Bevendale Pty Ltd v Lucky Eights Pty Ltd [2020] VSCA 312

Gaming Machine Control Act 1991Bevendale Pty Ltd v Lucky Eights Pty Ltd [2020] VSCA 312 | Case summary | Zoe

[136]

The considerations for the [VCGLR] upon granting a [premises approval] under the [GRA] and the contrast between those and the considerations stated as relevant in other parts of Chapter 3 relative to the grant of [VOLs], make good Bevendale's contention that the [premises approval] 'pertains' to the land rather than to the person who made the application, whether that person be the freehold owner or, as in the present case, someone acting with the authority of the freehold owner. The analogy between the [premises approval] and planning permits granted under the Town and Country Planning Act 1961 or the Planning and Environment Act 1987 is compelling. There would seem to be no reason why the Premises Approval ought not to be regarded as running with the land and available for the advantage of the owner or occupier of the land for the time being.

...

Had the Premises Approval in this case been granted on or after 2004 under the terms of the [GRA], the arguments of Bevendale as to the Premises Approval would have to be accepted.

Do the transitional provisions enacted in 1997 and 2003 affect this conclusion?

I agree with the contention on behalf of Bevendale that, since the effect of the transitional provisions relative to the Premises Approval is that such approval is deemed to have been granted under the [GRA], in general terms it is that statute which must guide the characterisation of the Approval. Section 14 of the [ILA] is however also relevant. The [GRA] repealed the [GMCA]. Section 14(2)(e) of the [ILA] provides that the amendment 'shall not, unless the contrary intention expressly appears ... affect any right, privilege, obligation or liability acquired, accrued or incurred under that Act [viz the repealed Act] or provision ...'.

The Premises Approval may be classified as a right or a privilege. [LE] also relied on sub-section (2A) [of s 14 of the ILA] which provides, generally, that the repeal of an Act 'unless the contrary intention expressly appears, [does not] affect the operation of the savings or transitional provisions or end the validating effect of the provision ...'. The contention therefore is that first, no contrary intention appears and secondly, that the effect of this sub-section is to preserve the original regime in which [LE] held the Premises Approval on its own behalf legally and beneficially to the exclusion of any right on behalf of Bevendale.

[LE], by virtue of [s 163(5)] of the [GMCA] as amended is deemed to be the holder of the Premises Approval. This approval was deemed to have been given under Part 2A of the [GMCA] as amended. This was a right or privilege enjoyed by [LE] at the time of the [GRA's] repeal of the [GMCA]. As such, it was a right or privilege preserved by section 14 of the [ILA].

The structure of the [GRA] might be thought to be an implicit manifestation of an intention to the contrary of preserving the Premises Approval as a right or privilege accruing to [LE], but 'contrary intention' required by [ss 14(2)(e) and 14(2A) of the ILA] requires it to be manifested expressly. The implicit inconsistency of the regime established by the [GRA] is therefore insufficient to exclude the preserving effect of section 14.

It follows that the contention on behalf of [LE] that it is the holder of the Premises Approval, despite what might have been the situation had the approval actually been granted under the [GRA] as distinct from merely being taken to have been granted under its term, must be accepted. It follows, therefore, that the hypothetical tenant should not be regarded as able to utilise the existing Premises Approval, first, because it could be surrendered by [LE] under the statutory right in that respect granted by the [GRA] without reference to Bevendale, and secondly, by virtue of the transitional provisions, [LE] is the holder for its own benefit and not on behalf of Bevendale of the relevant Premises Approval.[17]

[287]

Essentially, there are three steps in the process.

(a) An estimate is made of the gross income from the business. In the case of a hotel this will mean that an estimate is made of the likely income from such sources as the letting of rooms, the restaurant and bars and ancillary functions such as holding conferences or running a health club. In the case of a casino an estimate will be made of the amount which members of the club will gamble ... and how much will be retained by the operators.

(b) An estimate is then made of the various expenses and outgoings involved in the operation of the premises. To take again a hotel as an example there will be staff expenses, purchases of items such as food and drink, and outgoings such as fuel, rates, insurance and advertising.

(c) The difference between the income and the running costs is the net profit. This amount is available for the payment of rent. The final step is therefore to decide what proportion of the net profit should be taken as that which the willing lessee would be willing to pay as rent.

...

