Reported Decision : (2007) NSW Conv R 56-188 New South Wales Supreme Court CITATION : Adwell Holdings Pty Ltd v Bourne [2007] NSWSC 730 HEARING DATE(S) : 25/06/07 JURISDICTION : Equity Division JUDGMENT OF : Young CJ in Eq EX TEMPORE JUDGMENT DATE : 25 June 2007 DECISION : Reasons given as to why valuer's report defective. CATCHWORDS : LANDLORD & TENANT [51]- Rent- Rent review clauses- Reference to valuer- Valulation to be and to be set out in accordance with s 19 of Retail Leases Act 1994- Not mandatory that valuation be provided within one month of reference to valuer- Valuation flawed due to absence of detailed reasons. Civil Procedure Act 2005, s 56 LEGISLATION CITED : Retail Leases Act 1994, ss 6(1)(b), 19, 19A, 32A Supreme Court Act 1970, s 63 Commonwealth of Australia v Wawbe Pty Ltd (1999) ANZ ConvR 597 CASES CITED : Kanivah Holdings Pty Ltd v Holdsworth Properties Pty Ltd (2001) 10 BPR 18,825; affirmed (2002) 11 BPR 20,201 Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286 United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 PARTIES : Adwell Holdings Pty Ltd (P) Robert James Thomas Bourne (D) FILE NUMBER(S) : SC 3767/06 COUNSEL : B Sharpe (P) A Hatzis (D) SOLICITORS : Gary Cleary & Associates (P) Thorntons Lawyers (D) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION YOUNG CJ in EQ Monday 25 June 2007 3767/06 – ADWELL HOLDINGS PTY LTD v BOURNE JUDGMENT 1 HIS HONOUR: This is a dispute between landlord and tenant over the rent review provisions of leases in respect of the Henry Kendall Family Bistro and Tavern at West Gosford. There are two registered leases that I have to consider, each is in identical form, apart from amounts as to rent. One bears date 1 July 2000 and is in respect of shops 35-40 of the relevant shopping centre. The other bears date 1 April 2001, and is in respect of shops 41-42. Shops 35-42 are used as one commercial enterprise by the lessee. 2 Clause 2(a) of annexure "B" to both leases provides that rent is to be payable in accordance with the First Schedule. The relevant parts of the First Schedule - and I am looking at page 65 of PX02, that is, the lease of 1 July 2000 (the other lease is identical except as to figures) - provides, inter alia, as follows: "The amount of rent payable by the Lessee pursuant to Clause 2 of the Lease shall be calculated and payable as follows: The Lessee will during the term pay to the Lessor without demand from the Lessor ... an annual rent (hereinafter called 'the minimum rent') in the sum specified in Item 12.1 of the Appendix hereto BUT IF at the commencement of this Lease or at any time during the term of this Lease, a Poker Machine License is granted to the Lessee, the minimum rent payable by the Lessee under the Lease shall be the amount set out in Item 12.2 of the Appendix ... ." Item 12.1 of the Appendix in respect of the 2000 lease specified $78,000 and Item 12.2 $182,000. In respect of the 2001 lease, the figures were respectively $28,000 and $43,000. 3 The leases provide that the minimum rent would be adjusted for CPI variations on 1 August of each year. In addition, there was to be a review to market on various stated dates; the first of which was 1 August 2005. The First Schedule then provides: "The amount of rent payable by the Lessee pursuant to Clause 2 after a market review date shall be calculated and payable as follows ...". There were then provisions whereby the lessor was, in writing, to specify a rent, which it considered to be the current open market rent. The lessee then had a right within fourteen days to dispute that, and if it did, then the dispute was to be referred to a valuer. The lessor gave the notice, the lessee objected, but unfortunately the procedure for appointing a valuer broke down. However, eventually the parties agreed that a valuation could be made by a Mr Phil Rennie, and after receiving Mr Rennie's quotation, he was commissioned to give his valuation on 23 December 2005. 4 The leases required the valuer to be a specialist retail valuer (which he was) and the relevant provision was that "the said valuer shall determine the current market rent and setting out in accordance with the provisions of the Retail Leases Amendment Act 1998." 5 A subsequent provision of the First Schedule is as follows: "(c) [w]here the minimum rent has not been revised during the review period the Lessee shall pending the ascertainment thereof continue to pay the rent reserved under the Lease at the rate applicable prior to completion of the review but subject to the revision thereof and upon the revised rent being ascertained any necessary adjustment of rent calculated from the end of the relevant review period shall be paid forthwith by the Lessee to the Lessor." 6 Before going further, I should mention three important matters: (a) it seems to have been accepted by both parties that the rent review provisions do not contain any ratchet clause; (b) the Retail Leases Act 1994, as amended, does not apply to the leases because s 6(1)(b) of that Act excludes leases for a term of twenty-five years or more and these leases qualify when one takes into account the option for renewal; and (c) the leases, to an extent, require the valuer to act in his or her determination and the setting out of that determination in accordance with the provisions of the Act. 7 The 23rd of December is, of course, just before Christmas and Mr Rennie was given to understand that some of the details he would require for his valuation would be made available after Christmas. Material was made available to him in late January and thereafter the parties made submissions to him. He handed down his valuation on 7 March 2006. He fixed the rent at $145,011 per annum for the 2000 lease, and $31,509 for the 2001 lease; a total of $176,520 per year. As the landlord originally wanted $240,021.64 plus