Supreme Court New South Wales Medium Neutral Citation: Alroy Tavern Pty Limited v Blacktown City Council [2016] NSWSC 644 Hearing dates: 30 March 2016 Date of orders: 19 May 2016 Decision date: 19 May 2016 Jurisdiction: Equity Before: Darke J Decision: Amended Statement of Claim is dismissed with costs Catchwords: LANDLORD AND TENANT – rent – provisions as to rent in agreement for lease or lease – rent review provisions – where valuer nominated to undertake determination of current market rental value of 'Demised Premises' – whether valuer erred as to what constitutes 'Demised Premises' – whether valuation otherwise failed to comply with terms of lease Cases Cited: Eureka Funds Management Limited v Freehills Services Pty Limited [2008] VSCA 156; (2008) 19 VR 676 Kanivah Holdings Pty Ltd Pty Limited v Holdsworth Properties Pty Limited [2002] NSWCA 180; (2002) 11 BPR 20,201 Legal and General Life of Australia v A Hudson Pty Limited (1985) 1 NSWLR 314 Category: Principal judgment Parties: Alroy Tavern Pty Limited (Plaintiff) Blacktown City Council (Defendant) Representation: Counsel: Mr R Scruby (Plaintiff) Mr M Wright (Defendant) Solicitors: JDK Legal (Plaintiff) Matthews Folbigg (Defendant) File Number(s): 2015/103757 Publication restriction: None Judgment Introduction 1. These proceedings concern an expert determination by a valuer pursuant to a rent review clause in a lease. The plaintiff, Alroy Tavern Pty Limited ('Alroy'), is the Lessee of certain land at Plumpton pursuant to a registered lease entered into with the defendant, Blacktown City Council ('the Council'), as Lessor. The lease is for a term of 10 years from 1 May 2006 to 30 April 2016. The lease contains options for three further terms of 10 years each. 2. Alroy and the Council had earlier entered into an Agreement for Lease dated 22 December 2000. The Agreement for Lease provided for Alroy to complete certain works on the land. In short, the works involved conservation work on a Victorian era residence situated on the property known as "Alroy", and the construction of additional structures including a gaming room, and other improvements such as a courtyard, landscaping and a car parking area. It was contemplated that upon completion of the works a lease would be entered into which provided for the Lessee to use the Demised Premises as a licensed family style tavern that may include gaming machines. 3. The lease subsequently entered into contains rent review provisions in clause 3.1. At the conclusion of the first seven years of the term, Mr Paul Hall, a valuer from Ray White Advisory, was nominated to undertake a determination of the current market rental value of the Demised Premises. On 16 July 2014 Mr Hall produced a report by which he determined that the current market rent of the Demised Premises as at 1 May 2013 was $145,000 per annum plus GST. 4. A dispute has arisen as to whether Mr Hall's determination is binding upon the parties. Alroy claims that the determination was not made in accordance with the provisions of the lease and is thus not binding. The Council takes the opposite view. The Agreement for Lease and the Lease 1. Clause 2.1 of the Agreement for Lease provides that, subject to the Lessee obtaining necessary approvals and completing certain works, the Lessor shall grant and the Lessee shall accept a lease of the Property upon the terms and conditions of the Lease as completed in accordance with clause 2.2. Lease was defined to mean the lease annexed to the Agreement for Lease. Property was defined to mean "the area of approximately 1.495 ha fronting Rooty Hill Road North, Plumpton being part of Lot 1 in Deposited Plan 34637……and includes any lot in a re-subdivision of Lot 1 in DP 34637 comprising such area." 2. The obligations upon Alroy to complete certain works are contained within Part 7 (clauses 7.1 to 7.6) of the Agreement for Lease. "Works" is defined to mean certain building, car parking, landscaping and other works, including the Conservation Works as described in clause 7.2. Clause 7.5 provides: Any materials of the Lessee which are used in the Construction of the Works shall upon the earliest to occur of: (a) determination of this Deed under Part 10; (b) determination of the Lease for any reason; and (c) the date upon which any such materials are depreciated to "nil" in the accounts of the Lessee become the property of the Lessor upon and by virtue of their affixing to the Property. Subject to Clause 10.1, any materials of the Lessee which are not incorporated into the Works shall remain the property of the Lessee. 1. Clause 1.2 of the Agreement for Lease provides that: Should any provision of the Lease be inconsistent with any provision of this Deed, the provisions of this Deed shall prevail. 