A willing lessee of premises such as a hotel would be likely to be faced with substantial initial expenditure. The rule ... that all tenant's fixtures and all chattels are taken to be removed means that the incoming lessee would have to provide items such as bedroom furniture and equipment for the restaurant and common parts. When a comparables method of valuation is used it is not usually necessary to do a calculation of initial fitting out costs since the need to fit out the premises will be a factor already taken into account in the rent agreed or determined for the comparables. The use of the profits method entails the cost of fitting out and similar work being brought into the calculations since it is a cost which will be borne by the lessee in order to make a profit. The usual means of paying regard to this aspect of the operation is to estimate the capital cost involved and then to rentalise it over the period of the expected life of the equipment. The annual or rentalised sum will then be an item of expenditure to be put into the notional accounts. A similar process would be necessary if a willing lessee would expect to carry out improvements to the premises.[61]

[295]

To foreshadow what I discuss below, in my view the EBIDTAR methodology achieves the same outcome as the three-step process described by [Hill and Redman] and the rental ratio is ultimately the assessment of what proportion of the sum available for the payment of rent should be taken as that which the willing hypothetical incoming tenant would be willing to pay. The rental ratio recognises that the sitting tenant will have generated the earnings it has by reason of its fixtures and fittings, amongst other things, but, where the ratio is based on an assumption of average standard management in comparable premises, and therefore average fixtures and fittings, this is not impermissibly to take the sitting tenant's fixtures and fittings into account which is the mischief which s 37(2) is directed at avoiding.

...

As [Croft J] sought to explain, s 37(2) does not prohibit a method that includes within the calculation a value for a tenant's fixtures and fittings providing that the value of those fittings and fixtures is cancelled out in arriving at the appropriate figure representing the market rental.

...

In my view, the judge was correct to conclude that the methodology adopted by the Valuer, although it indirectly had regard to the Tenant's fixtures and fittings by taking into account the earnings made by the Tenant, 'cancelled out' that regard. The 'cancelling out' occurred with the adoption of a rental ratio that, as the Landlord submits, 'allows for' a deduction of the value of the market average of fixtures and fittings. As is reflected in the third and final step in making a determination of current market rental described by Hill and Redman, from the available balance of the net earnings remaining after operational expenses it is necessary 'to decide what proportion of the net profit should be taken as that which the willing lessee would be willing to pay as rent'. That proportion is what the Valuer described as the rental ratio; this was based on market norms of what a willing lessee would be willing to pay as rent. Importantly, the rental ratio takes account of the need also for the willing lessee to acquire the fixtures and fittings of the existing tenant. As the Valuer said, '[i]t is also the market norm whereby the negotiation of a new lease agreement would also comprise the Tenant's purchasing the Fixtures & Fittings plus the negotiation of a Rental'. By 'the Tenant' in this extract the Valuer is referring to the hypothetical future tenant. The rental ratio chosen here reflects or allows for a market norm with respect to average fixtures and fittings.

In my view, the choice by the Valuer of the pre-August 2012 rental ratio of 38 per cent reflected the proportion of the Tenant's earnings (calculated in accordance with the EBIDTAR methodology) which the willing lessee would be willing to pay as rent discounting, on a market norm basis, the notional acquisition of the Tenant's fixtures and fittings (conceived of as average fixtures and fittings) in a manner that cancelled out the impact of those fixtures and fittings upon the Tenant's earnings. Moreover, because the Tenant has not challenged the assumption of average good management and trading at reasonable levels, the Tenant is not in the position of having to pay more rent because of its specific fixtures and fittings (including the gaming machines and gaming entitlements); it is not in the position of having to pay more rent because of things it had done. The unfairness that s 37(2) is intended to prevent is a windfall rent being paid to a landlord because of the particular qualities of the fixtures and fittings of a tenant, or personal goodwill. The methodology of the Valuer, applied to the circumstances here, avoided any such windfall.

[T]he rental ratio here was based on an assumption of good average standard management. As mentioned above, the Valuer made explicit his assumption that 'a significant component of this rental determination is the assessment of a reasonable trading level for the Epping Hotel' and the assumption of 'reasonableness' was not challenged. This assumption meant that it was permissible for the Valuer to approach the determination of the current market rental for the Epping Hotel on the basis that the Tenant's fixtures and fittings reflected the market norm. This enabled the Valuer to rely upon transactional evidence and broad industry parameters. There was no celebrity factor, or enhanced fixtures and fittings above the market norm, that would have boosted the Tenant's EBIDTAR beyond the market norm. Had there been such factors, in my view, to maintain consistency with s 37(2), this would have precluded reliance upon broad industry parameters and this would have driven down the proportion of the EBIDTAR that the willing lessee would be willing to pay as rent. However, there was here no evidence of matters of an exceptional kind that should have reduced the rental ratio to a percentage below the market norm.

...