GST, it is no surprise that the lessor has commenced these proceedings for a declaration that the determination by Mr Rennie is null and void. 8 Section 19 of the Retail Leases Act, as was in force as at 1 August 2005 (it has since been amended) provides: "(1) A retail shop lease that provides for rent to be changed to current market rent is taken to include provision to the following effect: (a) The current market rent is the rent that would reasonably be expected to be paid for the shop, determined on an effective rent basis, having regard to the following matters: (i) the provisions of the lease, (ii) the rent that would reasonably be expected to be paid for the shop if it were unoccupied and offered for renting for the same or a substantially similar use to which the shop may be put under the lease, (iii) the gross rent, less the lessor's outgoings payable by the lessee, (iv) rent concessions and other benefits that are frequently or generally offered to prospective lessees of unoccupied retail shops. The current market rent is not to take into account the value of goodwill created by the lessee's occupation or the value of the lessee's fixtures and fittings on the retail shop premises ... . (c) The matters set out in paragraph (a) are to be taken into account by a specialist retail valuer ... in determining the amount of the rent ... . (e) A valuation for the purposes of paragraph (b) is to be in writing, to contain detailed reasons for the specialist retail valuer's determination and to specify the matters to which the valuer had regard for the purposes of making his or her determination. (2) A specialist retail valuer must make a valuation of a current market rent for the purposes referred to in this section not later than 1 month after accepting the appointment to make the valuation. (3) A specialist retail valuer may apply to the Tribunal ... for an order that a lessor comply with a request ... to supply relevant information about leases for retail shops situated in the same building or retail shopping centre to assist the valuer to determine the rent." 9 The valuation given by Mr Rennie is annexure AJ in exhibit PX01. He notes that the market review had been retrospectively assessed as at 1 August 2005. He sets out the provisions of the lease for both sets of shops. He acknowledges that he has copies of each of the leases. At page 3 he sets out the definition of "current market rental" based on s 31 of the Retail Leases Act 1994. This is an error. He should have referred to s 19, but as ss 31 and 19 contain exactly the same provisions, the error is of no moment. He correctly sets out paragraph 1(a)(i) to (iv) as I have set them out above. He then has a heading "Submissions" and he says that he has given each party the opportunity of making submissions and has received submissions from the lessor dated 1 March 2006, submissions on behalf of the lessee of 14 February 2006, and a rental valuation by another valuer of 16 January 2004. He then says he has read the submissions and summarises the opinions. He then sets out the floor areas of the defined premises and continues: "Whilst I have examined the various submissions, I have made my own investigations and analysis in order to complete the determination. As per the Retail Leases Act, (which supersedes the lease) the reason and matters of the determination have been set out following without disclosure of comparable evidence in relation to the identification of other leases or parties to other leases or relating to the business of parties to other leases, other than those in the subjects complex (sic) and or those parties providing consent to relevant information." 10 I did not think that that last paragraph made sense, but counsel referred me to s 19A of the Retail Leases Act which provides that a specialist retail valuer is not to divulge information given by a lessor or lessee for the purpose of determining the rent without consent and imposes a criminal penalty if he or she does so. However, with respect, the valuer does not seem to have fully acquainted himself with what s 19A says. It does not prevent him from setting out the facts which he determined in a way which does not reveal how he got that information. It is certainly not a blanket reason why a valuer is prohibited from giving full reasons. In any event the restrictions imposed by s 19A apply only in connection with making an assessment under the Act itself. Where one is making an assessment under contract, which contract incorporates, to some extent, the provisions as to determination and setting out of a valuation, it is very doubtful as to whether s 19A of the Act has any relevance at all. 11 Returning to the valuation, the next heading is "Reasons & Matters of the Determination". There follows seven bullet points. The seven bullet points do not really provide reasons. They are merely random thoughts as to factors which need to be taken into the mix. Then there is a heading "Determination": "In accordance with the provisions of the lease and the Retail Leases Act 1994 No 46, I have determined the current market rental as at 1 August 2005, exclusive of GST and inclusive of outgoings to be $176,520 pa." 12 On the hearing before me today Mr B Sharpe appeared for the plaintiff and Mr A Hatzis for the defendant and I am indebted to both of them for their concise and intelligent submissions. 13 Mr Sharpe focussed on the provision in the leases which made applicable the principles in the Retail Leases Act. Although I am probably verballing him to some extent, his submissions amounted to the proposition that the valuer and the Court had to approach the valuation problem in exactly the same way as if the valuer were determining a current market rent under section 19. Accordingly, he said, if the valuer made his determination outside the one month period set out in s 19(2) of the Act, then the valuation was invalid. 