Lad y JUDG. TT es. AOO/ €E_ IN THE FEDERAL COURT OF AUSTRALIA) ) NEW SOUTH WALES DISTRICT REGISTRY) No. G532 of 1986 ) GENERAL DIVISION ) BETWEEN: D.I. & M.C. SETTREE PTY. LIMITED Applicant AND: CALTEX PROPERTIES LIMITED Respondent CORAM: M. L. FOSTER, J. DATE: 14 JULY, 1988. PLACE: SYDNEY. REASONS FOR JUDGMENT (EXTEMPORE) HIS HONOUR: The applicant company conducts a service station business with an associated restaurant business in Cobar, New South Wales. The business is called "the Golden Fleece Service Station, Cobar". The service station premises, :ncluding the restaurant, together with a residential cottage in *hich the directors of the Company, Mr. and Mrs. Settree and their family 2. reside are leased from the respondent under a lease agreement dated 22 September, 1982, which provides for rental and contains a large number of other provisions. It 1s annexure C to the Affidavit of Ian Settree of 6 Narch, 1987. The lease expired according to its terms on 31 August, 1985. Since that time the premises have been occupied by the applicant, apparently under a holding~-over clause. The business has been carried on by the applicant in a situation where there was a dispute as to the proper rental to be paid for the leased premises. The applicant brings these proceedings pursuant to s. 1980 ("the Act"). The proceedings also include a claim under s. 9 of the Act. This claim has been abandoned. The applicant now seeks the following orders in its application; namely:- "(1) A declaration that the agreement entered into between the applicant and the respondent on 22 September, 1982 18 a Franchise Agreement within the terms of the Petroleum Retail Marketing and Franchise Act, 1980; (2) An order that pursuant to s. 17A(7) of the Petroleum Retail Marketing Franchise Act, 1980 that the respondent be directed to renew the Franchise Agreement with the applicant; (3) An order that the proposed Franchise Agreement, undated, between the applicant and the respondent, be renewed on the terms set forth in the Deed of Lease in Annexure "F" cf the %£fidavit of Tan Settree svorn or 5 March, 1987 subject to the following orders ard variations as sought herein; 3. (5) An order that the said Deed of Lease be varied by inserting in clause 1(a) sums payable as rent calculated or determined in such a manner as to he reasonable, having regerd to the market value of any interest, goods, or services to which that sum relates; and (10) An order that the respondent pay the applicant's costs." There 1s no dispute as to the first claim. I accordingly make the declaration sought. The respondent, however, disputes that s. 17A is available to the applicant. It submits that the applicant can proceed only under s. 9. It submits that by virtue of the holding-over clause already referred to and the operation of s. 13 of the Act, the respondent, as franchisor, has not relevantly proposed to renew the franchise agreement under s. 17A. It 15 not necessary to set out the argument in full. The respondent has had the benefit of 1t. I reject this submission. In my view, the case quite clearly falls within s. 17A. I am quite satisfied that the respondent's letter of 27 July, 1985 (Annexure F to the Affidavit of Ian Settree) clearly amounts to a proposal to review the franchise agreement. TI am further satisfied that the respondent at all relevant times was seeking to invoke the machinery of s. 17A in relation toa renewal of the agreement for a further fixed term at «un tncreased rental. The letter itself clearly purports te be a vratzce in accordance with s. 17A(1) and (2) and includes a proposal as to a provision 4. differing from that of the e»1sting agreement, namely that the rent should be increased. Section 17A contains mandatory provisions as to time in relation to the service of a notice. There 18 no dispute that these conditions were not complied with. In the result, in my opinion, the applicant, as franchisee, was entitled to invoke the provisions of s. 17A(7) seeking an order from the Court directing the franchisee to renew the agreement. None of the excluding provisions of sub-section (5) or sub-section (7) apply. The Court consequently makes the orders sought in paragraph 2 of the application. The applicant 1s thus entitled to seek an order under sub-section (9)(a). This provides that the Court may make: "Orders determining any amount to be payable by the franchisee under the franchise agreement as to be renewed." In the circumstances of this case, the court 1s asked to determane the rent payable under the renewed franchise agreement. Although in its proposal for renewal the respondent sought an increased rent, it now seeks only that the rent payable at the date of expiry of the franchise agreement; namely, $67,008 per year, be fixed as the rent for the reneved agreement. Furthermore, 1t does not seck any annual cseslation of tie rent as had previously been provided for. ul The applicant contends for a considerably iower tent than 1t was paying at the end of the previous term. It asserted that the rent was rendering the conduct of the business unprofitable. This was disputed by the resvondent which Maintained that any unprofitability of the business resulted from poor management on the part of the applicant, in particular from the employment of excess staff in the restaurant, and from a cessation of 24 hour trading. These matters would have asumed