The Commonwealth of Australia v Merilla Pty Ltd
[2016] WASC 150
•19 MAY 2016
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: THE COMMONWEALTH OF AUSTRALIA -v- MERILLA PTY LTD [2016] WASC 150
CORAM: BEECH J
HEARD: 29 APRIL 2016
DELIVERED : 19 MAY 2016
FILE NO/S: CIV 2795 of 2015
BETWEEN: THE COMMONWEALTH OF AUSTRALIA
Plaintiff
AND
MERILLA PTY LTD
ARTUS PTY LTD
Defendants
Catchwords:
Contracts - Lease - Proper construction - Rent review clause - Provision in Lease for determination of rent by valuer - Whether valuer's determination of market rent was made in accordance with the Lease - Turns on own facts
Legislation:
Nil
Result:
Declaration that determination of market rent is valid and binding on the parties
Category: B
Representation:
Counsel:
Plaintiff: Ms C H Thompson
Defendants: No appearance by counsel
(By leave) Mr G Pitman for First Defendant
(By leave) Mr M Franks for Second Defendant
Solicitors:
Plaintiff: Minter Ellison
Defendants: No appearance
Case(s) referred to in judgment(s):
AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173
Australian Vintage Limited v Belvino Investments (No 2) Pty Ltd [2015] NSWCA 275
Bell v Cribb [2013] WASC 32
Eastern Metropolitan Regional Council v Four Seasons Construction Pty Ltd [2000] WASC 178; (2000) 22 WAR 372
Glew v Frank Jasper Pty Ltd [2010] WASCA 87
Gollin & Co Ltd v Karenlee Nominees Pty Ltd [1983] HCA 38; (1983) 153 CLR 455
Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314
McKay v Commissioner of Main Roads [No 7] [2011] WASC 223
Merilla Pty Ltd v Commonwealth of Australia [2015] WASC 309
Merilla Pty Ltd v Commonwealth of Australia [2015] WASC 309 (S)
Neil v Nott [1994] HCA 23; (1994) 121 ALR 148
Shoalhaven City Council v Firedam Civil Engineering Pty Ltd [2011] HCA 38; (2011) 244 CLR 305
Spencer v The Commonwealth of Australia [1907] HCA 82; (1907) 5 CLR 418
Wilden Pty Ltd v Green [2009] WASCA 38; (2009) 38 WAR 429
WMC Resources Ltd v Leighton Contractors Pty Ltd [1999] WASCA 10; (1999) 20 WAR 489
BEECH J: The defendants (the Owners) own land in Busselton that is leased by the plaintiff (the Commonwealth). The building on the land was purpose built by the Owners to the Commonwealth's specifications under a design, contract and lease agreement.[1] Since about October 2013, the parties have been in dispute about the rent review for the fourth Rent Period of the lease.
[1] See Merilla Pty Ltd v Commonwealth of Australia [2015] WASC 309 [102] ‑ [106].
Some of the disputes between the parties relating to the fourth Rent Period were determined in an earlier action brought by the Owners against the Commonwealth. On 20 August 2015, I published reasons for decision (the 2015 Decision) in that action.[2] Regrettably, from very shortly after the publication of those reasons, further disputes emerged between the parties as to the rent for the fourth Rent Period of the lease.
[2] Merilla Pty Ltd v Commonwealth of Australia [2015] WASC 309.
The central issue in these proceedings is whether a determination of market rent made by a valuer in January 2016 is valid and effective to determine the rent for the fourth Rent Period. For the reasons that follow, I am satisfied that it is, and would make a declaration to that effect.
It is convenient to begin by setting out the terms of the lease between the parties. I will then summarise the issues and reasons in the 2015 Decision, before outlining events since that decision.
The Lease
On 10 September 2010, the Owners as lessor and the Commonwealth as lessee entered into a lease (the Lease). The Lease is for a term of seven years commencing 4 May 2010, with two options of renewal for further terms of three years in favour of the Commonwealth[3].
[3] Lease, cl 33; sch 1, item 4, item 5.
In July 2009, one of the Owners, Merilla Pty Ltd, and the Commonwealth had contracted for Merilla to design, construct a building to the Commonwealth's specifications and lease the premises.
The annual rental under the Lease was $287,500, calculated at $575 per m2.[4]
[4] Lease, sch 1, item L.
Generally, the Lease provides for rent reviews to the greater of an increase of 3.5% or a CPI increase.[5]
[5] Lease, cl 5.3, cl 5.4, cl 5.5.
There is an exception to this general rent review regime. Clause 5.7.1 provides that 'the rent for the fourth Rent Period of the Term shall be the rent which is agreed between the Parties and failing agreement within three months after the commencement of that Period, the market rent determined in accordance with the procedure set out in Schedule 7'. Schedule 7 is set out later in this section of my reasons.
The date of the review at the third anniversary of the Commencement Date, referrable to the fourth Rent Period, is termed the 'Market Review Date'.[6]
[6] Lease, cl 5.2.1; sch 1, item N.
Clause 5.6 provides as follows:
5.6.1The Rent fixed under this clause 5 is payable from the commencement of the relevant Rent Period.
5.6.2Until the Landlord notifies the Tenant of a change in Rent, the Tenant must pay the Rent which applies immediately prior to the Review Date.
5.6.3If the Rent changes by the operation of clause 5, the Parties must make any necessary adjustment by payment or repayment within 30 days after the Landlord gives the Tenant notice under clause 5.6.2.
Clause 5.8 is in the following terms:
5.8.1.Subject to clause 5.8.2 if a review notice is given, until such time as the Rent for the Rent Period has been agreed by the Parties or determined by the Valuer, the Tenant must continue to pay the Rent payable immediately prior to the commencement of that Rent Period and the Parties must make any necessary adjustment within 30 days after the Rent has been agreed or determined.
5.8.2.If the Rent for the Rent Period which is increased under clause 5.3 or is agreed or determined under clause 5.7 exceeds the Rent for the immediately preceding Rent Period, until the Landlord provides the Tenant with the documents referred to in clauses 18.6 and 18.8 ('the Documents') in respect of the anniversary of the Commencement Date which coincides with the commencement of the Rent Period for which Rent is increased or agreed or determined under this clause 5 ('the Relevant Rent Period'), the Landlord must continue to accept the Rent payable immediately prior to the commencement of the Relevant Rent Period and the Parties must make any necessary adjustment within 30 days after the Landlord provides the Documents to the Tenant.
Clause 33 provides as follows:
33.1.1If:
aa Further term is set out in Item S;
bthe Tenant wishes to lease the Premises for that Further Term commencing upon the expiration of the Term granted by this Lease;
cthe Tenant gives notice to the Landlord of that wish not less than 3 months prior to the expiration of the Term; and
dany breach or default by the Tenant under this Lease prior to that notice which has been notified to the Tenant by the Landlord has been either waived or rectified or in the case of a negative covenant, has been discontinued,
then the Landlord must grant to the Tenant a new lease of the Premises for the Further Term:
eat an initial Rent for the first Rent Period which is agreed between the Parties or failing agreement within 3 months after the commencement of the new lease determined in accordance with the procedure set out in schedule 7; and
fotherwise, on the same terms contained in this Lease except that:
ithis clause 33 will be omitted unless Item S refers to a Further Term after that for which the new lease is being granted;
iithe Review Dates in the Further Term will be those set out in Item T; and
iiithe items in Schedule 1 will be amended as appropriate.
