Inspire International Holdings Pty Ltd v Heriot Pty Ltd [2013] NSWADT 48

Administrative Decisions Tribunal New South Wales Medium Neutral Citation: Inspire International Holdings Pty Ltd v Heriot Pty Ltd [2013] NSWADT 48 Hearing dates: 13 February 2013 Decision date: 28 February 2013 Before: Deputy President D Patten Decision: 1. Application dismissed. 2. Applicant to pay respondent's costs. Catchwords: Application to set aside decision of Specialist Valuers - Alleged failure to have regard to matters specified in s 31(1)(a) - No manifest fundamental error established Legislation Cited: Administrative Decisions Tribunal Act 1997 Retail Leases Act 1994 Cases Cited: Eastpoint Shopping Village Pty Ltd v Grayson Pty Ltd [2011] NSWADT 68 Category: Principal judgment Parties: Inspire International Holdings Pty Ltd (Applicant) Heriot Pty Ltd (Respondent) Representation: Counsel R D Marshall (Applicant) D H Murr SC (Respondent) Morgan Lewis Solicitors (Applicant) Baron and Associates (Respondent) File Number(s): 125166

reasons for decision 1This is an application under s 32A(12) of the Retail Leases Act 1994 (the Act) to set aside the decision of 2 specialist valuers on the ground that they "have manifestly made a fundamental error warranting such an order". 2The background to the matter is that the respondent is the lessor and the applicant the lessee under a lease of premises, Shop 4, 152 Campbell Parade, Bondi Beach (the premises). The lease for a term of 5 years expired on 14 March 2012 but in due time the applicant exercised an option for renewal for a further term of 5 years. The use provided for by the lease was "as a restaurant (eat in, take away and home delivery) and for the making and selling of sandwiches, salads, soups, quiches, cakes, beverages, fruit juices, health foods and similar items". The lease is thus a retail lease within the meaning of the Act. 3Clause 33 of the lease providing for an option of renewal also provided for the rental payable under the renewed lease to be the current market rent as determined. The exercise of the option thus enlivened s 31 of the Act which provides: 31 Reviews of current market rent (1) A retail shop lease that provides an option to renew or extend the lease at 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, as between a willing lessor and a willing lessee in an arm's length transaction (where the parties are each acting knowledgeably, prudently and without compulsion), 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. (b) If the lessor and the lessee do not agree as to what the actual amount of that rent is to be, the amount of the rent is to be determined by valuation carried out by a specialist retail valuer appointed by agreement of the parties to the lease, or failing agreement, by the Tribunal. (c) The matters set out in paragraph (a) are to be taken into account by a specialist retail valuer appointed under paragraph (b) in determining the amount of the rent. (d) The lessor must, not later than 14 days after being requested to do so by a specialist retail valuer appointed under paragraph (b), supply the valuer with information (where reasonably available to the lessor) requested in a list provided by the valuer to assist the valuer to determine the current market value, including the following information about leases for comparable retail shops in the same building or retail shopping centre: (i) current rental for each lease, (ii) rent free periods or any other form of incentive, (iii) recent or proposed variations of any lease, (iv) outgoings for each lease, and including any other information prescribed by the regulations. (e) A valuation for the purposes of paragraph (b) is to be in writing and 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. (f) The parties to the lease are to pay the costs of a valuation by a specialist retail valuer appointed under paragraph (b) in equal shares. Note. The procedure provided by this section can be avoided if the parties can come to an agreement as to what the rent is to be. (1A) A party to a lease may apply to the Tribunal for the appointment of a specialist retail valuer for the purposes of subsection (1) (b). (1B) A party to a lease may make written submissions to a specialist retail valuer to assist in the valuer's consideration of the valuation, and the valuer must consider any such written submissions. (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 receiving the information referred to in subsection (1) (d). (3) A specialist retail valuer may apply to the Tribunal under Part 8 for an order that a lessor comply with a request referred to in subsection (1) (d) 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. (4) The reasons and matters included in a valuation as referred to in subsection (1) (e) must not be set out in a way that discloses information identifying other leases or parties to other leases or relating to the business of parties to other leases. This subsection does not apply to leases between the parties to the lease for which the valuation is made or to leases whose parties consent to the disclosure of the information. 