1. The lease was entered into in May 2006. The Torrens Title box on the front page of the lease contains a reference to Folio Identifier 11/1024861 formerly known as part of Folio Identifier 1/34637. Presumably, a sub-division of Lot 1 in Deposited Plan 34637 had by then taken place, and Folio Identifier 11/1024861 consisted of the area that was the Property the subject of the Agreement for Lease. Further down the front page of the lease it is stated that the Lessor leases to the Lessee the property referred to above. 2. Annexure A to the lease contains a Summary of Lease Particulars, including the following: ITEM 4 DEMISED PREMISES: The Property Leased together with all improvements thereon including the Victorian residence known as "Alroy" …… ITEM 7 PERMISSIBLE USE: (clause 6.1) The Demised Premises must be used as a licensed family style tavern type Hotel which shall provide food and drink to its patrons in accordance with the Licensing Laws and may include the operation of gaming machines in any gaming room so identified within the premises…… 1. Part 1 of the lease contains numerous defined terms. Clause 1.23 provides as follows: In the interpretation of this Lease unless there is something repugnant to the context or inconsistent therewith the terms defined in this Part shall have the meanings hereby assigned to them. 1. Clause 1.3 contains the following definition of Demised Premises: "Demised Premises" means and includes the whole of the Property Leased described on the first page of the Lease and also the premises described in Item 4 of the Summary of Lease Particulars including the fixtures fittings plant machinery and equipment (if any) installed therein other than by the Lessee (except where otherwise expressed). 1. By Clause 2.1 the Lessor leases the Demised Premises to the Lessee to hold the same as tenant for the term commencing on the Commencement Date and terminating on the Terminating Date. 2. By clause 2.2 the Lessee is obliged at the expiration or sooner determination of the term to yield up the Demised Premises in the order and condition prescribed in clause 8.6. Clause 8.6 requires the Lessee to yield up the Demised Premises "so painted repaired cleaned and kept as by this Lease required with all additions replacements and improvements thereto and all fixtures which during the said term may be affixed or fastened to or upon the Demised Premises". 3. Clause 2.3 makes provision in relation to the removal of the Lessee's trade fixtures and fittings which have been erected or installed by the Lessee during or prior to the term of the lease. The Lessor may require the Lessee to remove such fixtures and fittings within 14 days from the expiration or sooner determination of the lease, but any which are not required to be removed shall be and become the property of the Lessor. 4. Rent is dealt with in Part 3 of the lease. Clause 3.1(a) provides for a concessional rent payable during the first 7 years of the term. Clauses 3.1(b) to 3.1(d) deal with periodic market reviews that are to take place thereafter. It is relevantly provided: (b) As from the expiration of the Concessional Rental Period and on and from the first Market Review Date the annual rate at which rent is payable hereunder shall be varied and shall be the current market rental value of the Demised Premises as agreed between the Lessor and the Lessee but if not so agreed within twenty-one (21) days of the Lessor proposing such rent to the Lessee then the then current market rental value of the Demised Premises shall be determined by a qualified valuer……who has a minimum of five (5) years' experience of valuing properties from which are carried on the business or activity for which the Demised Premises are expressly permitted to be used pursuant to Clause 6.1 as shall be nominated…… (c) Not later than three (3) months before each Market Review Date the Lessor shall notify the Lessee of the amount which the Lessor assesses to be the current annual market rental value of the Demised Premises as at the next Market Review Date and if the Lessee does not object to such assessment…..then and in any such case as from the next Market Review Date and for the next period of one (1) year the annual rate at which rent shall be payable hereunder shall be varied so that such annual rate shall thereafter and until again varied in accordance with Clause 3.2 be the amount of the assessment last notified by the Lessor to the Lessee of aforesaid. (d) In the event only that the Lessee objects to any such assessment by notice in writing given to the Lessor within twenty-one (21) days after being notified of such assessment by the Lessor then the annual rate at which rent is payable hereunder for the next period of one (1) year shall be varied as from the next Market Review Date so that such annual rate shall be thereafter and until again varied in accordance with Clause 3.2 be the amount of the then current annual market rental value of the Demised Premises determined by agreement in writing between the Lessor and the Lessee or failing such agreement…..be determined by a qualified valuer selected by the Lessee from a panel nominated by the Lessor of three (3) qualified valuers……who each has a minimum of five (5) years' experience of valuing properties from which are carried on the business or activity for which the Demised Premises are expressly permitted to be used pursuant to Clause 6.1….. 