Victorian Civil and Administrative Tribunal|2013-03-25

The Applicant ('the Landlord') seeks an order setting aside an expert determination made by a specialist retail valuer, appointed by the Small Business Commissioner to determine the market rent of premises leased by the Respondent. The leased premises are located in Glenferrie Road, Hawthorn ('the Premises') and are the subject of a lease dated 12 April 2007, which commenced on 1 April 2007 for a period of 5 years with two further terms of 5 years each ('the Lease').
The Premises comprise two shops which have been consolidated into one retail outlet from which the respondent ('the Tenant') sells shoes and associated accessories. There is no partition or any physical barrier delineating Shop 1 from Shop 2.
The Lease stated that upon the exercise of the option to renew, the rent was to be reviewed according to market. The Lease further provided that if the parties did not agree on what the rent was to be, they were to appoint a specialist retail valuer to determine the current market rent. In the event that they could not agree on the specialist retail valuer, the specialist retail valuer was to be appointed by the Small Business Commissioner.
The parties could not agree on the current market rent and as a consequence, Mr Brown of M3Property (Vic) Pty Ltd, was appointed by the Small Business Commissioner as the specialist retail valuer ('the Valuer').
On 11 September 2012, the Valuer determined the market rent in the sum of $190,000 per annum. He did so by calculating the gross lettable area and fixing the sum of $670 per square metre as the appropriate rate per square metre.
By letter dated 20 September 2012, the Landlord objected to the determination on the ground that the Valuer had not arrived at the current market rent by assessing the rent in accordance with the terms of the Lease. In particular, Clause 11.6 of the Lease stated:

11.6 The valuer must determine a current market rental on the basis of 2 separate retail shops.

The Landlord contended that the assessment of the rent based on the gross lettable area was erroneous because rent should have been determined on the basis of 2 separate retail shops. It argued that this required that the market rent for each shop be individually assessed and then added together to arrive at an aggregate amount representing the market rent for the Premises.
By letter dated 24 September 2012, the Valuer dismissed the Landlord's objections.
As a consequence, the Landlord filed this application seeking orders that the rental determination be set aside and that a new valuer be appointed to determine the current market rent.
Mr Morfuni of senior counsel appeared on behalf of the Landlord. Mr Northrop of counsel appeared on behalf of the Tenant. Both counsel prepared detailed written submissions in support of their clients' respective positions. No evidence was adduced by either party.

As I have indicated, the Landlord challenges the Valuer's determination on the ground that he failed to determine the market rent in accordance with the provisions of the Lease and in accordance with the requirements set out under s.37 of the Retail Leases Act 2003 ('the RLA'). The relevant parts of s.37 of the RLA state:

(1) A retail premises lease that provides for a rent review to be made on the basis of the current market rent of the premises is taken to provide as set out in sub-sections (2) and (6).

(2) The current market rent is to be the rent obtainable at the time of the review in a free and open market between a willing landlord and willing tenant in an arms length transaction having regard to these matters:

(b) the rent that would reasonably be expected to be paid for the premises if they were unoccupied and offered for lease at the same, or a substantially similar, use to which the premises may be put under the lease;

(d) rent concessions and other benefits offered to prospective tenants of unoccupied retail premises...

(b) contain detailed reasons for the specialist retail valuer's determination; and

Mr Morfuni submitted that in arriving at his determination, the Valuer was obliged to have regard to the terms of the Lease and to apply those terms. Accordingly, he submitted that the Valuer was required to determine the market rent on the basis of 2 separate retail shops, which he did not do. Further, he submitted that the Valuer did not comply with the RLA because he failed to provide detailed reasons. Therefore, the issues which arise for consideration are:
- (a) Did the Valuer's failure to determine the market rent on the basis of 2 separate retail shops vitiate his determination?
- (b) Did the Valuer provide detailed reasons or specify the matters to which he had regard in making his determination?

It is common ground that the circumstances in which a party may challenge a valuer's determination are extremely limited. In Commonwealth of Australia v Wawbe Pty Ltd,[1] Gillard J considered the relevant authorities and concluded:

The trend of the authorities establishes that the mistake must be of a kind which demonstrates that the valuer did not perform his task as required by the contract making allowance for the fact that the valuer in construing the agreement, where necessary, is a valuer and not a lawyer.

In my opinion it follows that the court should consider three questions -

(i) What did the parties agree to remit to the expert?