14 With great respect, I do not consider this is the appropriate way of construing this provision. The First Schedule does not incorporate the whole of the procedure under the Retail Leases Act; all it does is to require the valuer, under the contract: (a) to determine the current market rent; and (b) set out his determination in accordance with the provisions of the Act. Virtually anything in the Act outside that he can ignore and one of the provisions, for instance, he may be able to ignore is s 19A, to which I have already referred. 15 However, it is probably simpler to deal with Mr Sharpe's three subpoints because the core of the matter is more easily examined that way. Mr Sharpe put that there were three major defects in Mr Rennie's valuation which rendered it invalid. Namely, (A) it was out of time (cf section 19(2)); (B) it did not give a statement of detailed reasons (cf section 19(1)(e)); and (C) it did not deal with the matters set out under s 19 (1)(a) and in particular was mistaken as to the significance of the lessee's entitlement to use poker machines. 16 As to (A), even if I was dealing with an application under the Retail Leases Act, it would be very difficult to construe subsection (2) as making it absolutely mandatory for the valuation to be provided within one month after accepting appointment. It is quite clear under s 19(1)(d) that the valuer may make a request of the lessor for relevant information and that that request need not necessarily be made on the day he accepts appointment. The lessor then has fourteen days to respond to that request and then, under subsection (3), the specialist retail valuer may apply to the Tribunal if dissatisfied. It is impossible to say, in the light of the time that that would take, that the legislature must have intended that if the valuation was not made within one month, it was invalid. 17 What subsection (2) must mean is that a specialist retail valuer must, if possible or if practicable, make a valuation of the current market rent within one month, not that there is an absolute mandatory requirement that it be done within one month. 18 On that interpretation, which I must confess was not put by either counsel, there is no breach or invalidity attached to the fact that the valuation did not occur until 7 March 2006. 19 Even if that were wrong, then it is hard to say that merely because a valuation is a month or so late, that it is necessarily invalid. It is hard to see why a valuation made, for instance, one hour or one day after the period would fail completely because the whole purpose of the Act appears to be to provide for a determination that is binding on both parties with a minimum of formality. 20 However, there is a third answer to the point, and that was raised by Mr Hatzis, that the valuer was proceeding under contract. The machinery for the valuation fell down and the parties varied the procedure so as to agree on Mr Rennie. They also appear, because each of them made submissions after the one month, to have acquiesced in the valuer considering their submissions after the due date. I would say that there has been a variation of the contract even if subsection (2) otherwise applied to vary the one month period. Having come to that view, it is unnecessary for me to consider further the argument by Mr Hatzis that time of one month is not of the essence under subsection (2). 21 (B) This is the matter that concerned me considerably, the "Reasons" given by Mr Rennie for his valuation are very sparse. Now I understand that this may be because of his misunderstanding of s 19A of the Act, but the fact remains that they are very sparse. It would be very difficult for a person to work out just what reasons motivated Mr Rennie to come to the conclusion that he did. It is true that he sets out what he has to consider, but the law is full of cases where people have set out what the test is that they must apply and have not got around actually to applying it. It is easy enough just to repeat by rote the test, the real question is whether the valuer has actually applied the various criteria. 22 Now Mr Hatzis refers to the decision of Palmer J in Kanivah Holdings Pty Ltd v Holdsworth Properties Pty Ltd (2001) 10 BPR 18,825 which was affirmed by the Court of Appeal in (2002) 11 BPR 20,201 under the same name. That was not a case on all fours with the present because the valuer had to value the relevant rent under contract and had to give sufficient written reasons. Palmer J said at [118] that that requirement obliged the valuer: " … to disclose what he did and why only to the extent necessary to enable the parties, with the assistance of their experts, to see whether he had complied with the requirements ... having regard to the matters to which he was obliged to have regard, and by disregarding the matters which he was obliged to disregard." 23 Mr Sharpe says that there is a real difference between the requirement of sufficient reasons as in the Kanivah case and the requirements of s 19(e) for the writing to contain detailed reasons. However, the question must be asked why did the parties - or in the case under the Act, why did the legislature - require that there be detailed reasons. 24 Before the Act was amended in 2005 there was no merits review. Thus, the reasons need not be such as would guide the review panel as to how the valuer had reached his or her decision. It could only be so that the parties could be assured that the valuation was in accordance with their agreement, and in this respect, the Kanivah case is applicable by analogy. 