1. Clauses 3.1(f) and 3.1(g) provide as follows in relation to the valuation process: (f) A valuer when making a determination in accordance with this Clause 3.1 shall be acting as an expert and not as an arbitrator and the decision of such qualified valuer shall accordingly be final and binding on the parties to this Lease and the costs of any such determination by a valuer shall be borne in equal shares by the Lessor and the Lessee. Any such valuer must provide as part of his determination a valuation rationale. (g) A valuer when making a determination in accordance with this Clause 3.1 shall have regard to the following: (i) all the obligations of the Lessee and the Lessor pursuant to this Lease and at law; (ii) the then current market rental value of comparable premises in comparable (or as near to comparable) locations used for similar purposes to the Demised Premises; (iii) the period of time until the next Market Review Date; (iv) the trading turnover of any business conducted on the Demised Premises; (v) whether the Lessee or Lessor is the beneficial owner of any permit or license required to be exercised in using the Demised Premises for their permitted use. 1. Clause 3.1(h) stipulates that the Lessee must in certain circumstances provide to the Lessor the Licensee's and the Lessee's trading figures in relation to the business conducted by the Lessee upon the Demised Premises. (The Licensee is the holder of any liquor license enabling alcoholic beverages to be sold at the Demised Premises). 2. Clause 3.2 provides for periodic variations to the rent according to upwards movement in the Consumer Price Index. 3. Part 6 deals with the use of the Demised Premises. Clause 6.1 stipulates that the Lessee shall not use the Demised Premises or any part thereof or permit the same to be used otherwise than for the purpose specified in Item 7 of the Summary of Lease Particulars – that is, as a family style tavern that provides food and drink to patrons in accordance with licensing laws and may include the operation of gaming machines in any gaming room so identified within the premises. Clause 18.6 makes further provision concerning the carrying on of the business permitted under the lease. 4. Parts 7 and 8 contain various obligations of the Lessee. Finally, reference should be made to clause 12, which concerns insurance. Clause 12.1.1 provides that the Lessee bears the cost of insuring, in the respective interests of the Lessor and the Lessee, the improvements forming part of the Demised Premises, including all fixtures fittings plant machinery and equipment installed therein. Submissions 1. Alroy contends that Mr Hall's determination was not made in accordance with the provisions of the lease and is therefore not binding on the parties. The primary complaint is that Mr Hall proceeded upon a fundamentally mistaken view as to what constituted the Demised Premises. It was submitted that, contrary to the approach taken by Mr Hall, the Demised Premises do not include improvements made by Alroy pursuant to the Agreement for Lease, such as the gaming room that had been constructed by Alroy as part of the Works. It was submitted that it was thus not permissible to take into account, as Mr Hall did, the gaming revenue that had been earned by Alroy. Alroy based its argument upon the definition of Demised Premises in the lease and/or clause 7.5 of the Agreement for Lease. 2. In relation to the definition of Demised Premises, Alroy contends that the improvements it made are not included within the definition, and hence they do not form part of the subject matter of the lease. It was submitted that it would be erroneous for a valuer, conducting a valuation pursuant to clause 3.1 of the lease, to treat the improvements as if they formed part of the Demised Premises. 3. In relation to clause 7.5 of the Agreement for Lease, Alroy contends that either legal or beneficial ownership of the materials it affixed to the land is conferred upon it until the occurrence of one of the events specified in the clause. Accordingly, the materials are either not the subject of the lease at all, or Alroy's ownership of the materials is a matter that must be taken into account in a valuation conducted pursuant to clause 3.1 of the lease. It is submitted that, on either view, it is not open to a valuer conducting such a valuation to treat the materials as the property of the Lessor. 4. Alroy further submitted that Mr Hall failed to comply with clause 3.1(g)(i) of the Lease in that he failed to take into account clause 7.5 of the Agreement for Lease. It was put that clause 7.5 contained an obligation upon the Lessee to depreciate those items, and that the obligation was an obligation "at law" for the purposes of clause 3.1(g)(i). 