4As the applicant and respondent were unable to agree upon a rent, this Tribunal under s 31(1A) appointed Mr K J McCarney as a specialist retail valuer. His report (Ex. A) assessed "the effective fair market gross rental for the demised premises at $2,900m2 equating to $220,400 per annum". 5The applicant, in accordance with s 32A, applied for the appointment of 2 specialist retail valuers to conduct a review of Mr McCarney's determination. The Tribunal appointed Mr Malcolm Gunning and Mr Ian Handley (hereafter the joint valuers) for this purpose. 6The joint valuers determined the Gross Annual Market rental of the premises as at 15 March 2012 at $226,000 or approximately $2,974 per m2. It is this determination of the joint valuers that the applicant seeks to set aside in these proceedings. 7Mr R D Marshall, counsel for the applicant, challenges the report of the joint valuers on 2 bases, namely that they did not have regard to the rent that would reasonably be expected to be paid for the shop were it unoccupied (s 31(1)(a)(ii)) and that they did not have regard to rent concessions and other benefits that are frequently or generally offered to prospective lessees of unoccupied retail shops (s 31(1)(a)(iv)). 8In effect so it was submitted (correctly in my view) the valuers were required to value the premises as an empty shop having the benefit of a grease trap and a permitted use consistent with its actual use but disregarding the lessee's goodwill, fixtures and fittings. They were also required to have regard to the possible availability of rent concessions and other benefits. It was asserted that they had in effect manifestly disregarded these obligations. 9In my opinion as a matter of statutory interpretation the words "having regard to" in the opening paragraph of s 31(1)(a) need to be applied consistently to sub-paras (i) to (iv). As there is potentially some tension between these sub-paragraphs none of itself is determinative of the outcome. The sub-section requires no more than that the valuation has "regard to" the matters listed, the valuer as an expert being entitled to give the matters such weight as deemed appropriate in order to arrive at the "current market rent" as defined. The valuation of course may not take into account the value of the lessee's goodwill, fixtures or fittings but in my opinion nothing in the sub-section requires the production of an "artificial" valuation as submitted by Mr Marshall; such a result would in my view be quite inconsistent with the definition of the current market rent which appears in the introductory paragraph of s 31(1)(a). It follows in my view that even if it appeared that the joint valuers had no regard to some or all of the matters in sub-paras (i) to (iv) of s 31(1)(a) more would need to be established to constitute a "fundamental error" warranting an order that the valuation be set aside. I respectfully endorse what was said by Judicial Member Molony in Eastpoint Shopping Village Pty Ltd v Grayson Pty Ltd [2011] NSWADT 68 at para 33: 33 A valuation under s 19(1)(a) is a complex document setting out an expert opinion on matters requiring expertise, knowledge and skill. It should set out details as to how the valuer arrived at the determination, specify the matters to which the valuer had regard, and explain how those matters were considered in the process of making the valuation: Adwell Holdings v Bourne (2007) NSWSC 17, (2007) NSW Conv R 56-188 per Young J. An analysis of whether a valuation satisfies those requirements is to be made having regard to the valuation report as a whole, without undue attention to minutiae. It is ultimately an expert opinion, not a drafting exercise. An assessment of whether or not it is sufficient and addresses all the matters it is required to, can only be fairly made having regard to the document as a whole, and not with an eye "keenly attuned to a perception of error" (see Minister for Immigration and Ethnic Affairs v Wu Shan Liang [1996] HCA 6). 10As to the matters argued before me, I agree with the submission of Mr Murr SC, counsel for the respondent, that the task of the joint valuers was to "review" the valuation of Mr McCarney. The terms of the section itself seem to require this, particularly s 32A(3) which enables the valuers to affirm or vary the determination under review. It was a variation that occurred in this case. 11Accordingly as it seems to me in considering whether the joint valuation should be set aside, it is necessary for me first to consider Mr McCarney's valuation. He commenced it by describing the nature and location of the premises. He then referred to the lease noting that the initial rent was $122,640 pa which had increased to $144,894.64 pa by March 2012. 