far more importance had the case fallen for consideration and determination under s. 9 of the Act rather than s. 17A. However, insofar as these considerations may have some slight bearing upon the approach to be adopted 1n the fixing of rent, I indicate that I formed the view, on the evidence, that Mr. Settree was an experienced service station operator and that he and his wife worked diligently 1n the business, and that they were genuinely unable to achieve anything like the level of profit said to be theoretically available in accordance with calculations produced by Mr. Lillington on behalf of the respondent, Exhibits H and J. The Court, under s. 17A(9) in the instant case, 1S required, as it were, to perform the function of a valuer in fixing an appropriate mark of rental to be paid hy the applicart to the respondent for the service station premises, restaurant, th and dwelling. Part of the land available has, :1 fact, been used by the applicant to conduct a Heric Renec-a-Car francnise T am satisfied on the evidence that this area was made available by 6. oD tal o In O° tal o the respondent to the applicant without charge. 1 th exclude it from consideration in fixing the rent. As might be expected, evidence from evpert valuers has been called on both sz:des and the testimony has dealt not only with appropriate figures for the rent but also with principles to be applied in arriving at a market rental for service station premises. It has been made abundantly clear in argument that this litigation has not been approached by either side, on the basis that it constitutes a test case in which the Court 1s being asked to lay down appropriate principles for such a valuation. It has been accepted quite clearly that the question 1s one of fact, and the expert evidence serves only as a guide to the Court in determining the question. The service station premises, and I embrace in that description the restaurant and dwelling, are situated in the western outskirts of Cobar, a country town in the western district of New south Wales. It 1s predominantly a mining town in which the incomes of its approximately five thousand inhabitants can fluctuate. The service station is on the main highway to and from Broken H111 and is the first service station to be encountered by trucks approaching Cobar from the west along the highway. It therefore has a not inconsiderable passing trade in addition to the town trade. There are other service stations in the town. They are describec, witheit ¢ispuce, 27 the evidence. They naturally provide competition but it 1s not, as I 7. understand the evidence, asserted that the level of competition has changed in a manner which should influence the rental determination for the subject premises. Apart from the restaurant the business provides the usual service station facilities, including sale of petrol of all kinds, distillate, tyres, accessories, servicing of vehicles, mechanical repairs, and sales through a shop of items that travellers buy. Accounting records of an ordinary Find have been kept with the assistance of accountants, and these have been the subject of examination and evidence in the case. It 15 clear that the service station, although having many features 1n common to all small service stations, also has features attributable to 1ts location in a small country town in a fairly isolated area upon a main highway. It appears, for instance, that the employment of labour presented difficult features for the applicants from those applicable in the city, and that the cost of raw materials for use in the business could be higher. In particular, from a valuation point of view, it was most difficult to obtain comparable rentals. The service station businesses in Cobar were not really comparable. Dubbo and Nyngan, the closest towns, were a far larger size, a fact which made comparison difficult. The evidence made t abundantly clear thac the valuation exercise required partook more of art than of science. 8. The experts differed markedly, not only in the figures arrived at but also in respect of the appropriate approach to be adopted. All experts were agreed that truly comparable rentals were the best guide on appropriate market rental, but that these were not available. In these circumstances two main approaches appeared in the evidence; valuers relied upon by the applicant used predominantly an approach described as "return on capital". This was a Simple approach claimed to be appropriate to a fairly remote country area of establishing a proper capital value for the premises and then establishing rent by fixing appropriate percentage return on that capital. The applicant called three qualified valuers who adopted this approach. Of the three f found the evidence of Mr. Sammerville the most impressive. He valued the service station and restaurant facilities at $250,000 and took 15.5. per cent as an appropriate percentage to apply. He arrived thereby at a figure of $38,750 as rental appropriate to that part of the premises. He allowed in addition a rent of $4,000 per annum for the dwelling. This latter rent does not seem to be the subject of any real dispute whereas the former 18. It 1s clear that Mr. Sommerville did not approach the establishment of the capital value of the business premises on the basis that they were mere static real estate. He approached on the basis that he was valuing