Item T of sch 1 provides that Rent Review Dates are each anniversary of the Commencement Date of the Further Term and provides that the Market Review Date is the Commencement Date of the Further Term.
Schedule 7 provides as follows:
A.1.1.If the Parties fail to agree the Rent for the fourth Rent Period of the Term in accordance with clause 5.7 or the first Rent Period of the Further Term in accordance with clause 33.1.1.e, the Rent will be determined by a Valuer appointed in accordance with clause A.2.1 of this Schedule.
A.2.1.If the Parties fail to agree on a Valuer within 14 days after the expiration of a period of 3 months following the commencement of the Further Term either Party may request the president of the Institute to appoint a Valuer.
B.Valuer's determination of Rent
B.1.Role of Valuer
B.1.1.The Valuer must:
a.determine the open market rental value of the Premises at the commencement date of the Further Term (the Effective Date);
b.act as an expert and not as an arbitrator; and
c.give a written determination with reasons within 28 days after the Valuer's appointment.
B.2.Submissions
B.2.1.In making a determination the Valuer must consider the written and oral submissions of a Party received within 14 days after the Valuer's appointment.
B.3.Fees
B.3.1.The fees and expenses of the Valuer must be paid by the Landlord and the Tenant equally.
B.4.Determination final
B.4.1.The Valuer's determination is final and binding.
B.4.2.The Valuer must determine the open market rental value of the Premises at the Effective Date assuming that:
a.the Landlord is a willing but not anxious landlord and the Tenant is a willing but not anxious tenant;
b.the Premises are available with vacant possession;
and taking into account:
c.the open market rental value (other than rental values which have been escalated to a predetermined amount or in accordance with movements in the consumer price index or any other index) at the Effective Date of comparable premises, in the town or city within which the Building is situated whether that value is determined in respect of new lettings with vacant possession or in respect of occupied premises;
d.the Permitted Use of the Premises;
e.the period which will elapse between the Effective Date and the first review date in the Further Term or, if there is no review date, the end of the Further Term;
f.the increased value of the Premises occasioned by the Landlord repainting or recarpeting the Premises pursuant to this Lease (provided that nothing in this clause will require the Tenant to reimburse the Landlord for the cost of that repainting or recarpeting);
g.the restriction on user, assignment or sub-letting;
h.the terms and conditions generally of the lease for the Further Term;
i.any rent-free period, financial contribution (including any contribution towards the cost of fitout) or other concession customarily or likely to be offered to new tenants of comparable vacant premises.
but not taking into account:
j.the adverse effect on the condition or rental value of the Premises of any breach of this Lease by the Tenant;
k.any Fittings and other improvements or alterations installed in or made to the Premises by or for the Tenant, its sub‑tenants or their respective predecessors in title during the Term, the Further Term or any period of prior occupation to the intent that the Premises for the purpose of determining the open market rental value will be regarded as cleared space but otherwise serviced and habitable;
l.any increase in value in the Premises as a result of any structural alterations or other voluntary improvements made to the Premises or the Building (including installation of equipment) by the Landlord at its discretion for any reason at any time (except any carried out at the prior request of the Tenant to which the Tenant has not contributed either by way of service charge or otherwise);
m.any special interest of the Tenant, its sub‑tenants or their respective predecessors in title including the fact that the Tenant is a sitting tenant;
n.goodwill occasioned by the Tenant, its sub‑tenants or their respective predecessors in title;
o.any right of the Tenant to use any part of the Building or the Land other than the net lettable area of the Premises and the Car Parking Bays; or
p.any naming rights the Tenant may have in respect of the Building.
C.If Valuer fails to make a determination
C.1Replacement of valuer
C.1.1If the Valuer fails to make a determination under clause B of this Schedule within 28 days after the date of the Valuer's appointment, a Party may request the president of the Institute to appoint another Valuer to make a determination in accordance with that clause.
C.1.2A Valuer appointed under this clause C will be deemed to have been appointed under Clause A of this Schedule and must make the determination in accordance with Clause B of this Schedule.
The 2015 Decision
In the action the subject of the 2015 Decision, the Owners contended, among other contentions, that cl 5.7.1 was void for uncertainty, and the Commonwealth contended that a purported determination made on 17 April 2014 of the open market rental value of the premises as at 4 May 2013 was effective to determine the rent for the fourth Rent Period.
The major conclusions in the 2015 Decision may, relevantly, be summarised as follows:
(1)Clause 5.7.1 is not uncertain.
(2)On its proper construction, cl 5.7.1 of the Lease provides that the rent for the fourth Rent Period will be the rent agreed between the parties or, if there is no agreement within three months of the commencement of the fourth Rent Period, the rent determined by a valuer as the market rent for the fourth Rent Period in accordance with sch 7, with all necessary changes.
(3)The necessary changes to sch 7 when it is applied to the determination of market rent for the fourth Rent Period are:
(a)the insertion of the words 'the fourth Rent Period of the Term' immediately before the words 'the Further Term' in cl A.2.1;
(b)the modification of cl B.1.1(a) to read that the 'Valuer must determine the market rent of the premises at the commencement date of the fourth Rent Period of the Term (Effective Date)'; and
(c)the deletion of cl B.4.2.
(4)Clause 5.7.1 operates so that on a market rent review, the rent may increase or decrease.
(5)The effect of cl 5.7.1, read with sch 7 (see especially cl A.2.1), is that it is open to either party to request the appointment of a valuer once the three‑month period has elapsed.
(6)The purported determination of 17 April 2014 was not binding as it was not made in accordance with the Lease.
In my decision as to the costs of the action, I summarised the outcome of the 2015 decision in the following terms:[7]
The result of the litigation is that the rent for the fourth Rent Period is, at present, unknown and yet to be determined, but is open to be determined by a valuer who determines the market rent for the Premises as at 4 May 2013.
[7] Merilla Pty Ltd v Commonwealth of Australia [2015] WASC 309 (S) [19].
Events since the 2015 Decision
Since the delivery of the 2015 Decision, the parties have not reached agreement on the rent for the fourth Rent Period.
On 15 October 2015, Mr Pitman wrote on behalf of the Owners to Jones Lang LaSalle on behalf of the Commonwealth. The letter included the following:
In accordance with the decision, the Landlord is now entitled to the CPI/Fixed 3.5% rent reviews which were due in May 2014 and May 2015, and which bring the rent up to the new amount of $329,912.86, and there is a shortfall arrears of $40,026.76, which is due in 30 days. These amounts are now due and payable within 30 days of this letter. We attach the invoices, and associated certificates, for your action.