25 I should note that after the 2005 amendments, which took effect after 1 August, so are germane to these reasons, s 32A was added to the Act so as to provide for a merits review of a rent determination. There was no corresponding adjustment of s 19(1)(e). Section 19(1)(e) means now that the reasons given by the valuer are to be used by the Review Board as well as by the parties and that gives an additional reason why they should be insisted upon. One could argue that as s 19(1)(e) has not been adjusted, it always meant that. I have taken that argument into account, but I do not think it is the strongest argument. 26 However, I would agree with Mr Sharpe that the contract required the valuer to give "detailed" reasons; this goes further than merely requiring "sufficient" reasons and requires the valuer to set out details as to how he or she arrived at the determination. Further, when it says that it is to specify the matters to which the valuer had regard, that does not just mean setting out by rote what is in the Act, but actually dealing with how those matters were considered in the process of making the valuation. 27 To my mind the valuer fell far short of providing detailed reasons and specifying the required information in the random thoughts he proffered with respect to the valuation which he gave. Accordingly, in my view the valuation is suspect because of that. I will consider the consequence of this view later. 28 (C) The alleged failure here is directed at s 19(1)(a)(ii) where the valuer has to consider the rent that would reasonably be expected to be paid for the shop if it were unoccupied and offered for renting for the same or a substantially similar use to which the shop may be put under the lease. 29 The leases allow for ten poker machines and they allow under the First Schedule for a substantially increased minimum rent if there was a poker machine licence. It appears that fourteen poker machines are now allowed in the shop and that the valuer did not take account of this. However, as Mr Hatzis points out, the way the leases are worded is that the triggering event is not the number of poker machines, but the fact that they are allowed at all, and that has been compensated for by the substantial increase in the minimum rent. There is, to my mind, nothing that has been demonstrated here over and above what I said in respect of (B) which would amount to a further failure. 30 I do not, myself, see any mistake that the valuer made in respect of the poker machines; but if he did, it would not be a mistake as to the function of fulfilling the contract between the parties, but rather a mere mistake of assessment, within his expertise as a valuer, which would not be able to be attacked. 31 Accordingly, I have reached the view that one of the three attacks made by Mr Sharpe is made out. There is then a question as to what follows. 32 The summons merely seeks a declaration that the valuation is null and void. The Court does not make a declaration unless there is some utility in doing so. Furthermore, the Court is required by s 56 of the Civil Procedure Act 2005 and s 63 of the Supreme Court Act 1970 to put an end to the dispute between the parties. The High Court in Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286 makes it quite clear that courts are not to make a declaration where the making of the declaration would not put an end to the dispute between the parties. However, as Judges of this Court have said, that does not mean that all the relief has to be dealt with at the one time. Accordingly, there is no problem at all about me giving my reasons and then standing the matter over so that the parties can take some time to consider what follows. 33 Before finishing these reasons, however, I must remark that it is quite clear on the authorities that courts are not to interfere where the parties have set up a system for adjusting rent or providing for valuations, unless the determination is so far removed from the contract that it would be inequitable to have the parties bound by it. Mr Hatzis says that if Mr Rennie has made an error, then the situation is that he has not produced a proper valuation and the matter should be referred back to Mr Rennie to complete the task he was paid to do. The problem with that, as Mr Sharpe points out, is that Mr Rennie is not a party to these proceedings and there is no way in which I can compel him to do anything. 34 Mr Sharpe says that because the valuation exercise has failed, it is completely frustrated, and the valuation is void. Thus the only option is for the whole procedure to start again. There are, again, problems about that in that one just does not know whether there will ever be any consent to vary the failed machinery or whether, as Mr Sharpe optimistically suggests, the failed machinery might work next time. 35 It must always be remembered in this type of case, as Lord Diplock made clear in United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 at 930 that where parties have agreed to accept the decision of an expert, a court does not deprive people of substantially the benefit that they were intended to receive by the process. Furthermore, deficiency of reasons where there is no merits review available is not the most serious blemish in a valuation; see eg Commonwealth of Australia v Wawbe Pty Ltd (1999) ANZ Conv R 597. 36 However each situation must be assessed on its own circumstances. In the light of the terms of the contract in this case, I think that the difficulty with the supply of detailed reasons is sufficiently bad to make out an essential breach of the obligation so that the valuation cannot stand. However, what follows from that, I think, must be a matter of further argument after the parties have digested these reasons and hopefully, have entered into meaningful commercial negotiations. 37 Accordingly, I publish these reasons and stand the matter over to my list at 9.50 am on 13 August 2007. ****************** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.