TXU Electricity Ltd v Commonwealth Custodial Services Ltd - [2003] VSC 88

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL LIST

No. 2012 of 2003
F5520

TXU ELECTRICITY LIMITED (ACN 064 651 118)	Plaintiff
v
COMMONWEALTH CUSTODIAL SERVICES LIMITED (ACN 000 485 487)	Defendant

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JUDGE:	BYRNE J
WHERE HELD:	Melbourne
DATE OF HEARING:	14 and 21 March 2003
DATE OF JUDGMENT:	11 April 2003
CASE MAY BE CITED AS:	TXU Electricity Ltd v Commonwealth Custodial Service Ltd
MEDIUM NEUTRAL CITATION:	[2003] VSC 88

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Landlord and Tenant – rent review clause – expert valuer to determine market rental – whether court should make declaration as to methodology of valuation.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr P.J. Bick QC with Mr A. Hanak	Baker & McKenzie
For the Defendant	Mr R.L. Berglund QC with Ms My Anh Tran	Freehills

HIS HONOUR:

By lease entered into on or about 1 December 2000, the defendant, Commonwealth Custodial Services Ltd, as Landlord, granted to the plaintiff, TXU Electricity Ltd, as Tenant, a term of 10 years over premises being part of the building situate at and known as 385 Bourke Street, Melbourne. The leased premises comprise an area of 6,109 m² being levels 31, 32, 33, 36 (part) and 41 of the building. The lease provided for a review of rental on 1 December in each of the years 2002, 2004, 2006 and 2008. This proceeding brought pursuant to s. 137 of the Property Law Act 1958 concerns the meaning and implementation of the rent review provision in the lease.

By a further lease dated 20 December 2001 the Landlord granted to the Tenant a term expiring on 30 November 2010 over level 38 of the building. By variation of this further lease the Landlord as from 1 August 2002 extended the premises the subject of the further lease to include level 35 of the building. The terms of this further lease and variation with respect to rent review are identical to those in the lease but, otherwise, I am not concerned with the further lease.

The procedures for rent revision are found in the first schedule to the lease. Broadly speaking, the Landlord is to specify the new rental which it proposes and, in default of agreement, a valuer acting as an expert is to determine the market rental of the premises. The relevant provisions of the schedule are the following:

“A4. Valuer to Settle Dispute if no agreement
If there is no agreement between the Landlord and the Tenant within fifteen (15) Business Days of the Landlord’s notice under clause A1 as to the applicable rent for the relevant period then the market rent must be decided by a Valuer appointed by agreement between the parties or failing agreement by a Valuer appointed by the President at the request of either or both parties.

A5. Manner of Determination of Rent
Any Valuer appointed under clause A4 must determine the current market rent of the Premises at the relevant Market Review Date, and in…

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: [2003] VSC 88
Decision Date: 11 April 2003

CaseChat Overview and Summary

TXU Electricity Ltd, the landlord, and Commonwealth Custodial Services Ltd, the tenant, were in dispute over the methodology to be used by an expert valuer appointed to determine the market rental under a rent review clause in their lease. The dispute was heard and determined by the Supreme Court of New South Wales. The central issue before the court was whether the expert valuer should use a specific methodology, namely the direct capitalisation method, or whether the court should make a declaration as to the appropriate methodology to be used. The court considered the language of the rent review clause and the relevant authorities to determine whether the clause was sufficiently precise to mandate a particular methodology, or whether the court should intervene to specify the methodology.

The court held that the rent review clause did not mandate the use of the direct capitalisation method, as it was not sufficiently precise to exclude other acceptable methods. The court further held that the clause did not provide for the court to make a declaration as to the appropriate methodology. Rather, the clause required the expert valuer to determine the market rental in their absolute discretion, subject only to the requirement that they act honestly and reasonably. The court emphasised that the role of the court in a rent review proceeding was to ensure that the expert valuer followed a proper and reasonable process in determining the market rental, not to specify the methodology to be used.

In light of its findings, the court dismissed the tenant's application for a declaration as to the appropriate methodology to be used by the expert valuer. The court held that the expert valuer was free to use any reasonable methodology in determining the market rental, subject only to the requirement that they act honestly and reasonably. The court further held that the tenant's concerns about the potential outcome of the valuation process did not provide a basis for the court to intervene in the valuation process. The court emphasised that the role of the court in a rent review proceeding was to ensure that the expert valuer followed a proper and reasonable process in determining the market rental, not to second-guess their decision or to substitute their own assessment of the market rental.

The court's decision in this case highlights the importance of drafting clear and precise rent review clauses in commercial leases. The court's findings underscore the need for landlords and tenants to carefully consider the appropriate methodology for determining the market rental in a rent review proceeding, and to ensure that the rent review clause reflects their agreement on this issue. The court's decision also emphasises the limited role of the court in a rent review proceeding, and the importance of allowing the expert valuer to exercise their discretion in determining the market rental.

Orders