…
We are aware of a letter from your Lawyer sent, to Lawfield (our Lawyers), on the 4th September 2015. We will not be consenting to any further valuation on the following basis. Firstly, the lease only permits one review for 2013 and that review has concluded, although it has been held to be of no effect. No further attempt at rent review for 2013 is permitted by the lease. Second, even if it is permitted, it is now out of time. There must be some time limit on when a party can request this review and even though the time limit is not specified in the lease, a delay of more than 2 years is clearly too long. Third, it is clear from the Judge's comments at para 122 that any review now must take into account that the owner would tend to hold out to recover an appropriate return on the capital costs of construction through the rent, and the tenant would tend to pay a higher rent to reflect the special suitability of the property to that tenant's needs. And at para 128 the Judge observed that the terms of a recent arms‑length lease for the subject property, including its rent, would be relevant to any review. Given these considerations it is apparent that the landlord would not accept any amount for the market rent less than $307,977 pa plus gst, which is the amount payable under the 'arms length' terms negotiated between the parties, and is the amount which is payable now, so no review is necessary.
…
Our position is very clear. The decision is made and Centrelink owes the Landlord rent in accordance with the attached invoices. There will be no more discussion from our side. Payment is due in thirty days. If payment is not made, the Landlord will exercise its legal rights and lock out the tenant.
We look forward to receiving prompt payment. [8]
(original emphasis)
[8] Exhibit B.
On 10 November 2015, the Commonwealth filed an originating summons commencing these proceedings, and a chamber summons seeking an interlocutory order restraining the Owners from exercising any power of re‑entry of the premises.
On 12 November 2015, I granted an interim injunction restraining the Owners from exercising any power of re‑entry.
On 20 November 2015, I ordered, without opposition from the Owners, that the Owners be restrained from exercising any power of re‑entry of the premises.
By application dated 12 November 2015, the Commonwealth applied to the President of the Australian Property Institute (API) for the appointment of a valuer to determine the rent for the fourth period.[9]
[9] Exhibit A, pages 96 ‑ 99.
By letter of 17 November 2015, the President of the API offered to Mr Michael Copeland an appointment to determine the rent for the fourth Rent Period.[10]
[10] Exhibit A, pages 94 ‑ 95.
By letter of 4 December 2015, Mr Copeland wrote to the Owners and to the Commonwealth.[11] Mr Copeland's letter:
(1)referred to the request by the President of the API;
(2)stated that the parties to the Lease, upon both executing the agreement said to be constituted by the letter, had jointly appointed him to carry out the determination;
(3)stated that he agreed to accept the appointment subject to receiving a signed copy of the agreement from both parties;
(4)stated that the agreement constituted by the letter set out the terms and conditions governing his appointment and that it was binding on both parties;
(5)stated that both parties were required to submit a copy of the current lease and any sub‑leases, extensions, variations or assignments and copies of all correspondence from the parties regarding negotiations prior to and subsequent to the relevant review date of the rental value; and
(6)encouraged the parties to provide written submissions to him on matters that they considered relevant and that may affect the rental value.
[11] Exhibit A, pages 89 ‑ 92.
By email to the parties, Mr Copeland stated that he would need the signed instruction returned from all parties before proceeding further with his appointment.[12] The Commonwealth executed Mr Copeland's letter of 4 December 2015 on 8 December 2015.[13] The Owners have not done so.
[12] Exhibit A, page 53.
[13] Exhibit A, page 93.
By email of 9 December 2015, Mr Pitman asked Mr Copeland to advise whether he would be proceeding with the determination regardless of the fact that the Owners had not signed the authority.[14] Mr Copeland said he would be proceeding, and asked Mr Pitman whether the Owners would be making any submissions.[15] Mr Pitman said that the Owners would make submissions on a without prejudice basis.[16] That is evidently a reference to the submissions being without prejudice to the Owners' contention that any determination by Mr Copeland would be invalid and of no effect.[17]
[14] Exhibit A, page 727.
[15] Exhibit A, page 726.
[16] Exhibit A, page 726.
[17] See Exhibit A, page 729.
The Owners, through Mr Pitman, wrote a letter dated 8 December 2015 containing submissions to Mr Copeland.[18] In that letter, the Owners:
(1)stated their strong position was that the rent should be the same as for the preceding period, plus an increase of 3.5%;
(2)stated that the building was a custom built service centre for Centrelink built in accordance with the performance specifications which the Owners attached to their letter. The Owners said that this was why the initial rent was above standard office rents, and why Centrelink was happy to pay that level of rent in recognition of the higher construction costs, submitting that it was unrealistic to expect a developer to build such a building and recoup those costs within three years;
(3)submitted that for the purpose of comparing premises, a valuer can only compare buildings of the same age and environmental standard, stating that the building had a 4.5 star National Australian Built Environmental Rating System (NABERS) rating;
(4)stated there were no comparable buildings in Busselton, Bunbury or the region and that, accordingly, the most comparable buildings were two Centrelink buildings, one in Gosnells ($518 per m2) and one in Fremantle ($550 per m2);
(5)pointed to offers to purchase the premises received in October 2012 and February 2013, submitting that the offer prices reflected the market's views as to the rent; and
(6)attached a letter from an agent/valuer expressing the view that the rent for the fourth period should be the same as for the third period.
[18] Exhibit A, pages 507 ‑ 509.
On 8 December 2015, the Commonwealth provided submissions to Mr Copeland.[19] By email of 15 December 2015, Mr Pitman, on behalf of the Owners, made some comments to Mr Copeland regarding the Commonwealth's submissions.[20] In his email, Mr Pitman:
(1)stated that there was a difference between Open Market Rent as defined in the Lease and market rent, saying that, unlike Open Market Rent, market rent allows the valuer to compare premises at any location, and permits the subject premises to be considered;
(2)suggested that the valuations relied on by the Commonwealth used lease evidence which was not appropriate, because only specialised buildings of the same age and with 4.5 star NABERS ratings could be considered comparable; and
(3)emphasised the importance of reading the specifications for the building to understand the construction process and costs involved.
[19] Exhibit A, pages 515 ‑ 518.
[20] Exhibit A, pages 513 ‑ 514.
On 24 December 2015, Mr Pitman sent an email to the Commonwealth's solicitors,[21] stating that the Owners did not accept that a second rent determination could be made, and that Mr Copeland had not given a written determination with reasons within 28 days of his appointment, as required by the Lease. Later on 24 December 2015, Mr Pitman sent another email to the Commonwealth's solicitors,[22] asserting that Mr Copeland had not complied with the terms of the Lease, so that the determination was invalid.
[21] Exhibit A, page 729.
[22] Exhibit A, page 731.
The December Report
Mr Copeland issued a document entitled 'Rental Determination Report' in December 2015 (the December Report).[23] The report:
[23] Exhibit A, pages 54 ‑ 87.
(1)stated that its purpose was to determine the market rent for the premises as at the date of valuation, namely 4 May 2013;[24]
[24] Exhibit A, pages 59 - 60.
(2)stated that the valuation took into account the definition and terms of the Lease, referring to sch 7, cl B.1.1 of the Lease, and said that, in accordance with the 2015 Decision, the determination of the market rent for the fourth Rent Period was required;[25]
[25] Exhibit A, page 62.
