KELMEA PTY LIMITED v STATE RAIL AUTHORITY OF NEW SOUTH WALES SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL Hope, MAHONEY and CLARKE JJA 17 December 1987, 29 June 1988 [1988] NSWCA 80 Landlord and Tenant; rent review clause; demised premises; unimproved value of the freehold. In a lease of commercial premises for the term of 20 years there was provision for annual rent reviews after five years had elapsed. The revised rent was to be the greater of a fixed sum or $7,500 plus 7.5% of the unimproved value of the freehold of the demised premises current on the first day of the tenancy year. Unimproved value was defined as meaning the improved value determined pursuant to the Valuation of Land Act 1916 or if none had been determined the "unimproved value of the premises agreed between the parties or, failing agreement, determined by an arbitrator". HELD: 1. That the circumstance that the improved value had not been ascertained by the commencement of the tenancy year did not mean that the rent was to be the fixed sum mentioned; 2. The words "unimproved value of the freehold of the demised premises" were to be given their natural ordinary meaning. Hope JA I agree with Clarke JA. Mahoney JA The facts are set forth in the judgment of Clarke JA and it is not necessary for me to recapitulate them. Subject to one matter, on which I desire to add some observations of my own, I agree with his Honour's judgment and the reasons which he has given. The learned trial judge declared that, upon a reference to arbitration in accordance with the relevant provisions of the lease, "the amount of the unimproved value of the freehold of the demised premises is to be determined as at 1 June 1985 according to the ordinary and natural meaning of those words in the lease when applied to the facts". The term "the unimproved value of land" as used in s6 of the Valuation of Land Act 1916, as it was before the amendments to which Clarke JA has referred, was seen as going to the capital sum which the fee simple of the land might be expected to realise on a proper sale assuming that the improvements on or appertaining to it had not been made: see s6. However, in ascertaining that value, there was to be taken into account, to put the matter compendiously, the potentialities for improvement or otherwise for use of the land. One of the questions to be determined in the proceeding is the meaning of "the unimproved value of the demised premises" as contained in CL2 of the second schedule to the lease. The submissions for the appellant were directed, I think, in the main to limiting the potential improvements which were to be taken into account for the purposes of such a valuation. I agree with what has been said by Clarke JA in that regard. 2 UNREPORTED JUDGMENTS But a further question has arisen, or may at least arise, upon the proposed arbitration. The learned judge declared that, in the arbitration, "the amount of the unimproved value of the freehold of the demised premises is to be determined as at 1 June 1985 according to the ordinary and natural meaning of those words in the lease when applied to the facts". On my view, the arbitrator should determine the unimproved value in the same way as, for example, the Valuer General would have determined the unimproved value within s6 of the Valuation of Land Act 1916 for the purposes of that Act. I do not think that, in the present case, there is any difference between the unimproved value of the land, understood according to "the ordinary and natural meaning of those words" and the unimproved value of the land as it would have been determined in accordance with s6. But it is necessary to determine what form the declaration should take. On this basis, I agree with what has been proposed by Clarke JA. Clarke JA On 8 October 1980 the Public Transport Commission of New South Wales(which was succeeded by the present respondent) granted a lease of premises described in the memorandum of lease to the appellant for the term of 20 years commencing on | June 1980 and terminating on 31 May 2000 at the yearly rent set out schedule 2 of the memorandum the relevant portion of which read as follows: "1. The yearly rent shall be: (a) THIRTY FIVE THOUSAND DOLLARS ($35,000) for the first year of the term; (b) SIXTY SIX THOUSAND TWO HUNDRED AND FIFTY DOLLARS ($66,250) for the second, third, fourth and fifth years of the term; For the remainder of the term the yearly rent shall be whichever is the greater of: (c) SIXTY SIX THOUSAND TWO HUNDRED AND FIFTY DOLLARS ($66,250); or (d) SEVEN THOUSAND FIVE HUNDRED DOLLARS ($7,500) plus 7.5% of the unimproved value of the freehold of the demised premises current on the first day of each tenancy year; CL2 of the second schedule defined the meaning of the phrase "unimproved value" for the purposes of CL1(d) of the schedule in these terms: "2(a) The expression 'Unimproved Value' used in CL1(d) hereof shall mean Unimproved Value as determined pursuant to the Valuation of Land Act, 1916 or any Act amending or in substitution for the same or if on the first day of any tenancy year there is no Unimproved Value of the demised premises so determined then the said expression shall mean: The amount agreed between the Lessor and the Lessee to be the Unimproved Value of the demised premises, or In the the event of the Lessee failing within 1 month of being requested in writing by the Lessor to agree upon an amount as the Unimproved Value of the demised premises, such amount as is determined to be such Unimproved Value upon a reference to Arbitration in accordance with the provisions of the Arbitration Act, 1902." The stipulated rental for the first five years of the term was duly paid but disputes arose between the parties as to the rental which was payable for the year commencing on | June 1985. The respondent initially claimed