AQUITAL HOLDINGS PTY LTD -v- MARLIN GROUP PTY LTD [2012] WASC 198 (12 June 2012)

3 The plaintiff has commenced the present proceedings seeking declarations to the effect that the defendant has breached the Lease and a declaration that the plaintiff is entitled to remain in possession of the Property until certain consideration which is required to be paid pursuant to the Lease, in the event of its early termination, is paid.

4 The dispute between the plaintiff and the defendant focuses on the proper construction of three clauses in the Lease. It is convenient to set these out:

Notwithstanding the specific provisions of this Lease the Lessor shall be entitled to terminate this Lease on giving to the Lessee not less than SIX (6) months notice and at the expiration of the term specified in such notice the Lessee shall vacate the premises. The Lessor's entitlement to terminate the lease shall not affect or relieve the Lessee from its obligations to comply with the covenants and obligations imposed on the Lessee up until the date of vacation of the premises.

In consideration of the Lease being terminated and the Lessee vacating the Premises as provided for in clause 18.3(a), the Lessor shall pay to the Lessee on the date of termination of the Lease an amount calculated as follows:

V +10%

Where 'V' equals the value of the Business including, but not limited to, the goodwill of the Business and the plant and equipment of the Business.

(The term 'Business' is defined in the Lease to mean the hotel, motel and caravan park business conducted from the premises.)

If the Lessor and the Lessee are unable to agree the value of the Business, then the value of the Business and the plant and equipment of the Business shall be determined as the average of the valuations of TWO (2) independent valuers, ONE (1) appointed by the Lessor and ONE (1) appointed by the Lessee.

(a) On 22 August 2011, the defendant gave the plaintiff a Notice of Termination of the Lease pursuant to cl 18.13(a) of the Lease;

(b) The parties failed to agree on the consideration to be paid by the defendant as a result of the early termination of the Lease;

(c) When the defendant issues an early termination notice under cl 18.13(a), as occurred here, the defendant is required to pay the plaintiff compensation for the loss to the plaintiff of the Business, inclusive of the lease;

(d) On the proper construction of cl 18.13(c), independent valuers are to value the Business on the basis of the value of the Business (including the Lease) to the plaintiff;

(e) The reference to independent valuers to in cl 18.13(c) requires only that the valuers have experience in the valuation of businesses or business enterprises;

(f) It is an implied term of the Lease that if a party provided a valuation which did not comply with the requirements of cl 18.13 then that party would be entitled to an alternative valuation provided that was done within 21 days;

(g) If cl 18.13(b) is ambiguous, then various facts were known or notoriously known to the parties at particular times, including, for example, that the plaintiff proposed to undertake the Business pursuant to a business plan involving a rate of return over time, commensurate with the risk involved in undertaking the Business for the term of the Lease, so that the opportunity to fulfil that business plan would be compromised by the early termination of the Lease;

(h) The defendant is required to pay the plaintiff compensation for the loss of the Business (including the Lease), taking into account these extrinsic facts;

(i) The plaintiff and the defendant each tabled a valuation in reliance on cl 18.13(c) of the Lease;

(j) The defendant's valuation is in breach of cl 18.13 of the Lease because it was not undertaken using a methodology to compensate the plaintiff for the loss of the Business (including the Lease) but was instead undertaken using a methodology to ascertain the market value of the Business (inclusive of the Lease);

(k) The defendant has breached cl 18.13(c) of the Lease because it has refused to accept the plaintiff's valuation as a valuation for the purposes of cl 18.13(c) on the basis that the plaintiff's valuer is not a 'Valuer' as defined in cl 2 of the Lease;

(l) On a proper construction of cl 18.13(b), the Lessee need not give up possession of the property and the Business conducted on it until the defendant pays the consideration payable pursuant to cl 18.13(b) and cl 18.13(c); and

(m) The defendant has breached cl 18.13(b) of the Lease by asserting that it is entitled to possession of the Property on maturity of the Notice of Termination but before the defendant pays the compensation required to be paid under cl 18.13.

(a) The Lease terminates at the end of six months after the giving of a Notice of Termination under cl 18.13(a) (that is, on 16 April 2012);

(b) Alternatively, the Lease will terminate six months after giving a Notice of Termination except where the defendant has failed to make a payment of the compensation required under cl 18.13(b) if the amount of that payment has been determined. In the latter case, the Lease terminates when the defendant makes that payment;

(d) The value of the payment is the market value of the Business as at the end of six months after the giving of the Notice of Termination, or as at the date of termination of the Lease (if later);

(e) For the purposes of cl 18.13(c) each valuation is to be prepared by a 'Valuer' as defined in cl 2 of the Lease;

(f) Each valuation is to be an independent, genuine, objective, and reasoned opinion of value provided by a valuer appointed to provide such an opinion;

(g) The defendant provided a valuation which complied with cl 18.13(c) of the Lease;

(h) Paragraph 21 of the defence and counterclaim pleads that the plaintiff's valuation does not conform with the requirements of the Lease, as the valuation was not an independent, genuine, objective, and reasoned opinion of value provided by a valuer appointed to provide such an opinion, for a variety of reasons:

(i) Clause 21.1 sets out the first alleged reason, namely, that the valuer was only appointed after the plaintiff had sought and obtained from the valuer an indication of the likely outcome of the valuation;

(ii) The plaintiff's valuation was not an opinion as to the market value of the Business, but rather an opinion as to the value of the Business to the plaintiff;