5. The Council contended that Mr Hall was not mistaken as to what constituted the Demised Premises and that he carried out his task in the manner required by the lease. The Council also submitted that it had not been shown that Mr Hall failed to take into account any provisions of the Agreement for Lease. It was put that in any event clause 7.5 of the Agreement for Lease did not give rise to any obligations on the part of the Lessor or Lessee, and even if it did they were not obligations "at law" within the meaning of clause 3.1(g)(i). Determination 1. Clause 7.5 of the Agreement for Lease concerns materials of the Lessee. It is implicit that the materials are the property of the Lessee. The first part of the clause concerns materials which are used in the construction of the Works. A distinction is recognised between those materials and those which are not incorporated into the Works. The former become the property of the Lessor, but only upon the first to occur of the three identified events. The latter remain the property of the Lessee, but subject to the provisions of clause 10.1. 2. The present argument centres upon materials which are used in the construction of the Works upon the Lessor's land, including materials used in the construction of buildings. Property in such materials rests with the Lessee, notwithstanding the law concerning fixtures, until one of the three events occurs. In essence, ownership remains with the Lessee whilst either the Agreement for Lease or the lease remains on foot, unless the materials are earlier depreciated to nil in the accounts of the Lessee. If such depreciation occurs during the subsistence of the lease, the Lessor becomes the owner of the materials. It is evident that clause 7.5 is concerned, at least in part, with the claiming of depreciation allowances. 3. Clause 7.5 modifies the general law position and affects the relationship between Alroy and the Council. The materials used in the Works are, for a time, treated as the property of Alroy. However, it does not necessarily follow that the parties must be taken to have agreed that such materials, or the structures or parts of structures in which they have been used, are not included in the premises the subject of the lease. 4. It seems to me that it is possible for the parties to a lease of land to make an agreement that the premises which are the subject of the lease includes structures on the land which consist in whole or in part of materials which the parties agree are owned by the lessee. Even if such materials cannot themselves be the subject of a demise from a lessor to a lessee, the parties can agree that they form part of the premises under the terms of the lease. 5. The Agreement for Lease, of which clause 7.5 forms part, contemplated entry into a lease in the form of an annexed lease. The annexed lease is in the same terms as the lease subsequently entered into. It included the definition of Demised Premises set out above. 6. The definition of Demised Premises includes the whole of the Property Leased described on page 1 of the lease. That is the whole of the land contained in the relevant title reference. The definition also includes the premises described in Item 4 of the Summary of Lease Particulars. That is the Property Leased "together with all improvements thereon……" (emphasis added). The definition further includes "the fixtures fittings plant machinery and equipment (if any) installed therein other than by the Lessee". This inclusion seems to encompass any fixtures, fittings etc. that have been installed within the premises described in Item 4, unless such items are installed by the Lessee. 7. In summary, the definition of Demised Premises encompasses the whole of the land comprised in the relevant title reference and all improvements thereon including any fixtures, fittings etc. installed within the premises other than by the Lessee. To the extent that any fixtures, fittings etc. are installed within the premises by the Lessee, they are not included within the Demised Premises. 8. Alroy submitted that the word "fixtures" has a well-established meaning within land law, and that the expression fixtures, fittings etc. should therefore be read as including fixtures as that term is so understood. That may be accepted. 9. Alroy further submitted that, insofar as the Works carried out by it pursuant to the Agreement for Lease created fixtures, they were fixtures that have been installed by the Lessee and thus are not included within the Demised Premises. I do not accept that submission. I do not think that the fixtures created by Alroy in carrying out the Works (such as the gaming room) fall within fixtures fittings etc. "installed therein". Fixtures is used here in association with items such as plant, machinery and equipment. Moreover, the words "installed therein" are not apt to describe the erection of a building upon the land; to read the words "installed therein" to refer to or encompass the construction and development involved in the Works seems to me to be an unduly strained, and thereby inappropriate, use of the words. In my view, the fixtures created by Alroy in carrying out the Works fall within the definition of Demised Premises because they form part of "all improvements thereon". They are part of the improvements on the Property Leased. All such improvements fall within the definition of Demised Premises. 