(3)outlined the features and material composition of the building constructed on the premises;[26]
(4)summarised the terms of the Lease;[27]
(5)outlined the submissions made by the Owners and by the Commonwealth, recording that the Owners had provided rental evidence of two buildings recently leased to the Commonwealth, both located in the Perth metropolitan area;[28]
(6)stated that Mr Copeland had considered the rental evidence that had been provided by the parties' valuation consultants and had concluded that the most relevant evidence was the evidence relating to five properties in Busselton, details of which were set out;[29]
(7)stated that the most appropriate method of valuation was by market comparison with rentals of comparable properties, with adjustments made for points of difference, including location, standard of improvement, area and lease terms;[30]
(8)stated that Mr Copeland had given consideration to the rental evidence detailed in the report and also the evidence of Busselton office accommodation provided in the submissions;
(9)stated that evidence located outside of the City of Busselton had been disregarded in accordance with the Lease;[31]
(10)stated that Mr Copeland considered there was no office rental evidence in Busselton that was directly comparable, so that a rent above the range reflected in the leases he had referred to was appropriate;[32]
(11)noted that due to the requirement of the Lease under sch 7 cl B.4.2, Mr Copeland was required to take into account the open market rental value at the Effective Date of comparable premises in the town or city within which the premises were situated, observing that this added to the subjectivity of the assessment and meant that the metropolitan evidence provided in the lessor's submissions could not be included in the assessment;[33] and
(12)stated that Mr Copeland considered a rent of $480 per m2 to be applicable, assessing the rent accordingly at $240,000 per annum, plus GST.[34]
[26] Exhibit A, pages 66 ‑ 67.
[27] Exhibit A, page 72.
[28] Exhibit A, page 73.
[29] Exhibit A, pages 77 ‑ 82.
[30] Exhibit A, page 82.
[31] Exhibit A, page 83.
[32] Exhibit A, page 83.
[33] Exhibit A, page 83.
[34] Exhibit A, page 83.
Correspondence from the Commonwealth
By letter sent by email on 8 January 2016, the solicitors for the Commonwealth wrote to Mr Copeland.[35] Their letter sought clarification of the following issues:
(1)When the December Report was issued, given that pt 1.3 indicated it was issued on 22 December 2015 and pt 20.1 indicated it was issued on 31 December 2015.
(2)Sections of the December Report from pt 18.2, summarised in [32](9) and (11) above, were quoted, in which it was said that evidence outside the City of Busselton had been disregarded in accordance with the Lease. The letter referred to the court's interpretation of the Lease, asking why Mr Copeland considered cl B.4.2 to be relevant or necessary to refer to. The letter sought clarification of whether the reference to, and consideration of, cl B.4.2 had any material impact on the outcome of his determination.
[35] Exhibit A, page 383 - 384.
In response, Mr Copeland sent an email dated 11 January 2016, copied to Mr Pitman.[36] In his email, Mr Copeland said as follows:
•The date of issue was 22 December 2015.
•It is acknowledged that clause B.4.2 of the Lease should not be considered as outlined. The two sections of the report quoted should not have been included in my final report which was an oversight which I will rectify. My apologies.
[36] Exhibit A, page 386.
The January Report
On 20 January 2016, Mr Copeland issued a Rental Determination Report bearing that date (the January Report).[37]
[37] Exhibit A, pages 388 - 421.
With the exception of pt 18.2 and the change to the dates in pt 1.3 and pt 20.1, the January Report is materially indistinguishable from the December Report.
Part 17 of the January Report sets out, as the 'most relevant' rental evidence, the same five Busselton premises as were referred to in the December Report. As in the December Report, there is no reference in that part of the report to the premises upon which the Owners had relied in their submissions.
Part 18.2 was modified from the December Report by the deletion of the two passages quoted in the Commonwealth's solicitors' letter of 8 January 2016. It was otherwise unchanged. Part 18.2 is in the following terms:
18.2Valuation Assessment
I have given consideration to the rental evidence detailed within the preceding sections of this report and also the evidence of office accommodation provided in the submissions.
In analysing the rental evidence available and in consideration of my assessment of the market rent, I have had regard to, but not necessarily limited to, the following issues:
•Terms and conditions of the lease in relation to the assessment of the market rent.
•Leasing demand for the premises and nature of the Busselton office market as at the relevant date of the valuation.
•Rental evidence available and dates that these rents were negotiated relative to the date of rent review of the subject premises.
•General location of the property and the size and quality of the building.
•Nature, condition and facilities of the premises provided by the Lessor to the Lessee.
•Issues raised by the Lessor and Lessee by their respective submissions and responsive submissions.
The rental evidence analysed in my report ranges as follows.
•From 120 square metres to 367.5 square metres in area.
•Rents from $41,775 per annum to $129,655 per annum gross, plus GST.
•Reflects rates from $323 per square metre to $433 per square metre per annum gross, plus GST.
I note that there is no office rental evidence in Busselton that would be considered directly comparable to the subject given the building type and lease applicable and a rent above the range reflected is considered applicable.
Accordingly, for the purposes of this assessment and in accordance with the requirements of the lease, I consider a rental of $480 per square metre, based on the lease area for calculation purposes of '500 square metres', to be applicable for the subject.
The assessed rent accordingly equates to $240,000 per annum gross, plus GST.
As can be seen, in the January Report Mr Copeland determined that the market rent as at 4 May 2013 was $240,000 per annum, plus GST.
The Owners' response to Mr Copeland's determinations
In an email sent on 1 February 2016, the Owners made the following assertions about Mr Copeland's determinations:
(1)in the December Report:
(a)Mr Copeland wrongly applied cl B.4.2 of sch 7 and, consequently, wrongly excluded comparable rental evidence from outside Busselton.
(b)Failed to take into account the specialised nature of the building on the Premises and its construction to Commonwealth specifications.
(2)In his January Report:
(a)Mr Copeland perpetuated the error in the December Report by wrongly excluding rental evidence from outside Busselton.
(b)The determination was too late in that it was more than 28 days after Mr Copeland's appointment.[38]
[38] Exhibit A, pages 723 - 724.
The Commonwealth's claim
By its amended originating summons dated 8 February 2016, the Commonwealth claims the following declarations:
(1)That, in the absence of agreement between the parties, the rent payable for the premises at 65 Duchess Street, Busselton in the State of Western Australia (Premises) under the lease for the Premises dated 10 September 2010 (Lease) for the fourth Rent Period of the term of the Lease is to be determined in accordance with cl 5.7.1 of the Lease, in the manner decided in Merilla Pty Ltd v Commonwealth of Australia.[39]
(2)That the rent for the fifth Rent Period of the term of the Lease and the rent for the sixth Rent Period of the term of the Lease cannot be determined until the determination of the rent for the fourth Rent Period.
(3)That the rent for the fourth Rent Period of the term of the Lease has been determined at $240,000 plus GST pursuant to a determination made by Michael Copeland on 20 January 2016.
[39] Merilla Pty Ltd v Commonwealth of Australia [2015] WASC 309.
