Vo and Anor and Reyne P/L

Case •

[2006] WASAT 233

•

31 JULY 2006

JURISDICTION     :   STATE ADMINISTRATIVE TRIBUNAL

STREAM:   COMMERCIAL & CIVIL

ACT: COMMERCIAL TENANCY (RETAIL SHOPS) AGREEMENTS ACT 1985 (WA)

CITATION:   VO & ANOR and REYNE P/L [2006] WASAT 233

MEMBER:   DR B DE VILLIERS (MEMBER)

MR R J PRIEST (SENIOR SESSIONAL MEMBER)

HEARD:   31 JULY 2006

DELIVERED          :   Edited reasons delivered extemporaneously on 31 JULY 2006

FILE NO/S:   CC 498 of 2006

BETWEEN:   TRIEM VAN VO

THUY THU THI CAO
Applicants

AND

REYNE P/L
Respondent

Catchwords:

Question arising from a lease – Rent review – Market rental – Comparable premises

Legislation:

Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA), s 27(3)(b)

Result:

Rent determined

Category:    B

Representation:

Counsel:

Applicants:     Mr Filev (Acting as Agent)

Respondent:     Mr G Quartermaine

Solicitors:

Applicants:     N/A

Respondent:     Pye & Quartermaine

Case(s) referred to in decision(s):

Nil

Case(s) also cited:

Nil

REASONS FOR DECISION OF THE TRIBUNAL:

Question arising from the lease

  1. The Tribunal has been requested by the parties to determine the market rental value for Shop 5, Darling Ridge Shopping Centre, Swan View.

Background

  1. The application for determining the question of market rental value in regard to Shop 5, Darling Ridge Shopping Centre (the Centre), Swan View (Shop 5) was lodged on 3 April 2006.  Shop 5 operates as a delicatessen.

  2. The application initially contained a list of questions the Tribunal was requested to deal with pursuant to s 27(3)(b) of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (Act). At the directions hearing held on 19 June 2006, the applicants sought to amend the application to replace the list of questions with a single question – namely for the Tribunal to determine what the Current Market Rental Value (CRM Value) of the premises is in accordance with the lease.

  3. The parties indicated at the directions hearing that they had been unable to agree to a third valuer as per cl 3.6(c) of the lease and that they would prefer the Tribunal to determine the rental payable in accordance with the lease.

  4. The Tribunal gave the respective valuation experts the opportunity to submit a report on issues of agreement, disagreement and reasons for disagreement.  Their report was completed on 19 July 2006.  In the report they highlighted the following areas of agreement, disagreement and reasons for disagreement:

  5. "1.      Matters upon which we agree in relation to the market rental:

    •The area of the shop and associated storage area being 12.6 [metres squared] and 19.3 [metres squared] respectively.

    •The date of valuation of the market rent being 1 July 2006.

    2.Matters upon which we disagree in relation to the market rental:

    •Our respective opinions as to the market rent of the demised premises as at 1 July 2006.

    3.The reasons for the disagreement

    •Differing opinions as to the quality of the centre

    •Different rental evidence

    •The ratio of the storage rental to the shop rental

    •Differing views upon the trading ability of the Delicatessen as a result of the expansion of the supermarket and new Star Shop associated with the service station."

  6. The Tribunal did an inspection of the premises on 31 July 2006.  The parties and their experts were also present.  The hearing continued after the inspection.

  7. The Tribunal has taken into account all the evidence provided to us by Mr Filev and Mr O'Brian, as well as the reports submitted by the two expert valuers.

Contentions

  1. The Tribunal will deal with the respective contentions raised by the parties on a point by point basis.

Does increase in competition play a role in determining the rent?

  1. Mr Filev contended that the deli faces increased competition in the Centre after the recent renovation.  Mr O'Brian did not dispute that the competition is more intense but explained that there had been competition in the past and it is the responsibility of the lessee of Shop 5 to refine his products and become more competitive.

  2. We accept the evidence that competition has become more pressing but we find that the lease does not confer unto the tenant any exclusivity in the Centre regarding trading as a delicatessen.  We note that some of the other shops such as the butchery, Brumbies and Caltex convenience store all offer a degree of overlapping goods to the public.  Although the deli may have been worst affected by competition, the lease does not offer the applicants any special rights in regard to exclusive trading in Shop 5.  In fact, the premises are defined in the First Schedule of the lease without any reference to it being a delicatessen.

  3. We therefore do not accept the contention of Mr Filev that the increase in competition should be a factor to consider when the CMR Value is determined.

What should guide the Tribunal – use of the premises or size of the premises?

  1. Extensive discussion took place as to what should guide the Tribunal – use of the premises as deli or the size of the premises regardless of use, or if both criteria are used how to achieve an appropriate mix.  In essence, Mr Kreutzer contended that use is important and that the rental data of other delicatessens in those shopping centres should therefore be taken into account.  Mr Rowe contended that the primary guide is size of the premises and that other data may in principle be taken into account, but that in this instance there is no need to do so since the lease is very specific that size of the premises is the determining factor.

  2. As point of departure, the Tribunal is guided by the provisions of the lease to determine what the CMR Value is.  It is agreed by the parties that CMR Value is determined on 1 July 2006 and although historic information in regard to the lease may be of some peripheral interest, the CMR Value is determined as matters stood on the 1 July 2006.  Both experts agreed that their reports were prepared with the current state of affairs in mind, namely, what is the "best yearly rental that reasonably can be obtained for the leased Premises".