10. Demised Premises as defined for the purposes of the lease is not necessarily confined to property wholly owned by the Lessor. The parties recognised that the Lessee may have an interest in the improvements forming part of the Demised Premises. That is made clear by clause 12.1.1 of the lease. Clause 2.1 of the lease, whereby the Lessor leases the Demised Premises to the Lessee, must be read in light of that recognition. 11. The above construction is supported by the ordinary meaning of the language of the definition and the manner in which the defined term is used throughout the lease. The contrary view – that Demised Premises does not include the improvements made by Alroy – would lead to anomalous results, particularly in relation to the various obligations of the Lessee under clauses 7 and 8 of the Lease. Those obligations include matters such as cleaning, maintenance and repair. The various obligations are defined by reference to the concept of the Demised Premises. 12. There is no inconsistency between the definition of Demised Premises in the lease and clause 7.5 of the Agreement for Lease. It was open to the parties to make an agreement that the Demised Premises includes structures which consist in whole or in part of materials which the parties agree are owned by the Lessee. The provisions serve different purposes and can be read harmoniously. 13. It follows from the above that any improvements made by Alroy pursuant to the Agreement for Lease fall within the ambit of the Demised Premises as defined in the lease. That is the case even if such improvements consist of or include materials which, by virtue of clause 7.5 of the Agreement for Lease, remain the property of Alroy. 14. Accordingly, it would not be erroneous for a valuer, conducting a valuation pursuant to clause 3.1 of the lease, to proceed on the basis that the Demised Premises includes all the improvements on the land. I should add that to do so would not mean that the valuer has treated the clause 7.5 materials as the property of the Lessor. 15. The next question to consider is whether Alroy's ownership (legal or beneficial) of materials pursuant to clause 7.5 of the Agreement for Lease is a matter that a valuer is required to take into account when conducting a valuation pursuant to clause 3.1 of the lease. 16. Alroy noted that clause 3.1(g)(i) requires the valuer to have regard to all of the obligations of the Lessee and Lessor pursuant to the lease and at law. It was submitted that clause 7.5 of the Agreement for Lease imposes a legal obligation upon Alroy to depreciate the materials the subject of clause 7.5, and that Alroy's ownership of the clause 7.5 materials was an important part of the rights and obligations that make up the landlord and tenant relationship. 17. However, even if obligations under the Agreement for Lease are obligations "at law" for the purposes of clause 3.1(g)(i), I do not think that clause 7.5 imposes any obligations that are required by clause 3.1(g)(i) to be taken into account by the valuer. The essential function of clause 7.5 is to identify where ownership of the materials rests as between the parties. The clause contemplates that the Lessee will depreciate the materials in its accounts, but it does not expressly require the Lessee to do so. I do not think that an obligation to that effect would be implied. There is no necessity for such a term. 18. Alroy further submitted that Mr Hall, in determining a rental value, was bound to make proper allowance for all the advantages and disadvantages inherent in the arrangements, including collateral arrangements, that existed between it and the Council. In this regard, I was referred to Eureka Funds Management Limited v Freehills Services Pty Limited [2008] VSCA 156; (2008) 19 VR 676 at [53]. It was submitted that the agreement contained in clause 7.5 concerning ownership of the materials used in the construction of the Works was one such matter, and Mr Hall failed to have regard to it. 19. Clause 3.1 of the lease contains the provisions relevant to the determination of rental value. The task of the appointed valuer is to determine a current market rental value of the Demised Premises. The valuer acts as an expert, and the valuer's decision is final and binding on the parties to the lease. The valuer must provide a valuation rationale as part of the determination, and must have regard to the matters set forth in clause 3.1(g). 