The Owners were unrepresented
The Owners have not been legally represented in these proceedings. Given that they are companies, that has precluded them from taking any step in the proceedings, including filing any document.[40]
[40] Eastern Metropolitan Regional Council v Four Seasons Construction Pty Ltd [2000] WASC 178; (2000) 22 WAR 372 [47]; Bell v Cribb [2013] WASC 32 [73].
The Commonwealth has facilitated the resolution of the parties' dispute on its merits by, in effect, incorporating into the trial bundle tendered by consent all documents on which the Owners wish to rely by way of evidence or submissions in these proceedings.
At the hearing of the proceedings, without objection from the Commonwealth, I granted leave for Mr Pitman to speak on behalf of Merilla and Mr Franks to speak on behalf of Artus.[41]
[41] Eastern Metropolitan [49]; Bell v Cribb [73]; ts 26 - 27.
In circumstances in which the Owners are not legally represented, I have given careful consideration to their contentions (written and oral), mindful of the need to ensure that their rights are not 'obfuscated by their own advocacy'.[42]
[42] Neil v Nott [1994] HCA 23; (1994) 121 ALR 148, 150; Glew v Frank Jasper Pty Ltd [2010] WASCA 87 [10].
I turn to the merits of the declarations sought by the Commonwealth.
The first declaration
The Commonwealth's claim for the first declaration arises from the letter of 15 October 2015 written by Mr Pitman on behalf of the Owners. In that letter the Owners stated that the rent for the fourth period was $307,977, and made demand for payment of rent for the fifth and sixth periods based on an increase of 3.5% from that sum for the fifth period, and a further 3.5% increase for the sixth period.
The Owners no longer assert that they can unilaterally fix the rent, or that the rent has somehow been fixed at $307,977.[43] They are correct not to do so. There is no basis in the terms of the Lease, or in the events that have occurred since it was executed, for any assertion that the rent has been fixed in the sum referred to, or that the Owners are entitled to unilaterally fix the rent.
[43] ts 30.
Given that the Owners do not persist in any of these assertions, there is no occasion for making the first declaration sought.
The second declaration
The Commonwealth seeks a declaration that the rent for the fifth and sixth Rent Periods cannot be determined until the determination of the rent for the fourth Rent Period. Again, that claim arises from the Owners' letter of 15 October 2015.
It is, in my opinion, obvious that, under cl 5.3, cl 5.4 and cl 5.5 of the Lease, the rent for the fifth and sixth Rent Periods depends upon the rent for the fourth Rent Period, and so cannot be set until the rent for the fourth period has been determined. That is because the rent for the fifth Rent Period is equal to the rent for the fourth Rent Period increased by the greater of 3.5% or the increase in the CPI.
Given that the Owners do not persist in the position asserted in their letter of 15 October 2015, there is no occasion for a declaration to the effect claimed in par 2.
Is it too late for any further determination of the rent for the fourth period?
The Owners assert that Mr Copeland's December determination of rent is invalid because it was not made within the 28 day period following his appointment in accordance with sch 7.[44]
[44] Exhibit A, page 724.
Clause B.1.1(c) of sch 7 states that a valuer appointed under that schedule must give a written determination with reasons within 28 days after their appointment. Clause C.1.1 of sch 7 provides that if the valuer fails to make a determination within 28 days after their appointment, a party may request the President of the API to appoint another valuer to make a determination in accordance with cl B. In my view, that clause reinforces what would in any case be the starting point; that time is not of the essence.[45] In other words, the validity of a valuer's determination is not dependent upon the valuer providing the determination with reasons within 28 days. If a written determination with reasons is not provided within 28 days, it is open to a party to request the appointment of a different valuer. If that does not occur, the determination by the (original) valuer will be valid notwithstanding that it is provided more than 28 days after that valuer's appointment. Although the Owners reserved their rights to apply for the appointment of a new valuer,[46] they did not do so.
[45] See, for example, Gollin & Co Ltd v Karenlee Nominees Pty Ltd [1983] HCA 38; (1983) 153 CLR 455, 467 ‑ 468.
[46] Exhibit A, page 729.
In the letter of 15 October 2015, the Owners asserted that the lease permitted only one process of review and determination, so that it was not open to either party to seek a further determination.[47] In circumstances where the first determination was found to be invalid, I do not accept that contention. In my view, as I said in my decision on costs, the result of my 2015 Decision that the purported determination of 17 April 2014 was invalid was that the rent for the fourth Rent Period was yet to be determined but was open to be determined either by agreement between the parties or by a valuer who determined the market rent for the premises as at 4 May 2013.
[47] Exhibit B.
The third declaration: Is the January rent determination valid?
Valuation of property, including assessing its market rent, is an art not a science. It involves the making of discretionary value judgments, in respect of which there is not a single correct answer.[48]
[48] Spencer v The Commonwealth of Australia [1907] HCA 82; (1907) 5 CLR 418, 442 ‑ 443; Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314, 336; WMC Resources Ltd v Leighton Contractors Pty Ltd [1999] WASCA 10; (1999) 20 WAR 489 [25] ‑ [26]; McKay v Commissioner of Main Roads [No 7] [2011] WASC 223 [164] ‑ [165].
The role of the court in these proceedings is not to conduct its own valuation, or to assess the valuer's report on its merits. The role of the court is to determine whether the determination of rent is valid and binding on the parties to the Lease.
The question of whether the determination of rent is valid does not turn on whether the valuer made an error in the course of the determination. A mistake does not necessarily mean that the valuation is not binding. The test is whether it is shown that the valuation was not made in accordance with the Lease.[49] In other words, the question is whether the valuer has carried out the task which he was contractually required to undertake.[50]
[49] Legal & General (335 ‑ 336); Wilden Pty Ltd v Green [2009] WASCA 38; (2009) 38 WAR 429 [58] ‑ [60]; Shoalhaven City Council v Firedam Civil Engineering Pty Ltd [2011] HCA 38; (2011) 244 CLR 305 [26] ‑ [27]; Australian Vintage Limited v Belvino Investments (No 2) Pty Ltd [2015] NSWCA 275 [74].
[50] AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173 [51]; Shoalhaven [26] ‑ [27]; Australian Vintage Limited [74] ‑ [75].
Under the Lease, as construed in the 2015 Decision, the task of the valuer was to determine the market rent. As the Commonwealth submits, that was the task the valuer described himself as undertaking.[51] However, it is necessary to descend below that level of generality in assessing whether the valuer carried out the task he was contractually required to undertake.
[51] Exhibit A, pages 392, 394, 396.
The task of the valuer was to determine the market rent, applying the proper construction of the Lease in doing so. The parties did not delegate to the valuer the task of determining, in a fashion not reviewable for error, the proper construction of the Lease. In other words, the parties did not objectively intend to bind themselves to the valuer's determination of the proper construction of the Lease.[52] Thus if, in the course of determining the market value, the valuer had applied a wrong construction of the Lease, the valuation would not have been made in accordance with the Lease and so would be invalid.
[52] cf Australian Vintage [81] ‑ [86].