  3. As a general principle, the best rental value evidence is of directly comparable premises.  This is consistent with the lease which defines Current Market Rental as " the best yearly rental that can reasonably be obtained for the leased premises … (d) having regard to the current market rental values of comparable shop premises of similar size in the Centre and in other shopping centres of similar size to the Centre in the Metropolitan Region whether vacant or occupied and irrespective of the method by which the rental value has been reached …".  (Tribunal emphasis.)

  4. Although the experts agreed that size of premises is an important determining factor in the lease, they had different views as to the weight that should be attached (if any at all) to the use of the premises.  In practical terms they disagreed as to the relevance of the fact that the said premises are used for operating a delicatessen.  Mr Rowe contended that other rental evidence in the same centre should be the concluding factor and relied on the liquor store as the most appropriate indicator of the "best yearly rental" for floor space that can be obtained.  Mr Kreutzer contended that information regarding other delicatessen shops in similar situations should be taken into the equation.  Mr Kreutzer agreed however that even if rental evidence of delicatessens in other centres is used, the comparability of such information to Shop 5 is very difficult since the circumstances of the respective centres would be very different.  If obliged to choose a comparable premises within the Centre, he preferred the chemist as basis for calculating the rent.

  5. It is apparent to the Tribunal that the lease requires us to use comparable evidence from the Centre itself as guide to determine the question.  The lease does not totally preclude the use of other evidence regarding size of premises from outside the Centre but, in our view, there is sufficient evidence within the Centre to make a determination of "best yearly rental" that can be obtained.  The use of data from other centres would not add to any certainty – in fact, it would bring more variables into the equation.

  6. We are therefore satisfied that the most appropriate course of action, as supported by the lease, is that rental evidence from within the Centre is the best indicator of "best yearly rental that can reasonably obtained".  Differences of opinion between the experts regarding the quality of the Centre, its location, rental evidence of other premises in other centres and the trading ability of Shop 5 due to increased competition are thereby disposed of.

  7. By adopting the approach that current market rental of comparable shop premises of similar size in the Centre must guide us rather than the use of the premises, the issues in dispute between the experts are dealt with.

Location of Shop 5 within the Centre

  1. The only remaining conflict between the experts could be the location of Shop 5 within the Centre and how that might impact on the market rental.

  2. The best that can be said in this regard is that Shop 5 is situated in the front section of the Centre next to the liquor store.  It therefore has better street exposure from customers using the service station than shops situated to the back of the Centre, for example, the video store.  Although it is situated to the side of the Centre, it has next to it a focal point of trading namely the liquor store and the filling station is close to it.

  3. The valuers agree they met at 23 March 2006 and are said, by Mr Kreutzer, to have agreed for a market rental of $43 429 per annum net for Shop 5.  Mr Rowe confirmed that they had met and that they agreed to that rental although he reserved his position to undertake further market research.  Having done so, he reviewed his assessment to that now before the Tribunal, being the main retail area 126 metres squared $355 per metre squared net per annum, and rear store 19.3 metres squared at $17 750 net per annum, for a total of $48 227 net per annum.

  4. Mr Rowe contended that the most comparable premises is that next to Shop 5, namely the liquor store, having an area of 161 metres squared and in accordance with a recent marker rent review of $383.88 per metre squared net per annum.  Mr Kreutzer contended that the most comparable premises in the Centre is the chemist, which is situated next to the Caltex convenience store.  The chemist has a shop area of 114.1 metres squared and is paying $294.57 per metre squared net per annum.  Its rent is determined by the Consumer Price Index (CPI).

  5. The Tribunal finds that although it can take into account the rent of the chemist, we are required by the lease to determine the "best yearly rental that reasonably can be obtained" and that the market-based rent of the liquor store is more applicable to Shop 5 than the CPI rent of the chemist.  The comparability of the chemist is influenced by the fact that its rental has been reviewed per CPI, while the liquor store's rental was recently reviewed to market.

  6. Although the liquor store has a larger floor space (161 metres squared to 125 metres squared), we are not satisfied that that in itself is sufficient to reduce the rent payable by Shop 5.  We note that the fish and chips shop, which takes up 64 metres squared on the other side of Shop 5, pays rent of $356 net metres squared per annum.

Finding

  1. In summary, the Tribunal finds as follows:

    1)The increased competition within the Centre cannot be used as a factor to determine the question.

    2)The lease requires from the Tribunal to determine the question primarily on the basis of "market rental values of comparable Shop premises" and not the "use" of the premises.

    3)The most appropriate comparison is the rental paid by the liquor store since it was recently arrived at through market determination and should therefore be regarded as the "best yearly rental that reasonably can be obtained".  The rent proposed by Mr Rowe of $355 per metres squared for the main retail area of Shop 5 and $177.50 for the rear store of Shop 5 for a total of $48 227 net per annum is therefore consistent with the terms of the lease and the evidence before us.

Orders

  1. The total rent for Shop 5, Darling Ridge Shopping Centre, Swan View is set as $48 227 net per annum.  This is made up of $355 per metre squared for the main retail area of 126.2 metres squared and $177.50 metre squared for the 19.3 metres squared for the rear store.

    I certify that this and the preceding [27] paragraphs comprise the reasons for decision of the State Administrative Tribunal.

    ___________________________________

    DR B DE VILLIERS, MEMBER

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