20. The applicable principles were stated by McHugh JA in Legal and General Life of Australia Limited v A Hudson Pty Limited (1985) 1 NSWLR 314 at 335-6 as follows: The terms of the contract usually provide, as the lease in the present case does, that the decision of the valuer is "final and binding on the parties". By referring the decision to a valuer, the parties agree to accept his honest and impartial decision as to the appropriate amount of the valuation. They rely on his skill and judgment and agree to be bound by his decision. It is now settled that an action for damages for negligence will lie against a valuer to whom the parties have referred the question of valuation if one of them suffers loss as the result of his negligent valuation: Sutcliffe v Thackrah [1974] AC 727; Arenson v Arenson [1977] AC 405. But as between the parties to the main agreement the valuation can stand even though it was made negligently. While mistake or error on the part of the valuer is not by itself sufficient to invalidate the decision or the certificate of valuation, nevertheless, the mistake may be of a kind which shows that the valuation is not in accordance with the contract. A mistake concerning the identity of the premises to be valued could seldom, if ever, comply with the terms of the agreement between the parties. But a valuation which is the result of the mistaken application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case the critical question must always be: Was the valuation made in accordance with the terms of a contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account or has failed to take into account matters which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract. 1. It is apparent from Mr Hall's valuation report that he: 1. relied on information provided by the parties, including the lease and the Agreement for Lease; 2. inspected the property, received submissions from both parties, and obtained a legal opinion as to whether revenue generated from gaming machines should form part of the assessment; 3. regarded the Demised Premises as encompassing all of the improvements on the land, including the restored buildings as well as the outdoor areas; 4. had regard to clause 3.1(g) of the lease, and indeed considered it "the basis of review for determining the current market rental"; 5. adopted the Australian Property Institute definition of rental value, being "the estimated amount for which a premises should rent as at the relevant date, between a willing lessor and willing lessee in an arm's length transaction wherein the parties had each acted knowledgably, prudently and without compulsion"; 6. stated that he had regard to various matters including "the covenants of the lease and the agreement for lease" and the trading of the business conducted on the Demised Premises; 7. took into account four leasing transactions concerning other licensed premises; 8. undertook an assessment, based in part upon trading figures supplied by Alroy, of the likely level of market rental; and 9. determined the current market rent of the Demised Premises at $145,000 per annum plus GST. 1. Mr Hall stated that he had regard to the covenants of the Agreement for Lease. However, he did not specifically mention clause 7.5 in his report. It does not follow that he failed to take it into account (see Kanivah Holdings Pty Limited v Holdsworth Properties Pty Limited [2002] NSWCA 180; (2002) 11 BPR 20,201 at [62]). He may have considered the provision and decided that the matter of ownership of the materials used in the construction of the Works was of little importance to the task at hand. In any event, as the statement of McHugh JA set out above makes clear, even if Mr Hall should have taken it into account and failed to do so, the relevant question is not whether there has been an error in the judgment of the valuer; it is whether the valuation complies with the terms of the contract. 2. In my opinion it has not been established that Mr Hall's valuation failed to comply with the terms of the lease, such that his determination is not binding on the parties. As I have found, he was not in error in proceeding on the basis that the Demised Premises included all the improvements on the land. It has not been shown that he failed to have regard to any of the matters set forth in clause 3.1(g), including any obligations that fall within clause 3.1(g)(i). It appears that, as stated by Mr Hall, he was conscious of the requirements of clause 3.1(g), and had regard to the matters there set out. His report plainly contains a valuation rationale as required by clause 3.1(f). 3. I do not accept Alroy's contentions that Mr Hall's valuation was not made in accordance with the lease. I note that various other contentions were referred to in the Amended Statement of Claim but were not addressed a the hearing. I take those matters to have been abandoned. Orders 1. The proceedings will be dismissed. It is appropriate that Alroy pay the Council's costs of the proceedings. The orders of the Court are: 1. That the Amended Statement of Claim is dismissed. 2. That the plaintiff pay the defendant's costs of the proceedings. ********** 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. Decision last updated: 23 May 2016