As explained in the 2015 Decision, in determining the market rent under the Lease:
(1)the valuer should take account of the substantial capital costs incurred by the Owners in constructing a purpose built building. The range of hypothetical tenants and landlords to be considered in determining the market rent would include the landlord who had spent a considerable amount of money on building the purpose built building and the tenant for whom the building had been built and whose needs it was specifically designed to meet;[53]
(2)the terms of a recent arms‑length lease for the subject property, including its rent, would be relevant;[54] and
(3)cl B 4.2 of sch 7 would not apply.[55]
[53] [2015] WASC 309 [122] ‑ [126].
[54] [2015] WASC 309 [128].
[55] [2015] WASC 309 [107] ‑ [132], [234].
The Owners submit that in making the January determination, the valuer did not take into account these matters.[56]
[56] Exhibit A, page 732.
For reasons that I will develop, I am satisfied that the January determination is consistent with my findings as to the proper construction of the Lease, and is consistent with the proper construction of the Lease generally. In short:
(1)the first two points were emphasised in the Owners' submissions[57] and fairly summarised in the January Report,[58] and were considered by the valuer;[59] and
(2)the valuer acted consistently with the exclusion of cl B.4.2. In particular, he did not restrict his consideration of potentially comparable rental properties to those within Busselton.[60]
[57] Exhibit A, pages 507, 513.
[58] Exhibit A, page 407.
[59] Exhibit A, pages 408, 417.
[60] Exhibit A, pages 411, 417.
In assessing whether the January determination was made in accordance with the proper construction of the Lease, the January Report must itself be construed. That is a conventional exercise in construction, to be done objectively and by reading the instrument as a whole.
The Owners contend that Mr Copeland impermissibly excluded rental properties outside Busselton from consideration.[61] While I agree that to have done so would have been contrary to the Lease, I do not accept that this is what Mr Copeland did in making the January determination. In this context there is an important distinction between viewing property outside Busselton as irrelevant, in the sense of being excluded from any possible consideration, and coming to the view that property outside Busselton is not worthy of any or any significant weight in the valuation exercise. The former would involve an error of construction of the Lease. The latter involves an exercise of the valuer's discretionary judgment, which the court has no role in second guessing.[62]
[61] Exhibit A, pages 723 ‑ 724.
[62] See, for example Legal & General (336); WMC Resources [40].
In outlining the Owners' submissions, Mr Copeland specifically referred to the Owners' reliance on the properties rented by Centrelink in Gosnells and Fremantle.[63]
[63] Exhibit A, page 407.
In pt 17 of the report,[64] Mr Copeland said that he had considered the rental evidence provided by the parties' valuation consultants, and that he considered the 'most relevant' evidence to be the five Busselton properties that he then detailed. One of the valuation consultants relied on by the Commonwealth relied on some properties outside Busselton, including in the Northern Territory.[65] Mr Copeland did not say in the January Report that any of these properties were irrelevant and that regard could not be had to them. To the contrary, the reference in the January Report to what is 'most relevant' is an indication that the wider group of properties had been considered, and a judgment formed as to which properties within the wider group were most relevant. Moreover, a statement as to which properties were 'most relevant' indicates an acceptance that other properties are, to a lesser extent, also relevant.
[64] Exhibit A, page 411.
[65] Exhibit A, pages 617, 618.
Further, in the opening sentence of pt 18.2, Mr Copeland stated that he had given consideration to the rental evidence detailed in the preceding sections of the report and the evidence referred to in the parties' submissions. That is an express statement by the valuer that he considered the properties outside Busselton on which the Owners relied in their submissions.
Thus, the January Report contains two statements to the effect that rental properties outside Busselton were considered in the course of assessing and determining the market rent. In the face of those statements, I am not persuaded that the valuer erred in making the January determination by misconstruing the Lease as requiring the exclusion of rental properties outside Busselton from all consideration. When the January Report is read as a whole, I think the proper construction of it is as follows:
(1)Rental properties in Busselton and outside Busselton were considered as potentially relevant, but in the end the judgment of the valuer was that the five Busselton properties he detailed in pt 17 of the report were the most relevant comparators.
(2)The valuer formed the view that given the nature of the building on the premises, and the terms of the Lease between the Owners and the Commonwealth, none of the Busselton rental properties to which he had referred was directly comparable to the premises.
(3)As a result, he selected a rent ($480 per m²) substantially above the top of the range of the rents of the five Busselton properties ($433 per m²).
(4)The selection of the extent of the uplift from the top of the range of the rentals of the Busselton properties was informed by consideration of all of the matters to which the parties had pointed in their submissions.
The Owners appear to submit that it could be inferred from the result reached by the valuer that he did not have regard to all the factors to which he said he had regard.[66] I do not accept that submission. As I have said, there is an important difference between excluding something from being considered at all, and deciding that something is not worthy of significant weight in light of other matters. For the reasons that I have given, I think the preferable reading of the January Report puts it in the second class of case. The result reached by Mr Copeland is consistent with his having considered the properties relied on by the Owners, but having determined, as a matter of discretionary value judgment, that other matters were worthy of greater weight and led to the market rent that he determined.
[66] ts 53.
The Owners also point to the fact that Mr Copeland arrived at a lower value for market rent ($240,000 per annum) than Mr Hughes had arrived at in determining open market rental value in the purported determination of 17 April 2014 ($250,000 per annum). They submit that this reveals an error in Mr Copeland's approach because market rent is unconstrained by the strictures of cl B.4.2 of sch 7, and so should be higher than open market rental value.[67] I do not accept this submission. In my view, it overlooks the discretionary character of the process of valuation; there is no unique correct value for market rent or for open market rental value.
[67] ts 51 - 52.
The Owners point to the December Report as revealing an error of construction on the part of the valuer. In that report, Mr Copeland specifically and expressly excluded from consideration rentals outside the Busselton area and said that this was required by the terms of the Lease, specifically referring to cl B.4.2 of sch 7.
The Commonwealth submits that the reference in the December Report to cl B.4.2 of sch 7 was 'a drafting error'.[68] It refers to Mr Copeland's email of 11 January 2016, in which he described the inclusion of the two sections of the report quoted in the Commonwealth's solicitors' email of 8 January 2016 as 'an oversight'.[69]
[68] Plaintiff's submissions [60].
[69] Plaintiff's submissions [12]; Exhibit A, page 386.
It is difficult to accept that the reference to cl B.4.2 in Mr Copeland's December Report can fairly be characterised as an oversight, or as inadvertent or a drafting error. The terms of the December Report make it clear that Mr Copeland acted on cl B.4.2 in excluding from consideration rental properties outside Busselton.
It is not necessary to decide whether the January Report is to be construed in the context of the December Report. Assuming, favourably to the Owners, that it is, it is still the January Report that is to be construed. That directs primary attention to the text of the January Report, read as a whole.
It appears to be submitted by the Owners that:
(1)the December Report explicitly and wrongly excluded Busselton properties from consideration;
(2)the terms of the January Report and the December Report are identical apart from the deletion of the two passages quoted in the Commonwealth's solicitors' letter of 8 January 2016;
(3)consequently, it should be inferred that the January Report involves the same erroneous exclusion from consideration of all properties outside Busselton.
While I accept the first two of these propositions, I do not accept the third.
