would affect the current market review are not explained in any meaningful way or at all. For that reason, the reference to outgoings does not reveal that the Valuers determined market rent having regard to outgoings.
Further, Redgum submitted that the statement that appears at the conclusion of the Determination headed, “Acknowledgment” which is said to “reaffirm” the matters that the Valuers have taken into account, makes no reference to outgoings. Redgum’s counsel said that had that list of factors included reference to outgoings, that would have been sufficient to indicate that the Valuers had fulfilled their contractual task.
The latter point can be dealt with shortly. As noted above in connection with the issue of rent concessions, the list of considerations appearing under the heading “Acknowledgment” cannot reasonably be taken to be a statement of all of the matters informing the Valuers’ opinion concerning market rental. In any event, the statement of the matters taken into account includes “the terms of this lease”. The terms of the Lease govern the tenant’s liability for the landlord’s outgoings.[55]
[55]Lease, clauses 1.1, 2.1.5, 2.1.2, 5.4; schedule item 10.
The Determination reveals that the Valuers had regard to the outgoings for which the tenant was responsible in the course of formulating their opinion as to market rent, in particular:
(a)They identified the salient terms of the lease as including a provision for the lessee to pay all outgoings;[56]
(b)They observed that G8’s submissions identified the present value of outgoings including land tax;[57]
(c)They made their assessment of rental exclusive of outgoings, and specifically recorded in the Determination that the lessee is to pay all outgoings and calculated the amount of those that were recoverable, noting the value for each type of outgoing (rates, land tax and so on), quantifying the total liability on a per square metre and per child basis.[58]
[56]Determination, page 9.
[57]Determination, page 19; G8’s valuation, page 15.
[58]Determination, page 25.
It is true that the Determination does not explain “the manner in which the outgoings would affect current market rent”, if indeed it was the Valuers’ opinion that the way in which outgoings were dealt with in the Lease or the cost of the outgoings were factors that would affect the rent obtainable. If that criticism has any potency, it is not a matter on the basis of which the Determination can be impugned.
Disposition
The plaintiff’s claim is dismissed.
15
0