premises used as a Service station; that this was their best use@ and treat the service station was an established and going concern. Any doubts as to 9. this were completely dispelled by answers he gave vhen recalled to the witness box in the last day of eviderce in th:s case. For this reason his evidence, in my view, carries more weight than that of Mr. Poulter. He did not value the premises other than as real estate. Mr. McLennan, the other valuer called for the applicant, contributed evidence, which I regard as most useful, to the effect that the percentage return reasonably to be expected on a service station capital investment necessarily increased with the distance of the station from the larger urban areas in the Blue Mountains and beyond as the investment risk in terms of capital appreciation or depreciation necessarily increased with distance from such areas. The valuers called for the respondent favoured an approach referred to as the piecemeal approach. This consisted of valuing rent in relation to the turnover achieved in various aspects of the business and only using the real estate valuation as some sort of a check. Only one of these valuers, however, actually saw the premises and provided a figure for rent. He was Mr. Breckenridge whose evidence I did not find particularly heloful. He appears to have been very much inflivenced, in mv vier, by the ¢eisting agreed rental which was under attack. Fe aderted tre viecemeal approach to the extent that he valued the rental for the fuel 10. selling area on the basis of turnover, but he valued the other portions of the premises on a return of real estate basis. He acknowledged that there was no standard way of arriving at a rental value of business premises and that 1t was a matter of looking at individual circumstances of each service station. The other two valuers: Messrs. Parish and Aubin did not see the premises although each of them said that 1t was of significance to do so in making a rental valuation. They heavily espoused the piecemeal approach based on turnover. Niether of them, however, provided a valuation to the Court although it appears that they were aware of the existence of the applicant's financial records which evidenced turnover in all relevant areas and they merely affirmed the supericrity of a method which took into account and fixed a separate rental in respect o£ the turnover of particular aspects of the service station business. The absence of their actually fixing figures in respect of the applicant's business 1s, 1n my view, very detrimental to the respondent's case. It 1S a poor substitute to proceed as was done simply by applying the stated principles as a matter of arithmetic to figures extracted from the applicant's records and the experts may not have proceeded in this way, they may have acceded to suggestions in cross-examination which would have altered the purely arithmetical situation vhen applied to the specific facts of this case. Both valuers also recognised that other approaches were poss:ble ane viable. Ll. Furthermore, 1t 1s clear that the respandent itself when seeking to f1x the rent for the renewal of the franchise did not in any real sense follow tne principles cspoused by tne experts 1t called in this case. In all these circumstances, for the purpose of deciding this particular case, I feel that I should place more reliance on and follow the principles of the capital return method as espoused by Mr. Sommerville. I am fortified in this view by the fact already referred to that Mr. Sommerville made 1t abundantly clear that in fixing a total sum for capital value of the business premises he bore in mind the factors which, in accordance with the other method, are made the subject of separate assessment. Indeed, 1t was recognised in the evidence of Mr. Aubin that the valuation of the site as a service station as an on-going operation was an available method of arriving at the rent in the absence of comparable rental information. Furthermore, the one expert, apart from Mr. Breckenridge, who apparently had regard to the actual turnover and other figures relating to the business was Mr. Sommerville, who expressed the view when called in reply that the strict application of the piecemeal principle could produce a rental figure in the present case which vas considerably in ercess of anything regarded as acceptable _-r the rvestein area. 12. On the other hand, I do not feel obliged to accept in toto the rental appraisal of the business premises made by Mr. Sommerville. The evidence of Mr. McLennan coupled with other evidence in the case, particularly that relating to an 18 per cent risk factor in respect of a service station in the Nyngan area, make me believe that a 20 per cent approach would be more appropriate here. Accordingly, I would adjust Mr. Sommerville's figure of $38,750 upwards by the application of 20 per cent to a figure of $50,000 with the result that the figure of annual rent that I fix is $54,000. I accordingly make order (5) in terms that the Deed of Lease be varied by inserting 1n clause 1({a) the sum of $54,000 in respect of each period therein set out. I order the respondent to pay the applicant's costs of this application. I certify that this and the 11 preceding pages are a true copy of the reasons for judgment herein of his Honour, itr. Justice it.L. Foster. Dated: 3 Augusc, 1988. Associate: Ride