(ii) Did the valuer make a mistake and if so what was the nature of the mistake?

(iii) Is the mistake of such a kind which demonstrates the valuation was not made in accordance with the terms of the contract and accordingly does not bind the parties? [2]

I will approach the present case in the same way.

Was the Valuer obligated to value market rent based on two separate shops?

Clause 11 of the Lease sets out the rent review procedure on each market review date. The relevant parts of that clause are:

(b) the Act applies and the parties do not agree on what the Rent is to be for the review period

the parties must appoint a Valuer (if the Act applies, a specialist retail valuer) to determine the current market rent ... If the Act applies, the specialist retail valuer is to be appointed by agreement of the parties, or failing agreement, by the Small Business Commissioner.

11.1.4 In determining the current market rent for the Premises the Valuer must-

(a) consider any written submissions made by the parties within 21 days of their being informed of the Valuer's appointment, and

(b) determine the current market rent as an expert.

11.2 The Valuer's determination binds both parties.

11.6 The Valuer must determine a current market rent on the basis of 2 separate retail shops.

As indicated above, s.37 of the RLA also regulates how market reviews are to be conducted where a lease provides for rent review. Insofar as a clause in a lease conflicts with s.37 of the RLA, the Act is to prevail.[3]
Mr Morfuni submitted that s.37(2)(a) expressly requires that the Valuer, in arriving at his determination of the current market rent, must have regard to the terms of the Lease. Therefore, the Valuer was obliged to determine the market rent on the basis of two separate retail shops.
I accept that s.37(2)(a) requires a specialist retail valuer to have regard to the terms of the lease in question. However, that does not, in my view, mean that a specialist retail valuer is required to apply terms that prescribe or adopt a methodology of valuation which conflicts with the RLA.
In the present case, Clause 11.6 of the Lease and s.37(2)(b) of the RLA are uneasy companions. On one hand, Clause 11.6 requires the valuer to determine current market rental on the basis of 2 separate retail shops. On the other hand, s.37(2)(b) states that the current market rent is to be the rate obtainable in a free and open market having regard to the rent that would reasonably be expected to be paid for the premises if they were unoccupied and offered for lease for the same, or a substantially similar, use to which the premises may be put under the lease. There is tension between Clause 11.6 and s.37(2)(b) because the current use to which the Premises are put is not as 2 separate retail shops. As I have indicated, the Premises are currently used as one retail shop. There are no partitions or other features distinguishing Shop 1 from Shop 2. Therefore, in order to determine a current market rental on the basis of two separate retail shops, the Valuer must ignore the current use to which the Premises are put under the Lease; namely, as one retail shop.
It is not in contention that the Lease permits the Tenant to occupy and use the Premises as one shop, nor is there any requirement under the Lease that the Tenant maintain any division between Shop 1 and Shop 2. Therefore, to only allow an assessment of the current market rent based on a hypothetical assumption that there are two retail premises requires the Valuer to ignore the reality of the situation, which in my view, is contrary to the evident purpose of s.37(2); namely to arrive at a rent that the market is willing to pay for the Premises, having regard to their permitted use under the Lease.
Consequently, I am of the opinion that the requirement under Clause 11.6 to only allow a determination of the current market rent based on two separate retail shops contravenes s.94 of the RLA, which states:

(1) A provision of a retail premises lease or of an agreement (whether or not the agreement is between the parties to a retail premises lease) is void to the extent that it is contrary to or inconsistent with anything in this Act (including anything that the lease is taken to include or provide because of a provision of this Act).

In my view, s.37(2) requires a specialist retail valuer to look at what the Tenant is permitted to do under the Lease and to determine the highest rent that would reasonably be expected to be paid for the Premises as one demise. To require a specialist retail valuer to artificially split the Premises into two separate leasehold interests may result in an outcome that does not reflect the rent obtainable at the time of review in a free and open market between a willing landlord and a willing tenant in an arm's length transaction.
Therefore, I find that the Valuer was not required to determine the market rent only on the basis of two separate retail shops, although it was open for him to do so if he considered that this was a more appropriate method to determine market rent.
I am of the view that the terms of his engagement, when considered in the light of s.37(b)(2) of the RLA, required him to determine the highest market rent that could reasonably be obtained, having regard to the permitted use of the Premises under the Lease. To that end, it was open for the Valuer to separately assess Shop 1 and Shop 2, if he formed the opinion that this method of valuation would yield a higher market rent.
I do not regard his failure to determine market rent on the basis of two separate shops as being a departure from his contractual obligations because Clause 11.6 cannot operate to fetter his judgment in determining the most appropriate method of determining market rent, having regard to the permitted use of the Premises under the Lease. To do so would be contrary to s.94 of the RLA. Therefore, determining current market rent on the basis of two separate retail shops or on the basis of the total floor area of the Premises are matters which go to the process of valuation, rather than the terms of the Valuer's engagement.