an amount based on a value which it is now conceded was not the "unimproved value" of the premises as that phrase is defined in the lease. The appellant for its part WHELMEA PTY LIMITED v STATE RAIL AUTHORITY OF NEW SOUTH WALES (Clarke JAB contended that there was no unimproved value current as at 1 June 1985 with the consequence that the sum of $66,250.00 specified in CL1(c) of the second schedule was the relevant rental for that year. The dispute was not resolved and the appellant instituted the present proceedings seeking declaratory relief and, in particular, declarations that there was no current "unimproved value" on 1 June 1985 and that the appropriate rental was $66,250.00. The case was heard by Bryson J who made a number of declarations which could broadly be classified into two categories. In the first place he declared that there was no unimproved value determined in accordance with the Valuation of Land Act 1916 (herein called "the Act"), or any substitute act, and that the relevant value should be determined upon a reference to arbitration. In the second place he declared that the amount of the unimproved value was to be determined according to the natural and ordinary meaning of those two words when applied to the facts of the case. In this appeal the appellant has challenged two of his Honour's conclusions. Before however referring to the precise issues presently confronting the court I should mention the fact that at the start of the hearing a solicitor, Mr. Roth, announced his appearance for Superannuation Fund Investment Trust which was, he said, the present owner of the premises. Some discussion ensued but in the end Mr Roth made it clear that he was not desirous of having his client joined as a party in the appeal and thereafter he took no part in it. The first issue which arises is whether the admitted fact that the unimproved value of the freehold had not been determined prior to, or on, 1 June 1985 meant that the rental for the ensuing year was fixed at $66,250.00. The appellant's argument in support of the proposition that an affirmative answer should be given to this question focused on the words "current on the first day of each tenancy year in CL1(d) and was developed in the following manner. The CL(1(d)) provided that the rent for the relevant year should be the greater of the sum of $66,250.00 or $7,500.00 plus 7.5% of the unimproved value of the freehold current on the first day of each tenancy year. As at 1 June 1985 the unimproved value had not been fixed. It had not been determined in accordance with the Act, had not been agreed nor resolved in an arbitration. Consequently there was no current unimproved value as at 1 June 1985 and the alternative rent, that is, $66,250.00 necessarily applied. I am unable to accept this construction of the clauses in question. In my opinion the word "current" was used to identify the date attributed to the valuation. If there was in fact a valuation under the Act in force on that date then it applied. If not and it was necessary for a value to be fixed by agreement or an arbitrator then that value should be fixed as at that date. In other words, the parties, when contemplating an agreed figure, or the arbitrator in fixing a value, were required to concern themselves with a valuation applicable to the specified date. No doubt the word "current" is not singularly appropriate in either of those circumstances but the parties were also concerned with identifying the relevant valuation pursuant to the Act. If, for instance, an unimproved value had been fixed under that act in, say, 1984 and had not been superseded by a later valuation then it would provide the "unimproved value... current" as at | June 1985 within the meaning of CL1(d). If there had been no valuation under the Act then it was necessary for an unimproved value as at the specified date to be determined in accordance with the agreed formula. 4 UNREPORTED JUDGMENTS This approach accords, in my view, with the obvious commercial purpose of the clause. But quite apart from that consideration there is a compelling reason why "current" should not be regarded as requiring that the relevant value be fixed by one or other of the stipulated means prior to, or on, the first day of the tenancy year. That reason is to be found in the contractual provision defining unimproved value. In that clause the primary meaning of the phrase is immediately followed by these words "if on the first day of any tenancy year there is no unimproved value of the demised premises so determined then the expression shall mean..." and there follow the statements of the secondary or alternative meanings. What is readily apparent is that the need to embark on a procedure to agree, or arbitrate, the unimproved value only arises if on the first day of the tenancy year - in this case | June 1985 - there is no unimproved value determined pursuant to the Valuation of Land Act. Until that date arrives it could not be said with certainty that there was a need to embark on the alternative procedures or not. A necessary consequence of this scheme is that the occasion for the parties to endeavour to agree would only arise on or after that first day of the tenancy year. Furthermore, the arbitration procedure was only to be invoked if "the lessee fails within 1 month of being requested in writing by the lessor to agree upon an amount". Obviously the contemplated arbitration would not take place until at least one month after the first day of the tenancy year. This whole scheme is inconsistent with, and utterly destructive of, the notion that the parties should be taken to have contemplated that CL1(d) should, in effect, be disregarded unless the unimproved value had been ascertained, in accordance with CL2(a), by the first day of the tenancy year. Accordingly it is not correct