(iii) it was an opinion as to the value of the Business and the income from the sub-lease of the caravan park;

(iv) it was not an opinion as to the value of the Business as at the end of six months after the termination notice was given;

(v) it was not made by a Valuer as defined in cl 2 of the Lease;

(vi) the valuation was not an independent, objective, and reasoned opinion of value provided by a valuer appointed to provide such an opinion because the valuer was only appointed after the plaintiff had sought and obtained from him an indication of the likely outcome of the valuation, the valuer acted on information provided by the plaintiff which was not accurate, adopted a discount rate which was not appropriate, and the valuation did not include reasons relied upon by the valuer which explain the opinions expressed in the valuation in relation to the cash flows or discount rate used;

(i) If the Lease provided for termination to occur six months after Notice of Termination is given and upon the defendant making the payment of compensation referred to, the plaintiff dispensed with the requirement for such payment to be made by failing to provide a conforming valuation prior to the termination of the Lease; and

(j) The Lease was validly terminated on 16 April 2012, but the plaintiff has wrongfully refused to give up possession of the Property in breach of the Lease.

10 The plaintiff sought to strikeout par 21.1 of the defence and counterclaim pursuant to O 20 r 19(1)(a), (b) or (c) of the Rules of the Supreme Court.

11 The principles applicable in applications of this kind were set out by Master Staples in Kimberley Downs Pty Ltd v Western Australia (Unreported, WASC, Library No 6414, 25 August 1986) and it is unnecessary to set them out again at this time; I respectfully adopt the statements of principle referred to by the learned Master in Kimberley Downs.

12 Counsel for the plaintiff submitted that par 21.1 of the defence and counterclaim in its present form is unarguable. Counsel submitted that cl 18.13(c) does not, by its express terms, oblige an appointor to only appoint a valuer who had not disclosed the potential outcome of the valuation, nor prevent an appointor interviewing a number of prospective valuers and choosing a preferred candidate. Counsel also submitted that such obligations could not be implied into cl 18.13(c) as it would not meet the requirements for implying a term into a contract.

13 Clause 18.13 of the Lease requires that the valuation be prepared by an independent valuer. What is meant by the term 'independent' is not defined in the Lease. The meaning of that term is clearly one of the central issues in the present dispute. As I read par 21 of the defence and counterclaim, the paragraph sets out the defendant's view of what cl 18.13(c), on its proper construction, means. Paragraph 21.1 then appears to set out how that understanding of the meaning of the term 'independent' has implications for the communications with a valuer which a party to the Lease may have, prior to appointing the valuer to provide a valuation as contemplated by cl 18.13(c) of the Lease.

14 The proper construction of the term 'independent' in cl 18.13(c) will be a matter for determination at trial. However, for present purposes, let it be assumed that the use of the word 'independent' in cl 18.13(c) of the Lease means that a valuer must not have any preexisting connection to, or relationship with, the party to the Lease, apart from the engagement to provide the valuation, so that the valuation provided is impartial. If that is the proper construction of the word 'independent', then I do not accept that a discussion between a party and a prospective valuer, in circumstances where the likely valuation which the valuer would provide was mentioned, could never (in the sense that it was unarguable, as the plaintiff contends) cast doubt on the independence of the valuer.

15 It is not difficult to envisage situations where a party's contact with a valuer prior to his or her providing a valuation would undermine the actual or perceived independence of that person in providing a valuation. It is also possible to envisage situations in which the likely valuation which may be given by a valuer was discussed in a context which would not cast any doubt on the independence of the valuer or his or her ability to provide an impartial and objective valuation. Quite clearly, much would depend upon the precise circumstances in which the likely valuation which would be given was discussed. However, if there was in fact a discussion between a party and a valuer, about the likely valuation which would be given, that at least leaves open the possibility that the independence of the valuer (whatever that term in the Lease means) arises as an issue.

16 Accordingly, I do not accept that par 21.1 of the defence and counterclaim is not arguable on the basis that it does not disclose a reasonable defence, nor do I accept that the paragraph is frivolous or vexatious, or that it may prejudice, embarrass or delay the fair trial of the action, so as to warrant its being struck out pursuant to O 20 r 19.

17 There is, however, one related matter which should be mentioned. Counsel for the defendant submitted that par 21.1 also contained a pleading that the plaintiff's valuer was not appointed in accordance with the requirements of the Lease, in addition to the argument that the valuer was not independent. As presently framed, I do not see par 21.1 as containing a plea that the plaintiff's valuer was not appointed in accordance with the requirements of cl 18.13(c) of the Lease.

18 Counsel for the defendant submitted that cl 18.13(c) of the Lease was similar to the clause considered by the High Court in Gollin & Co Ltd v Karenlee Nominees Pty Ltd [1983] HCA 38; (1983) 153 CLR 455, especially at 472. While the clauses are similar, Gollin was a case in which it appears to have been specifically alleged that the valuer was not appointed in accordance with the requirements of the lease, in that no notice had been given to the other party to the lease that the valuer had been appointed to conduct a valuation. If the defendant wishes to raise as an issue in this case the question of whether the plaintiff's valuer was appointed in accordance with the Lease, the defendant should amend par 21.1 of the defence and counterclaim to squarely plead it. As it is a matter for the defendant whether it wishes to raise that allegation in its defence and counterclaim, I will not make an order which would require the amendment of par 21.1.

19 For the reasons I have given, the plaintiff's application to strikeout par 21.1 of the defendant's defence and counterclaim is dismissed. I will hear from the parties in relation to the question of costs.