12He next stated that he had regard to the Act and set out the entirety of the provisions of sections 7 and 31. He outlined in some detail the submissions made to him by valuers representing each of the parties, Mr David Anderson for the lessor and Mr Robert Ellis for the lessee. After making reference to comparable leases relied upon by Mr Anderson, Mr McCarney observed: Mr Anderson tenders advice from the Lessor's marketing agent, Metro Commercial, that the Lessee of the subject shop, upon receipt of the Lessor's offer of a new rental once the option had been exercised, proposed to vacate and requested the Lessor to assist in finding an alternate occupant. The Lessor then offered the premises for lease. Mr Anderson also attaches a letter from the agent which confirms immediate tenant interest was received at an asking rental of $265,000 per annum gross. However, once Oporto's advised they had no intention of vacating, one of the prospective tenants then reluctantly agreed to a sub-lease of the adjoining Shop 201. 13Under his heading 'RATIONALE', Mr McCarney wrote: In addition to the submitted evidence, I have also carried out my own research and enquiries in relation to the retail evidence in the Bondi Beach precinct and specifically along Campbell Parade. By and large I am satisfied that the respective Valuers have together fully gleaned all the available evidence that has any bearing on the demised premises. I concur with Mr Anderson that the prime retail strip in Bondi Beach extends from Hall Street to Curlewis Street on Campbell Parade. I am further of the opinion that the focal point of this strip is now "The Bondi" (the building of which the premises forms part) since its refurbishment, coinciding with the Waverley Council upgrade of Roscoe Street that transformed the adjacent former cul-de-sac into a pedestrian mall. The "Bondi Breakers" building on the opposite side of the mall complements "The Bondi", which is a high quality mixed development that has attracted a good retail mix, with the tenants having the benefit of a captive clientele living within the luxury apartments above. The mall precinct is the hub of restaurants, cafes and bars and I note the only vacant shop is in "Bondi Breakers", on the Campbell Parade frontage. This surely indicates the strength of the locale, which is reflected in the prevailing rental levels. As already mentioned, the demised premises are ideally positioned at the only northbound bus stop in the prime sector of Campbell Parade and opposite the pedestrian crossing to the beach. I acknowledge that there are a number of vacant shops in Bondi Beach but only two are within the prime strip, one of which is within the mall precinct. I understand that the shop premises at 138 Campbell Parade have been leased to Liquorland on a 5+5 year lease from November 2011 at a gross rental of $170,000 per annum ($1278/m2) subject to Development Approval, which I understand was recently refused. A four month rent free incentive was included. The shop has the disadvantage of a footpath lease directly in front, which obstructs visibility. The vacant shop at 144 Campbell Parade is old style and has no grease trap (approval for which is difficult to obtain) and is being marketed by a Victorian Agent. It is also obscured from northbound traffic by the same nearby footpath lease. Shop 3 at "Bondi Breakers" is presently available for lease. It contains an area of 47 square metres and the asking face rental is $155,000 per annum gross ($3300/m2) with a negotiable two month rent free incentive offered. Take-away food shops are the preferred rental use along Campbell Parade and the strongest demand is also from this sector. It is not subject to the vagaries of fluctuating economic fortunes as are non-food operators e.g. clothing stores, boutiques etc., which have been severely undermined by the impact of on-line shopping. In keeping with "the same or a substantially similar use", I consider the food related tenancies to be the best yardstick as to the value of the subject premises. Indeed I further consider that the lettings within the same building provide the best comparative evidence, especially as they are also among the most recent to occur. All these shops have the benefit of excellent facilities as well as being in a modern complex that has an appealing streetscape and good visibility and exposure and the rents achieved are supported by other food related shops elsewhere on the Campbell Parade esplanade. Curiously though, it is noted that Mr Ellis only cites three food related lettings, two of which are old whilst the third is the lease to McDonalds, which contains a much larger area yet the rent is still higher than his estimated rent for the demised premises. In response to Mr Ellis's statement that several leases are distorted by the payment of incentives, I have perused all the recent leases in the building and other than the usual rent free incentives (as indicated) I can find no other incentives offered. I also sought and received a written assurance from the Lessor confirming that there were no off-lease incentives whilst I had further confirmation from the letting agent as well. Therefore in the absence of any proof, I am satisfied that the leases are genuine and can see no reason to dismiss such evidence. Mr Ellis makes no reference whatsoever to the most recent food related lettings (including one outside the subject building). It is of interest to note that Shop 201 is a sub-lease with the sub-lessee having very little security of tenure and being fully reliant on the head lessee exercising its option at the end of two years yet still prepared to take the risk presumably because of the shop's location. 