to say that the rent for the year commencing | June 1985 was necessarily $66,250.00 and the arbitration procedures already set on foot by the respondent should proceed. The appellant's second submission concerns the principles which should guide the arbitrator in his search for the appropriate value. The argument was put in these terms - "'Unimproved value of the demised premises' in the context of the lease must mean unimproved value determined for the site on the premise that development thereof will not at any material time exceed the degree and extent of the development as at the commencement of the lease". This was said to follow from the requirement that the arbitrator determine the 'unimproved value of the demised premises', an expression to be contrasted with the words in CL1(d) "unimproved value of the freehold of the demised premises". It is necessary in order properly to understand this submission to recount some historical detail. As at the date of the execution of the lease s6 of the Act provided a definition of the unimproved value of land. Clearly enough the parties at the time of execution contemplated that if the Valuer General had made a determination of that value then that valuation should be applied in making the calculation called for by CL1(c) and CL1(d). Furthermore it is accepted by the appellant that the Valuer General would value the unimproved value in accordance with the requirements of the statute and well established principles of valuation (eg he would take account of the development potential of the land). WHELMEA PTY LIMITED v STATE RAIL AUTHORITY OF NEW SOUTH WALES (Clarke JAB But it was argued that if the Valuer General had not valued the unimproved value the parties were called upon to consider the unimproved value of "the land the subject of the demise on the premise that use and development of such land may be no different or greater than that permitted by the terms of the lease given the nature and extent of the improvements at the commencement of the term" to use the words of senior counsel. If the parties could not agree then the duly appointed arbitrator had to determine the value on the same premise. At the time of execution of the lease there were two adjoining buildings on the land. One was an old building two storeys high which had previously been used as a substation in connection with the Sydney train system and the other was single storeyed and used as a parking station. The agreed user of these premises, as stated by CL4, was 'for a restaurant, cabaret, associated offices and motor vehicle parking' and under CL13 the appellant was required to renovate the premises to the satisfaction of the lessor within 18 months. CL12 is of some importance and I set it out in full: "THE land hereinbefore described (excepting thereout the services of the Lessor referred to in Memorandum Number R404670) is referred to as the demised premises in Memorandum Number R404670 and in this Lease which expression where the context so admits shall include any building structure fixture or improvement and all things thereto belonging which are at the commencement of or may during the term be erected placed or made by the Lessor or the Lessee on the said land and shall include any part thereof." The appellant placed great reliance on this clause for it was, his counsel contended, a clear indication that the use of the expression 'demised premises' in the latter parts of CL2(a) was indicative of an intention that the parties, or the arbitrator, should concern themselves with the unimproved value of land on which there were specific buildings to be used in a particular and restricted manner. The submission is not without some attraction. The respondent (or, more accurately, its predecessor) was leasing the land to the appellant for twenty years upon terms that the appellant would renovate and restore the existing old buildings and thereafter occupy them for the full term for, and only for, the expressed purposes. In these circumstances there is some force in the argument that the parties would have contemplated that rent increases should be based upon the value of the land upon which those buildings were erected and those restrictions applied and without regard to any potential of the land for greater development. It would be quite unfair, counsel argued, for any increase in the rent to be based on a valuation which took account of possible development and use of the land which was denied to the lessee under the lease. The difficulty with the submission is that the expression "demised premises" appears in each section of CL2(a). That is, whether the operative valuation is determined pursuant to the Act or results from agreement or arbitration, it is described in CL2 as the unimproved value of the "demised premises". It is common ground that the statutory valuation would not take account of restrictive covenants contained in the lease (Royal Sydney Golf Club v Federal Commissioner of Taxation, 91 CLR 310) but would have regard to the potential of the land for more advantageous development. Consequently the appellant's 6 UNREPORTED JUDGMENTS argument could only be upheld if the phrase "the unimproved value of the demised premises" was given a different meaning in the second and third stages of CL2. Counsel for the appellant recognised this but argued that the parties clearly contemplated that the phrase would have different meanings in different parts of the lease. This was said to flow from two features of the lease. Firstly, the distinction between the words unimproved value of the freehold of the demised premises in CL1(d) and the phrase appearing in CL2(a) and secondly the fact that the "demised premises" referred to in the lease comprised the land and the actual buildings on the site. Counsel sought to support the argument by reference