The inference invited by the Owners is directly contrary to the explicit statements to which I have already referred to the effect that Mr Copeland considered properties outside Busselton. The matters in (1) and (2) do not persuade me that, notwithstanding these express statements, on the proper construction of the January Report the valuer did not in fact consider properties outside the Busselton area and excluded them entirely from any consideration.
If the valuer had assessed the market rent for the premises by considering only properties in Busselton, then he would not have performed his task under the Lease. However, on my reading of the January Report, he did not constrain himself in this way.
To the extent that the Owners contend that the January determination is invalid because they did not execute Mr Copeland's letter of 4 December 2015,[70] I do not accept that submission. Clause A.2.1 in sch 7 of the Lease provides that if the parties fail to agree on a valuer either of them may request that the President of the API appoint one. The Lease does not require any action by the other party, or that there be any further agreement between the parties, in order for a valid determination to be made.
[70] Exhibit A, pages 723, 732.
For these reasons, I am satisfied that the January determination was made in accordance with the Lease, properly construed, and is, accordingly, valid and binding on the parties. As a result, I would make the third declaration sought by the Commonwealth.
Conclusion
For the reasons I have given, I would make the third declaration sought by the Commonwealth. I would hear from the parties as to the precise form of orders to be made, and as to costs.
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: THE COMMONWEALTH OF AUSTRALIA -v- MERILLA PTY LTD [2016] WASC 150 (S)
CORAM: BEECH J
HEARD: ON THE PAPERS
DELIVERED : 26 JULY 2016
FILE NO/S: CIV 2795 of 2015
BETWEEN: THE COMMONWEALTH OF AUSTRALIA
Plaintiff
AND
MERILLA PTY LTD
ARTUS PTY LTD
Defendants
Catchwords:
Practice and procedure - Costs - Whether costs should be ordered to be paid by non-party - Whether some costs should be ordered to be paid on an indemnity basis - Turns on own facts
Legislation:
Supreme Court Act 1935 (WA), s 37(1)
Result:
Costs order made against defendants only
Indemnity costs order in relation to the plaintiff's application for an interlocutory injunction
Category: B
Representation:
Counsel:
Plaintiff: No appearance
First-named Defendant : No appearance
Second-named Defendant : No appearance
Michael Franks & Sara Margaret Franks : No appearance
Solicitors:
Plaintiff: Minter Ellison
First-named Defendant : No appearance
Second-named Defendant : No appearance
Michael Franks & Sara Margaret Franks : Kott Gunning
Case(s) referred to in judgment(s):
Bischof v Adams [1992] 2 VR 198
Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations [No 4] [2012] FCAFC 50; (2012) 200 FCR 154
Duskwood Pty Ltd v Bellara Willows Pty Ltd [2001] WASC 281
Kebaro Pty Ltd v Saunders [2003] FACFC 5
Knight v FP Special Assets Ltd [1992] HCA 28; (1992) 174 CLR 178
Merilla Pty Ltd v Commonwealth of Australia [2015] WASC 309
Merilla Pty Ltd v Commonwealth of Australia [2015] WASC 309 (S)
Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 (S)
Tey v Optima Financial Group Pty Ltd [2012] WASCA 192
The Commonwealth of Australia v Merilla Pty Ltd [2016] WASC 150
Vestris v Cashman (1998) 72 SASR 449
BEECH J:
Introduction
On 19 May 2016, I published reasons for decision in these proceedings.[71] On the same day, I made a declaration in terms sought by the Commonwealth. In substance, I declared that the determination of market rent made by a valuer in January 2016 was valid and effective to determine the rent for the fourth Rent Period.
[71] The Commonwealth of Australia v Merilla Pty Ltd [2016] WASC 150. In these reasons I will use the terminology that I used in the reasons of 19 May 2016.
I also ordered that the question of costs be determined on the papers, after the exchange of submissions by the parties.
The Commonwealth substantially succeeded in the proceedings. Consequently, it should have a costs order in its favour. The Commonwealth's submissions on costs seek orders that, in two respects, go beyond an ordinary order for costs in favour of the Commonwealth. First, the Commonwealth seeks orders that costs be payable not only by the Owners, the defendants in the proceedings, but also by the individuals who are the directors and shareholders of the Owners (the Directors). Secondly, the Commonwealth seeks an order that the Owners and the Directors pay the costs of the Commonwealth's application for an interlocutory injunction on an indemnity basis.
I begin with the question of whether orders for costs should be made against the Directors.
Should costs be ordered against the Directors?
The broad powers of the court in relation to costs under s 37 of the Supreme Court Act 1935 (WA) encompass the power to make an order that the costs of proceedings be paid by a non‑party. Such an order may be made if the interests of justice warrant the departure from the ordinary starting point that it is the parties to proceedings who are the subject of costs orders.[72]
[72] Knight v FP Special Assets Ltd [1992] HCA 28; (1992) 174 CLR 178, 192 ‑ 193.
An order for costs against a non‑party will only be made in exceptional circumstances.[73]
[73] Vestris v Cashman (1998) 72 SASR 449, 467; Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations [No 4] [2012] FCAFC 50; (2012) 200 FCR 154 [90].
There is a general category of cases in which an order for costs should be made against a non‑party if the interests of justice require that it be made. That category consists of cases where:
(a)the party to the litigation is an insolvent person or a 'man of straw';
(b)the non‑party has played an active part in the conduct of the litigation; and
(c)the non‑party, or some person on whose behalf the non‑party is acting or by whom the non‑party has been appointed, has an interest in the subject of the litigation.[74]
[74] Knight v FP Special Assets Ltd (192 - 193); Dunghutti Elders Council [76].
In exercising its discretion, the court will have regard to the connection between the proceedings and the non‑party, and the causal connection between the non‑party and the incurring of costs in the proceedings.[75]
[75] Bischof v Adams [1992] 2 VR 198, 205; Dunghutti Elders Council [81].
The categories of cases in which an order for costs may be made against a non‑party are not closed.[76]
[76] Kebaro Pty Ltd v Saunders [2003] FACFC 5 [103]; Dunghutti Elders Council [82].
In FPM Constructions Pty Ltd v Council of the City of Blue Mountains[77] Basten JA, with whom Beazley JA agreed, said that a survey of the cases in which orders had been made against a non‑party showed that they tended to satisfy at least some, if not a majority, of the following criteria:
[77] FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 [210]; cited with approval in Dunghutti Elders Council [83].
(a)the unsuccessful party to the proceedings was the moving party and not the defendant;
(b)the source of funds for the litigation was the non‑party or its principal;
(c)the conduct of the litigation was unreasonable or improper;
(d)the non‑party, or its principal, had an interest (not necessarily financial) which was equal to or greater than that of the party or, if financial, was a substantial interest; and
(e)the unsuccessful party was insolvent or could otherwise be described as a 'person of straw'.
It is not a necessary precondition that the unsuccessful party is impecunious, although this is a relevant factor.[78]
[78] Dunghutti Elders Council [87].