Did the Valuer make a mistake in not separately assessing Shop 1 and Shop 2?

Mistake or error is not, in itself, a ground to set aside a valuation made by a valuer. Therefore, the fact that a valuer may have erroneously valued market rent or was unreasonable is not a basis to impugn the valuation. This statement of principle is expounded in the judgment of McHugh JA in Legal & General Life of Australia v A Hudson Pty Ltd [4]as follows:

A valuation obtained by fraud or collusion can usually be disregarded even in an action at law. For in the case of fraud or collusion the correct conclusion to be drawn will almost certainly be that there has been no valuation in accordance with the terms of the contract. As Sir David Cairns pointed out, it is easy to imply a term that a valuation must be made honestly and impartially. It will be difficult, and usually impossible, however, to imply a term that a valuation can be set aside on the ground of the valuer's mistake or because the valuation is unreasonable. 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.[5]

In the present case, the Valuer made reference to Clause 11.6 but nevertheless, assessed the gross market rent based on a single retail premises with a floor area of 865.72 m², being the total floor area of the Premises. Indeed, the Valuer stated in his report:

There is also a variation of opinion in relation to Clause 11.6 which specifies the following:

"The valuer must determine a current market rental on the basis of 2 separate retail shops."

Whilst the landlord's lawyer draws my attention to this clause, the evidence proposed by the valuer does not approach the assessment of rental on this basis.

The Lessee's valuer noted this requirement but believes that the premises would not achieve a significant rental greater as two separate shops than that assessed.

Interestingly, a later report dated 12 February 2013 prepared by the Landlord's expert valuer also confirms that a separate assessment for each shop would result in a lower overall rental.
In the present case, it is apparent that the Valuer did consider Clause 11.6 but ultimately took the view that the determination of market rent based on there being two separate shops was not an appropriate method by which to determine the highest rent obtainable at the time of review in a free and open market between a willing landlord and a willing tenant in an arm's length transaction.
As I have already indicated, that was a matter going to the process of valuation. Therefore, it is not a mistake of the kind that would render the determination invalid.[6]

Mr Morfuni submitted that the valuation did not comply with the provisions of the RLA because inadequate reasons were given as to why the Valuer adopted the per square metre rate that he did. Mr Morfuni referred to s.37(6) of the RLA, which requires that the valuation contain detailed reasons and specifies the matters to which the Valuer had regard in arriving at his determination.

The authorities establish that the failure to give adequate reasons may render the determination invalid if the scope of the Valuer's retainer required that adequate reasons be given. In Shoalhaven City Council v Firedam Civil Engineering Pty Ltd,[7] Gummow and Bell JJ stated:

A deficiency or error in the reasons given by an expert may affect the validity of the determination in two ways:

The deficiency or error may disclose that the expert has not made a determination in accordance with the contract and that the purported determination is therefore not binding.
The deficiency or error may be such that the purported reasons are not reasons within the meaning of the contract and, if it be the case that the provision of reasons is a necessary condition of the binding operation of the determination, the deficiency or error will have the result that the determination is not binding.[8]
As indicated above, s.37(6) of the RLA required detailed reasons be given. Mr Morfuni referred me to the judgement of Nettle JA in Hunter v Transport Accident Commission,[9] where his Honour stated:

... while the extent of the reasons will depend upon the circumstances of the case, the reasons should deal with the substantial points which have been raised; include findings on material questions of fact; refer to the evidence or other material upon which those findings are based; and provide an intelligible explanation of the process of reasoning that has led the Judge from the evidence to the findings and from the findings to the ultimate conclusion.[10]

Hunter v TAC concerned an appeal of a curial determination made by the judge below. It does concern the determination of an expert relating to a question within that expert's purview. As commented by the majority judgment of French CJ, Crennan and Kiefel JJ in Shoalhaven City Council, the adequacy of reasons in expert determinations is to be viewed in a different light to reasons given in curial determinations:

... The content of the requirement to give reasons must reflect the nature of the expert's determination process, which is neither arbitral nor judicial. It must also be informed by the nature of the issues to be determined. Judicial observations in other cases about contractual requirements to give reasons in expert determinations or in arbitrations must be read according to the context. It may be accepted, as a general proposition, that a mistake in the reasons given for an expert determination does not necessarily deprive them of the character of reasons as required by the relevant contract nor deprive the determination of its binding force.[11]

Further, McHugh JA in Kanivah Holdings Pty Ltd v Holdsworth Properties Pty Ltd & Ors[12] commented as follows:

[60] As to the submission concerning the sufficiency of reasons of the valuer, I can see no error in his Honour's approach. In my opinion, the valuer's reasons were quite sufficient for the purposes to which they were required by the lease.

[61] The reasons the valuer gave were sufficient to enable the parties to see whether clause 1(d) has been complied with in the valuation exercise. Detailed reasons, such as to be provided by a judicial officer or arbitrator, are not required. This valuer was appointed to act as an expert and not as an arbitrator. Gillard J discussed the standard of reasons usually required of a valuer in The Commonwealth v Wawbe Pty Limited (Unreported, Supreme Court of Victoria, 25 September 1998). I agreed with his Honour's observations. The form of the particular clause in this lease requiring sufficient reasons does not detract from the force of what Gillard J said.

[62] In any event, even a judge does not have to detail every factor seen as relevant or irrelevant or itemise every fact taken into account. Judicial reasons are not required to be elaborate. Rather they need to be such as indicate to the parties why and on what basis the decision was made. Step by step reasons to a conclusion are not required.

Nevertheless, Mr Morfuni submitted that the provisions of the RLA, which required detailed reasons, imposed a more stringent obligation on the Valuer to detail the reasoning underpinning his determination. He referred me to TX Australia Pty Ltd v Broadcast Australia Ltd.[13] In TX Australia, an expert was appointed by the parties to determine the fees payable for access to and use of certain broadcast transmission towers owned by TX Australia, which enabled Broadcast Australia Ltd to provide stand-by digital television services to the Australian Broadcasting Commission. The determination was issued by an expert who was appointed under five identical agreements, each one relating respectively to one of the five broadcasting towers. Under the agreement, the expert was expressly required to ensure that his determination comprised a detailed statement of reasons for the Expert's decision, including explanation of the methodology used to determine the Initial Fees.
TX Australia challenged the expert determination on a number of grounds, which included a claim that the expert had failed to provide adequate reasons. It was argued that there were significant aspects of his determination which were unexplained. Brereton J accepted that the content of the expert's obligation required him to provide sufficient reasons to enable the parties to understand the basis on which the determination had been made. He cited the following passage from the judgment of the Victorian Court of Appeal in Oil Basins Ltd v BHP Billiton Ltd [14] as pertinent to the issues before him:

[57] ... In complex commercial arbitrations, it may appear that the determination of the dispute demands reasons considerably more rigourous and illuminating than the mere ipse dixit of a 'lock-sniff' trade referee. And in cases like the present, which involve an intellectual exchange with reasons and analysis advanced on either side, conflicting expert evidence of a significant nature and substantial submissions, the parties to the dispute are almost certain to be left in doubt as to the basis on which an award has been given unless the reasons condescend to an intelligible explanation of why one set of evidence has been preferred over the other; why substantial submissions have been accepted or rejected; and, thus, ultimately, why the arbitrator prefers one case to the other. Hence, in our view the reasons in this case should have been at that standard.[15]

[102] That said, it is to be observed that the passage does not dictate that it will invariably be necessary to explain why every unsuccessful submission has been rejected...[16]

I do not accept that the requirement to provide detailed reasons as set out in s.37(6) of the RLA requires the determination of a specialist retail valuer to descend into the degree of particularity required of a judicial officer or arbitrator in curial proceedings. Inevitably, determinations made by a specialist retail valuer are made on the basis of written submissions from each of the parties which are considered against the background of the valuer's own expertise and investigation.
The opinion of the specialist retail valuer is integral to the determination and the parties, by agreeing to refer the determination of market rent to him or her, accept his or her opinion on that question. By contrast, curial determinations by judicial officers and to a lesser extent by arbitrators, rely heavily on what matters are advanced by each of the parties or their expert witnesses. It is generally not open for a judicial officer to proffer his or her personal opinion on technical issues in dispute without there being some expert evidence upon which a finding is based. Therefore, it is incumbent upon judicial officers to explain the reasoning process which led them to the conclusion they reached.
In my view, the test is whether there are sufficient reasons that enable the parties to understand the basis on which the determination has been made. I consider that to be the primary object of s.76(6) of the RLA.