A valuation of current market rent is a sophisticated and multi-dimensional exercise. As mentioned at the outset, s 37(2) does not mandate any particular methodology. To be consistent with s 37(2) it is sufficient that the methodology employed ensures that any regard paid to fixtures and fittings is only regard paid to market norms providing that the assumption of average good management and reasonable trading levels is well founded and there is no celebrity factor or enhanced or high-end fixtures and fittings.

In my view, the methodology employed by the Valuer did not result in the Tenant suffering a rent increase by reason of the Tenant's own improvements. I consider that the judge was correct to conclude that the methodology employed by the Valuer is consistent with s 37(2). ... The purpose of s 37(2), as explained above, is to ensure that the sitting tenant does not pay a higher rental in the future than it has paid in the past because of improvements it has made during the period of its previous tenancy, those improvements being reflected in the earnings. That is the nub of where the unfairness lies. However, for that unfairness to be avoided it is necessary to ensure, as the judge said, that the future tenant (in other words, the sitting tenant in the future) is not advantaged or disadvantaged in the rental calculation as a result of the prior tenant having improved the premises and enhanced the earnings obtained from the premises.[68]

[297]

Serene contended that the methodology used by the valuer did not and could not comply with the [RLA], or, alternatively, that in order to comply, the methodology must be adjusted to expressly deduct the capital cost of the tenant's fixtures and fittings. I disagree. In my view, the methodology used by the valuer could be, and was, applied in such a way that it complied with the requirement in the [RLA] that the current rent is not to take into account the value of the tenant's fixtures and fittings.

...

The methodology seeks to calculate the earnings that the hotel business makes before expenses are deducted for interest, depreciation, taxation, amortisation and rent (the EBIDTAR method).

Clearly interest is not deducted as that is a financing cost that is at the election of the tenant. Further, depreciation and amortisation are a book entry that could distort the figures if used. Taxation is an expense levied on the owner of the business not on the business itself. Rent is paid to the owner of the freehold and is the figure to be calculated.

Thus, the earnings derived are earnings of the subject hotel that can be compared to the earnings of other hotels.

The earnings calculated can then be allocated between the owner of the business and the owner of the freehold to reflect the contribution made by each to the earnings of the hotel. By allocating a proper proportion of the earnings to the owner of the business (that includes the fixtures and fittings of the tenant), the balance left for the payment of rent will by definition not take into account the value of the tenant's fixtures and fittings.

If the methodology is properly applied, the determination of the current market rent will not have regard to the 'value of the tenant's fixtures and fittings' in the hotel. Also the current market rent will be taken to be the rent that would reasonably be expected to be paid for the hotel premises as '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.'

The trial judge held that s 37(2) of the [RLA] does 'allow the valuer to assume the existence of the tenant's fixtures and fittings for the purpose of employing the so-called "profits method", provided that the value of those fixtures and fittings is treated in the calculations in such a way that the value is in effect "cancelled out".'

In my opinion, an alternate description of the methodology used by the valuer to determine the current market rent is that the methodology calculates the earnings of the hotel (using the EBIDTAR method) and then by applying an appropriate rental ratio the methodology identifies the earnings attributable to the tenant's fixtures and fittings and excludes those from being taken into account in determining the current market rent.

By doing so, the valuer has complied with the statutory injunction that the current market rent is not to take into account the value of the tenant's fixtures and fittings. There was no issue that the valuer had wrongly taken into account the value of the goodwill created by the tenant's occupation.

...

There was no evidence of any exceptional features of Serene's occupancy of the [Epping Hotel] that warranted ... an adjustment being made [to the EBITDAR to take into account any exceptional features of the Epping Hotel business]. The market based analysis which was the basis of the rental ratio was based on the undisputed assumptions of Serene's reasonable trading performance and average standard of management.[69]

[326]

It is necessary to note, first, that the requirement that the rental valuation 'not ... take into account the value of goodwill' does not apply to goodwill generally but only to that goodwill which is 'created by the tenant's occupation or the value of the tenant's fixtures and fittings' (Serene Hotels). ... [LE] filed a statement by Associate Professor Dunn who was the inaugural Chair of the Victorian Commission for Gambling Regulation, serving from 2005 to 2010 in that position. ...

According to Professor Dunn, the City of Whittlesea, being the municipal district in which the ... Centre is located, 'has experienced very high levels of gaming expenditure with a number of the biggest venues in the State ... All of the major venues have been at least, historically, in the south of the municipality, in or around Epping'.

It follows from Professor Dunn's observations as to the siting of [the Premises] that a very considerable portion of goodwill attaching to it for gaming purposes derives from its location in the City of Whittlesea which appears to be a 'gambling hot spot' on the Professor's analysis, and also its situation in a shopping centre properly characterised as a 'strip shopping centre'.

