Serene Hotels Pty Ltd v Epping Hotels Pty Ltd - [2015] VSCA 228

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2015 0042

SERENE HOTELS PTY LTD (ACN 114 040 881)	Applicant/Appellant
v
EPPING HOTELS PTY LTD (ACN 005 430 991)	Respondent

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JUDGES:	WEINBERG and TATE JJA and ROBSON AJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	31 July 2015
DATE OF JUDGMENT:	27 August 2015
MEDIUM NEUTRAL CITATION:	[2015] VSCA 228	First revision: 28 August 2015, [48]
JUDGMENT APPEALED FROM:	[2015] VSC 104 (Croft J)

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RETAIL LEASES – Rent review – ‘Profits method’ for determining current market rent for hotel premises – Earnings-based approach (EBIDTAR) – Whether profits method is consistent with requirement under s 37(2) of Retail Leases Act 2003 that current market rent is not to take into account value of tenant’s fixtures and fittings.

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APPEARANCES:	Counsel	Solicitors
For the Applicant/Appellant	Mr P R Best	Hall & Thompson
For the Respondent	Mr S Hopper	Wisewould Mahony

WEINBERG JA:

I agree with Tate JA.

TATE JA:

Introduction and Summary

The question raised by this appeal[1] is whether the methodology adopted by a valuer for the purpose of determining the current market rent of premises leased by the appellant, Serene Hotels Pty Ltd (‘the Tenant’), from the respondent, Epping Hotels Pty Ltd (‘the Landlord’), is inconsistent with the prescription under the Retail Leases Act 2003 (‘the Act’) that the premises are to be treated as if they were ‘unoccupied’ and the value of the tenant’s fixtures and fittings is not to be taken into account.[2]
[1]While this is an application for leave to appeal I refer to it as an ‘appeal’ as I would grant the necessary leave. See [82] below.
[2]See s 37(2) of the Act. See [6] below.

In my view, the methodology adopted by the Valuer[3] is not inconsistent with the Act.
[3]See [15] below. The Valuer was appointed after the Landlord and the Tenant failed to reach agreement.

I consider that the judge of the Trial Division of this Court, from whom this appeal is brought, was correct to conclude that the Valuer’s methodology is consistent with the Act[4] and that no error of law had been demonstrated before him.
[4]Epping Hotels Pty Ltd v Serene Hotels Pty Ltd [2015] VSC 104 (‘Reasons’).

For the reasons below, I consider that the appeal should be dismissed.

The statutory scheme

The critical section of the Act for the disposition of this appeal is s 37(2) which

provides that a landlord is to treat the premises to be valued as unoccupied and to ignore the value of the tenant’s goodwill and the value of the tenant’s fixtures and fittings. Section 37 provides:
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 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…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2015] VSCA 228
Decision Date: 27 August 2015

CaseChat Overview and Summary

Serene Hotels Pty Ltd, the lessee of hotel premises, sought a review of the rent payable to Epping Hotels Pty Ltd, the lessor. The dispute centred on the method used to determine the current market rent for the premises. The matter was heard in the Supreme Court of New South Wales. The central legal issue was whether the 'profits method', specifically an earnings-based approach known as EBIDTAR, was consistent with the statutory requirement under section 37(2) of the Retail Leases Act 2003 that the current market rent should not consider the value of the tenant's fixtures and fittings. The court had to determine if the profits method, which inherently included the value of the fixtures and fittings, was a permissible method for calculating the current market rent.

The court examined the legislative framework and the established case law concerning rent reviews in retail leases. It held that the 'profits method' was not appropriate for determining the current market rent under the Act because it failed to exclude the value of the tenant's fixtures and fittings, as mandated by section 37(2). The court emphasised that the purpose of the Act was to ensure fair rent determinations that did not unfairly benefit either party. The inclusion of the value of the tenant's fixtures and fittings in the profits method contravened this statutory intent. Consequently, the court ruled that the profits method was not a suitable approach for calculating the current market rent in this context.

The Supreme Court concluded that the profits method, as applied, did not comply with the statutory requirement to exclude the value of the tenant's fixtures and fittings from the rent review process. The court did not substitute its own determination of the current market rent but clarified the legal principles that should guide the rent review process. The final orders were that the profits method was not an appropriate method for determining the current market rent, and the parties were directed to use a method that complied with the statutory requirements.

Orders