Mr Morfuni criticised the determination in failing to explain how the Valuer arrived at his determination of $670m² as the market rent. He further criticised the determination on the ground that no reason was given to support the conclusion that:
- (a) the southern sector of the strip of shops was superior; or
- (b) the eastern side of Glenferrie Road was superior to the western side of Glenferrie Road.
Having considered the Valuer's determination in light of the authorities referred to above, I am of the view that the determination does provide adequately detailed reasons. I do not accept that the failure to provide a detailed explanation as to why the southern sector of the strip of shops was superior or why the eastern side of Glenferrie Road was superior detracts from the adequacy of the reasons given.
In particular, although no detailed explanation was given as to why the southern end of the shopping strip was regarded as being more favourable, it seems that this factor was common ground, in any event. To that end, the Valuer expressly set out the Landlord's submissions in summary form, which noted:

[The] Premises are located to the northern fringe of the designated prime retail precinct, which it noted is improving with further development being undertaken in the locality.[17]

Similar submissions were made by the Tenant's expert valuer, who also confirmed that the northern part of the shopping strip was a secondary position. Therefore, if the Premises are situated to the north of the designated prime retail precinct, what is to the south must be superior, in terms of rental yield.
Moreover, the Valuer accepted submissions made by the Tenant's expert valuer that the rental market on the east side of Glenferrie Road was slightly superior to the rental market on the west side of that road. I do not consider it necessary for the Valuer to explain why this is the case. He is entitled to rely upon the rental data provided to him or obtained by him and to form an opinion based on that evidence.
In arriving at a gross rental of $670 per m², the Valuer set out the evidence upon which he relied. He made reference to comparable retail premises to the north and south of the shopping strip where the Premises are located. He also compared retail premises on the opposite side of Glenferrie Road. He concluded:

I am satisfied that this evidence indicates a rental rate in the order of $600 per square metre for premises that I believe are inferior to the subject by way of location and, in part, quality of accommodation.

Having regard to the research in relation to rental evidence and my comments before, I have applied the following for the purpose of this determination.

Rental Determination - Shops 1 & 2 ...Glenferrie Rd Hawthorn

In relation to the above, I make the following comments:

The rental adopted in my view fairly reflects the quality of the premises and its size and location within the Glenferrie Road strip.
I have had regard to the Lease terms and conditions and note that the rental is established at 1 April 2012 for a 5 year term with intervening annual reviews at 4% per annum. These terms and conditions appear reasonable in the light of the evidence researched.
I believe the rental I have assessed fairly reflects the outgoing is required to be met by the Tenant in relation to the Lease Agreement.[18]

In my view, the reasons provided are sufficient to enable the parties to understand the basis upon which the determination was made. It is unnecessary to descend into any further detail in order to comply with s.37(6) of the RLA. In that regard, I wholly adopt the observations of the Privy Council in A. Hudson Pty Ltd v Legal and General Life of Australia Ltd:

In general their Lordships consider that it would be a disservice to the law and to litigants to encourage forensic attacks on valuations by experts where those attacks are based on textual criticisms more appropriate to the measured analysis of fiscal legislation.[19]

Having regard to my findings above, I will order that applicant's application is dismissed, with liberty to apply on the question of costs. In that regard, I draw the parties' attention to s.92 of the RLA.

[3] Section 94 of the RLA.

[6] Solomon Kurc v Eyecare Pty Ltd [2004] VCAT 1139.

[17] Valuation Report dated 11 September 2012 at page 17.

[18] Valuation Report dated 11 September 2012 at pages 25-26.

756 Glenferrie Road Pty Ltd v Mountfords Shoes Pty Ltd (Retail Tenancies) [2013] VCAT 640 (25 March 2013)

756 Glenferrie Road Pty Ltd v Mountfords Shoes Pty Ltd

At a glance

Court

Decision date

Source

Judgment (81 paragraphs)

Parties

Cases Cited (5)

756 Glenferrie Road Pty Ltd v Mountfords Shoes Pty Ltd (Retail Tenancies) [2013] VCAT 640 (25 March 2013)