to commercial reality. The premises were leased for a lengthy period for a nominated use which prevented any substantial alteration to the premises and the lessee was subjected to a number of significant restrictions. In these circumstances the parties should be taken to have intended that the assessment of the unimproved value would proceed without regard to any development potential that the site might have. It was submitted that the recognition that it would be unequitable to base a rent increase on a valuation which had regard to the potential of the site was reflected in the use of the phrase "valuation of the demised premises". In an endeavour to meet the problem posed by the consistent use of that phrase in CL2(a) counsel pointed out that in 1980 valuations were carried out by the Valuer General once every six years. In this way the impact of a valuation by the Valuer General which took account of development potential would be less than that of annual valuation by an arbitrator. I do not find this submission, the force of which is in any event diminished by CL2(b) of the lease which enabled the lessor to call for new valuations from the Valuer General every three years, at all compelling. Generally speaking however a phrase should be accorded the same meaning where it appears more than once in the same clause or paragraph. No doubt there are occasions when the context in which the phrase is found, or other circumstances, which would indicate that in a particular case this would not be so. I am unable to accept that this is such an occasion. It seems to me that the parties contemplated in CL2 that if there was no statutory valuation of the demised premises then a valuation would be obtained either from agreement or arbitration. Whatever the precise mechanism of determination the intended result was the unimproved value of the freehold of the demised premises which was to be determined in accordance with the principles which guide the Valuer General in determining the value under the relevant statute. I have already mentioned CL2(b). It provided as follows: "NOTWITHSTANDING any other provision herein contained the Lessor for the purpose of determining the rent hereinbefore reserved may at any time but not more frequently than once in every three (3) years require a new valuation of the freehold of the demised premises to be made pursuant to the Valuation of Land Act, 1916 or any Act amending or in substitution for the same and the cost of such new valuation shall without limiting in any way other provision hereof be paid by the Lessee to the Lessor upon demand." It will be seen that the phrase "valuation of the freehold of the demised premises", which is also identical with the expression used in CL1(d), is used in the context of a statutory valuation. WHELMEA PTY LIMITED v STATE RAIL AUTHORITY OF NEW SOUTH WALES (Clarke JAY This is to be contrasted with an earlier reference to a valuation determined pursuant to the Act in CL2(a) which is referred to as the valuation of "the unimproved value of the demised premises". As both the first paragraph of 2(a) and 2(b) are dealing with statutory valuations it would seem clear enough that the different phrases are used interchangeably and that the addition of the words "of the freehold" in 1(d) and 2(b) do not lead to the result urged by the appellant. In conclusion I am unable to find any indication in the lease that the parties intended that different principles should be applied in assessing the unimproved value of the premises. Consequently I am of opinion that the appellant's second submission advocating that the unimproved value should be determined upon the premise that development would not at any time exceed the degree and extent of development of the site at the commencement of the lease should be rejected and the declarations sought in the notice of appeal should be refused. I would add two observations. The first is that the respondent, in his written submissions, sought an order under SCR Pt72 r 2 referring the determination of the unimproved value to arbitration. A similar application had been made in the cross-claim and rejected by Bryson J and as no cross-appeal was filed it is not appropriate that this court make any order in that regard. Of course it is always open to the respondent to make an application under the rules if the appellant does not cooperate in the appointment of an arbitrator, or arbitrators. The second concerns the form of order that this court should now make. Bryson J made a number of declarations all of which were challenged by the appellant. The normal consequence of the failure of an appellant to sustain his attack is, in the absence of a cross-appeal or notice of contention, that the appeal be dismissed with costs. That is the order I am presently minded to make but there is a difficulty which the parties may wish to consider before a formal order is made. The reasoning which led me to reject the appellant's submissions accorded significance to the reference to the Valuation of Land Act 1916 in CL2(a) of the lease. Bryson J however had a different view. He did not accept that an arbitrator should act in accordance with the principles which guide the Valuer General for reasons which appear in his judgment. If an order is made dismissing the appeal then if an arbitrator is appointed in due course problems might arise form these differences in approach. In these circumstances it seems to me to be desirable to enable the parties to consider their positions. Accordingly I would propose that unless a party makes an application for a special order within 7 days the appeal be dismissed with costs. Appeal should be dismissed with costs. COUNSEL: Appellant - PR GRAHAM QC & G RUNDLE Respondent - T F M NAUGHTON QC SOLICITORS: Appellant - LANE & LANE Respondent - F D THOMPSON