14A little later in the report Mr McCarney identified 6 lettings which he regarded as offering "best comparability". After adjusting the rents to take account of incentives provided, he calculated the effective rents to range between $2,674/m2 gross and $3,204/m2. 15He expressed his conclusion: Upon due comparison and adjustment for the variables of location, frontage and area of the demised premises by comparison with each of the above individual lettings I have assessed the effective fair market gross rental for the demised premises at $2900/m2, equating to $220,400 per annum. 16His determination of $220,400 excluded GST. 17In my view although Mr McCarney did not expressly state that he valued the premises as an unoccupied shop, there is no reason to suppose that he did not do so particularly in light of his reproduction in the report of s 31 of the Act. Nor is there any reason to suppose that he took into account the value of the lessor's goodwill, fittings or fixtures. It is not apparent to me why it would not necessarily follow that a rental valuation of premises denuded of the lessees' fixtures and without regard to goodwill equates to a valuation of an unoccupied shop to all intents and purposes. 18In my opinion it is abundantly apparent from the passages I have quoted that Mr McCarney gave very full regard to rent concessions and other benefits. 19I now turn to the joint valuation at issue in these proceedings. The valuers noted their instructions: We have been instructed to inspect and review the current market rental determination report as prepared by J. K. McCarney & Co. Pty. Ltd. in relation to the subject property being Shop 4, 152-162 Campbell Parade Bondi Beach as at the 15th March 2012 in accordance with the terms of the current lease. and also the basis of their review: We confirm we have reviewed all pertinent factors of the Determining Valuers' report including all comparable lease evidence provided, relevant clauses of the Retail Leases Act 1994 as amended, the independent submissions made on behalf of the Lessor and Lessee, and other market factors. We have also had regard to the Australian Property Institute's definition relating to Market Rental Value which states the following: "Market Rental Value is deemed to be that rental which a tenancy would expect to command having regard firstly to evidence provided by recent lettings of comparable premises on the open market and secondly to evidence provided by rentals negotiated by sitting tenants, appropriately adjusted in all instances to reflect varying financial obligations for payments other than base rental occasioned by particular valuations between individual lease documents and assuming in all instances that the Lessor and Lessee were informed as to marketing conditions and willing but not over anxious to conclude an agreement." 20The report proceeded to describe the premises, their location, their dimensions, the Town Planning Zoning applicable and particulars of the lease. As to marketability, the joint valuers commented: We are of the opinion that, should the subject property be placed on the open market, we would expect a leasing period of 3 months assuming that the subject property would be marketed by a suitably qualified and experienced commercial real estate agent with a properly funded marketing programme. Given the passing vehicular and pedestrian traffic and its position and exposure on Campbell Parade we believe the property is most suitable for its current use. 21The joint valuers then stated their "Review Approach": 11.1 GENERAL CONSIDERATIONS Under this heading the Determining Valuer gave consideration to the Retail Leases Act 1994 and pertinent provisions including Part 1 Section 7 and Part 3 Section 31. We have not re-stated the wording of these provisions, but concur they are appropriate in their application to this review. The Determining Valuer also had regard to the Lessors' and Lessees' submissions as previously advised, and we further analyse the relevance of his comments and review independent assessments of the comparable rental evidence as presented, later in this report. 