This portion of goodwill cannot be regarded as deriving from [LE's] occupancy of premises rather, it inheres in the location itself. Expert valuer Ms Freeman who gave evidence on behalf of Bevendale contrasted the goodwill inherent in the site itself from 'the goodwill peculiar to the tenant, which is ... the special characteristics of trade that it brings. For instance, a football star operating the bar might generate a higher revenue and trade as compared to a conventional or good-average or average-competent manager. Equally, it could be underperforming due to ... laziness and incompetence by an ordinary tenant. So in the context of valuation of rent particularly, we try to consider the goodwill peculiar to the tenant as compared to what is created by the use and location and so on.'

Again, as I understood Ms Freeman, she said that the goodwill attributed to the tenant would be cancelled out of the equation by the rent which the market was prepared to pay for the premises, a particular portion or percentage of profit could be committed to rent in light of the goodwill which could be regarded as pertaining to the premises as distinct from the goodwill which the tenant was obliged to bring to the enterprise itself. In this case, [the Valuer] found that the profitability achieved equated with what might be expected from average competent management. [The Valuer] made a similar finding with respect to the Epping Hotel [2015] VSCA 228 [72]. There was no evidence of goodwill generated by [LE], itself, such as by having a sporting personality as the 'host'.

It follows that the [Valuer] cannot be regarded as having erred with respect to the treatment of goodwill.

Accepting that the Serene Hotels case does not state a general proposition that the 'profits' method of rent fixing is always appropriate, it does recognise that it may be appropriate and ... there would not seem to be a material distinction to draw between the Epping Hotel considered in the Serene Hotels case and the Epping Plaza Hotel in the present case.[92]

[370]

In my opinion the question whether a valuation is binding upon the parties depends in the first instance upon the terms of the contract, express or implied. ... A valuation obtained by fraud or collusion can usually be disregarded even in an action at law. For in a 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. ... [I]t is easy to imply a term that a valuation must be made honestly and impartially. It would 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 a result of his negligent valuation ... 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 [the] 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.[107]

[375]

It follows from these principles that a vast range of errors may be made by an expert valuer in formulating his valuation as an expert appointed by contract to provide a binding determination which do not invalidate his determination. According to [McHugh JA], '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'. Here, the error which I have found does not relate to the geographical identity of the premises to be valued, rather, it relates to one of its attributes or appurtenances. [The Valuer] proceeds upon the basis that the Premises Approval for the Epping Plaza Hotel would be available to the hypothetical tenant referred to in section 37(2) of the [RLA]. Bevendale ... contends that this was appropriate since the Premises Approval should be regarded either as appertaining to the premises, themselves, and therefore 'running with the land' like a planning permit, or as being a right held on behalf of the freehold owner, Bevendale, because of what might be regarded as a quirk of the transitional arrangements governing these [premises approvals]. Bevendale's analysis of the situation appears to be incorrect. Is this error of sufficient importance in accordance with the principles just discussed to invalidate the [Determination]?

For the period commencing 12 July 2015 the rent payable by [LE] for Shop 28 was $401,145.91 plus GST. Shop 28A commanded a rental in the same period of $55,181.45 ... [The Valuer's Determination] for the shops for the immediately following period commencing 12 July 2016 was $1,602,043 per annum exclusive of GST for Shop 28 and $213,957.00 per annum exclusive of GST for Shop 28A.

This extraordinary jump in rental resulted from the application of the 'profits' method as described above in lieu of the comparative rentals approach previously adopted. Bevendale was no doubt emboldened to seek a Rental Determination on this basis by the outcome of the Serene Hotels litigation. [The Valuer] is the same valuer who made the valuation challenged and upheld by Croft J and the Court of Appeal in that case. The crucial difference between [the Valuer's] Determination and the rentals which had previously been adopted for the [Premises] was that [the Valuer] fixed his Rental Determination by reference to the profitability of the [Epping Plaza Hotel] which is underpinned by an annual gaming revenue in the relevant period in excess of $21m. [The Valuer] placed the Premises Approval into the equation which has had a dramatic [effect]. Whether it is proper to regard the Premises Approval as some sort of interest in the nature of an incorporeal hereditament I need not pause to consider. The Premises Approval, however, was of such significance that to include it inappropriately, as I have found [the Valuer] did, amounts in substance to making an error as to the subject matter of the valuation, a matter which, as the passage quoted from ... McHugh JA in the Legal & General case [shows] is sufficient, in itself, to invalidate the [Determination].[109]

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