The court has a discretionary power to make an order for costs against a non‑party where the non‑party is connected with the unsuccessful party to the proceeding, and has caused that party to start, continue or prosecute the proceeding. This power can be exercised where the non‑party's conduct makes it just and equitable for them to be visited with an order for costs in favour of the successful party, either in addition to such an order against the unsuccessful party or in substitution for it.[79]
[79] Dunghutti Elders Council [88].
Whether an early warning has been given of an intention to seek a non‑party costs order is a factor to be considered in the exercise of the discretion.[80]
[80] Duskwood Pty Ltd v Bellara Willows Pty Ltd [2001] WASC 281 [18]; Vestris v Cashman (468).
In support of its contention that costs orders should be made against the Directors, the Commonwealth submits that:
(1)the Owners were not legally represented, and the Directors informed the court that this was because of the Owners' impecuniosity;
(2)the Directors were permitted to appear and make submissions to advance the Owners' case; and
(3)the Directors are both the directors and the only shareholders of the Owners.
In all the circumstances, I am not persuaded that costs orders should be made against the Directors. Those circumstances include the following. The Owners were not the moving party to the proceedings; they were the defendants. The Directors did not fund the litigation, or have an interest in it equal to or greater than that of the Owners. While there is room for concern as to whether the Owners will be able to meet any costs orders, it cannot be said that the Owners are persons of straw. Nor have they been shown to be insolvent, either now or at the time of the commencement of these proceedings. Although the proceedings were initially commenced in response to the Owners' threat to lock out the Commonwealth, in substance the proceedings became concerned with whether the determination of rent made in January 2016 was valid and effective. In that respect, there was nothing unreasonable in the conduct of the proceedings on behalf of the Owners. The Commonwealth did not give notice to the Directors of its intention to seek costs against them personally.
For these reasons, I decline to exercise my discretion to order costs against the Directors.
I turn to the question of whether an indemnity costs order should be made in respect of the Commonwealth's application for an injunction.
Indemnity costs in relation to the injunction application?
The principles relevant to whether costs should be ordered on an indemnity basis are well known. They were outlined by the Court of Appeal in Swansdale Pty Ltd v Whitcrest Pty Ltd.[81]
[81] Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 (S) [10].
In this case, the Commonwealth points to the conduct of the Owners in writing the letter of 15 October 2015, in which the Owners asserted that rent had been fixed at the old rent and that, if payment was not made accordingly, the Owners would lock out the Commonwealth from the premises. The Commonwealth, by its solicitors, invited the Owners to withdraw that threat and to have the rent determined by an independent valuer as was contemplated under the Lease.[82] By letter of 9 November 2015, Mr Pitman, on behalf of the Owners, stated that their position was unchanged and remained as set out in the letter of 15 October 2015.[83]
[82] Letter of 6 November 2015, Annexure GJSS‑8 to the affidavit of Geoffrey John Seymour Shaw sworn 10 November 2015.
[83] Affidavit of Mr Shaw sworn 12 November 2015, Annexure GJSS‑10.
As a result, the Commonwealth commenced these proceedings and applied for an interlocutory injunction restraining the Owners from exercising any power of re‑entry. I made interim (12 November 2015) and interlocutory (20 November 2015) orders to that effect without opposition from the Owners.
In opposition to the Commonwealth's application for indemnity costs, Mr Franks, one of the Directors, has sworn an affidavit in which he states that in October 2015 the Owners were continuing to consult with their previous solicitors, and that the letter of October 2015 was sent after those solicitors had advised that the position asserted in that letter was correct.[84] Mr Franks says that had the Owners received advice that they were not entitled to lock out the Commonwealth, as threatened in the letter of 15 October 2015, Mr and Mrs Franks, as Directors of Artus Pty Ltd, would not have approved of the letter of 15 October 2015 or the letter of 9 November 2015.[85]
[84] Affidavit of Michael Franks sworn 18 July 2016 [19].
[85] Affidavit of Mr Franks [20].
One category of cases where an indemnity costs order may be appropriate is where a party persists in what on proper consideration should be seen to be a hopeless case. Another is where, by asserting a position that is entirely baseless, a party necessitates another party to bring proceedings.
In either such case, the fact that the party against whom indemnity costs is sought obtained legal advice to the effect that their position was at least arguable is relevant, but not decisive. In the end, the question of whether the position adopted by that party was baseless is an objective one.
In my view, the position adopted by the Owners in their letters of 15 October 2015 and 9 November 2015 was entirely baseless. The effect of my 2015 Decision[86] was that rent for the fourth period had not yet been determined, and could be determined by a valuer appointed in accordance with the Lease. To the extent that this was not clear from that decision, it was spelt out, in terms, in my decision on the costs of the action.[87] That decision was delivered on 11 September 2015.
[86] Merilla Pty Ltd v Commonwealth of Australia [2015] WASC 309.
[87] Merilla Pty Ltd v Commonwealth of Australia [2015] WASC 309 (S) [19], [23].
In the circumstances, I am unable to see any basis upon which the Owners could have asserted that, as at October and November 2015, the rent had been determined in an amount equal to the rent for the third period and that, failing payment by the Commonwealth of that rent, the Commonwealth could be locked out of the premises.
In my view, the Owners' conduct in asserting that untenable position necessitated the commencement of these proceedings by the Commonwealth, and sustains an order that the Commonwealth's costs of its application for an injunction be paid on an indemnity basis.
Mr and Mrs Franks submit that the Owners' conduct did not necessitate the commencement of an injunction application because it was open to the Commonwealth to pay the amount claimed by the Owners under protest and then commence proceedings seeking to recover that amount. While that was a course open to the Commonwealth, in my view the Commonwealth was not reasonably required to adopt it. The Owners made a baseless assertion of an existing right to rent at the rate applicable to the preceding Rent Period, coupled with a threat to lock out the Commonwealth if payment was not forthcoming. In those circumstances, it was not incumbent on the Commonwealth to accede to the Owner's demand in order to avoid being locked out of the premises of which it was tenant. The Commonwealth's response to the threat in applying for an interlocutory injunction was entirely reasonable, and should reasonably have been anticipated as the consequence of the baseless threat made and repeated by the Owners' letters of 15 October 2015 and 9 November 2015.
I am mindful that the Owners have not been represented in these proceedings. That circumstance calls for caution before the making of an indemnity costs order.[88] In the end, however, there are cases where, when that circumstance is taken into account, the conclusion may nevertheless be that the untenable nature of the position adopted by a party makes an indemnity costs order appropriate. To my mind, this is such a case.
[88] Tey v Optima Financial Group Pty Ltd [2012] WASCA 192 [16].
For these reasons, I would make an order that the Owners pay the Commonwealth's costs of its application for an interlocutory injunction on an indemnity basis.
Conclusion
For the reasons I have given, I make the following orders:
(1)The Owners pay the Commonwealth's costs of its application for an interlocutory injunction, including the reserved costs of 12 November 2015 and 20 November 2015, except insofar as they are of an unreasonable amount or have been unreasonably incurred, so that subject to those exceptions the Commonwealth is completely indemnified by the Owners for its costs.
(2)Otherwise, the Owners pay the Commonwealth's costs of the proceedings, to be taxed if not agreed.
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