11.2 VALUATION METHODOLOGY The principle method of valuation engaged in the subject rental determination that we have reviewed has been the Direct Comparison Method. This entailed the extrapolation and analysis of rental evidence on a gross unit rate per square metre basis of comparable retail premises. This comparable evidence being within the immediate surrounds of the subject property and takes into account such factors as type, style, and area of improvements, location, accessibility, availability of customer car parking, signage, nature and terms of lease covenants, etc. 11.3 APPLICATION OF VALUATION METHODOLOGY BY THE DETERMINING VALUER When engaging the comparable rental technique, we note that considerations were given by the Determining Valuer to the level of comparable rentals being paid for retail tenancies on the Bondi Beach retail strip and we concur that the subject property is located in the "Core" retail area. It is also apparent from our own investigations that the level of demand changes significantly as you move away from this Core area. Other factors considered as being value determinants include:- * Level of pedestrian / food traffic * Proximity to public parking & public transport * Proximity to complimentary retail, shopping, professional service providers, life style commercial and entertainment uses * Exposure to passing vehicular traffic * Tenancy area * Frontage and access * Trader profile * Proximity to public transports * Proximity to multi-national / anchor tenants * Age and condition of premises * Leasing incentives To the best of our knowledge the Determining Valuer has applied these factors. 22After referring to and acknowledging with apparent approval the approach taken by Mr McCarney and referring and considering the 6 lettings which Mr McCarney regarded as most comparable and to the comparable lettings suggested by Mr Anderson and by Mr Ellis, the joint valuers wrote: We have reviewed the reports as submitted by both the Lessor and Lessee representatives and in particular the Determining Valuer's report and make the following comments: * The subject is located in the prime retail core of Campbell Parade and therefore attracts the highest rentals. * The retail strip changes both in terms of characteristics and therefore rental rates as you move away from this core. * Approved food uses in the prime retail core are in high demand, and are competitively sought particularly by local, national and international franchise chains. * We have considered only confirmed rental evidence and not any anecdotal evidence. * We consider the report submitted by Mr Ellis to the Determining Valuer was conservative, in its conclusions, and at the very low end of the prevailing market rental rates considered by Mr Anderson's report to the determining valuer. * The Determining Valuer's report was in our opinion well balanced and reviewed, discussed and challenged all evidence as presented by both parties and reflective of the current market rent at the time. * Prima facie the evidence relied on by the Determining Valuer in his conclusion was in our opinion more appropriate to the subject premises and specifically related to the prime Campbell Parade retail core. * We consider only premises on or near the Campbell Parade prime retail core should be considered comparable to the subject property, in particular approved food uses. 23There followed their determination of a gross market rental value of $226,000 pa exclusive of GST. The rent as assessed represents about $2,974 per m2. 24It seems to me that the joint valuers by their reference to and endorsement of Mr McCarney's views must be taken in effect to have incorporated his report and reasons into their own report. Although like Mr McCarney they did not expressly state that they valued the premises as though unoccupied, there is no reason to think they did not at least have regard to the premises as though unoccupied. They expressly referred to the "fit out" as owned by the lessee making it clear they did not have regard to fittings and fixtures. They made no reference to goodwill and I infer they had no regard to it. 25Once it is clear as it seems to be in this case that the valuers have not had regard to fittings, fixtures and goodwill, the rental value determined must in my view necessarily relate only to the bare or unoccupied shop, together with the use to which it may lawfully be put and, in this case, the benefit of a grease trap. 26In light of what I have said about Mr McCarney's treatment of rent concessions and other benefits and the deemed incorporation of that treatment in the joint valuation, I am satisfied that the requirements of s 31(1)(a) were met by the joint valuers in the sense that they "had regard to" all the matters specified. That being so, it is unnecessary to consider whether any failure to observe s 31(1)(a) constituted a fundamental error. The application made to the Tribunal must fail. 27In relation to costs, I agree with Mr Murr that as this was a dispute between significant commercial enterprises, that as the applicant failed to make out its case, and that as 3 valuers have reached virtually the same conclusion, it would be fair within s 88 of the Administrative Decisions Tribunal Act 1997 that the applicant pay the respondent's costs.