Colin Marg P/L v Mackay Medical Investment Ltd

[1] WILSON J: In this originating application the Court has been asked to construe a provision in a lease for the fixing of rent.

[2] The respondent is the registered proprietor of a property in North Mackay on which the Pioneer Valley Hospital has been constructed. The land is 1.214 hectares in area: the hospital building occupies 3,493 square metres. The hospital includes an administration area, two operating theatres, 26 wards (containing 39 beds) and the following leased areas -

five medical consulting suites for on-site resident medical specialists

five medical consulting suites for visiting medical specialists

[3] The applicant is the lessee of part of the ground floor of the building and an area of carpark, on which it operates a health and fitness centre known as "Starbodies Gymnasium". The area leased to it consists of 349 square metres at the rear of the ground floor of the building and 489 square metres of dedicated carpark.

[4] The lease was originally made between the respondent as lessor and Diane Flora Ware for the period from 7 February 2000 to 15 October 2005. After a number of assignments the applicant became the lessee on 26 February 2003.

[5] The use of the demised premises is limited by clause 4.1 which provides -

"4.1 PERMISSIBLE USE

4.1.1 The Lessee shall not use the premises for any purpose other than for the purpose described in Item 5 and for activities reasonably incidental thereto."

In Item 5 the permitted use is described as "Health and Fitness Centre".

[6] By clause 15 the lessee was granted an option to renew for 10 years, which the applicant duly exercised. Relevantly for present purposes the clause went on to provide -

"15.4 CONDITIONS AS TO FURTHER LEASE: Upon the Lessee's exercise of entitlement pursuant to the provision of this covenant the Lessor shall prepare and execute an agreement containing the same conditions as are contained in this agreement, subject to the following:-

...

15.4.3 The rent for the first year of the further Lease shall be mutually agreed upon by the Lessor and the Lessee within a period of one (1) month of the commencement of the rent period PROVIDED THAT pending mutual agreement the Lessee shall continue to pay on account of the rent ultimately determined to be payable rental at the rate current when the date of the increase ought to have come into force and the balance thereof upon mutual agreement;

15.4.4 Should the Lessor and the Lessee not reach agreement as to the rental then the annual amount for the first year shall be determined by a registered Valuer nominated for that purpose (at the request of either the Lessor or the Lessee) by the President for the time being of the Real Estate Institute of Queensland and the person so nominated shall act as an expert and not as an Arbitrator and such Valuer shall have regard to rentals payable for comparable premises (if any) in the locality of the demised premises during the last three (3) months of the previous rent period and his decision shall be final and binding on the Lessor and the Lessee and the cost of obtaining such determination by such Valuer shall be borne by the Lessor and the Lessee in equal shares, but in no case shall the annual rental be so determined at a figure less than the yearly rental payable in the immediately preceding rent period;"

[7] The applicant and the respondent did not agree on the rent for the first year of the further lease, and Mr Brett Thorne, a valuer with John Logan & Associates, was duly appointed to determine it. Mr Thorne determined the annual rent, exclusive of GST, at $59,338-00. He summarised the basis of his determination in this way -

"The subject consists of a 349 square metre tenancy situated within the privately run Pioneer Valley Hospital, the facility is located in Mount Pleasant a residential area to the north of the Mackay CBD.

The renewal option is for a further term of 10 years, and for the permitted use of health and fitness centre.

We have assessed the annual rental for the tenancy with regard to the terms and conditions of the existing lease, and from an investigation and analysis of the rentals payable for comparable premises within the immediate locality.

The permitted use under the lease is as a health and fitness centre, but we are of the opinion that the highest and best legal use for the premises is as second tier medical suites. The location at the rear of the building detracts but commercial exposure could be enhanced through signage at the Raymond Croker Drive entrance (where the existing gym signage is), signage at the Norris Road entrance and directional signage at the reception of the hospital. This would easily satisfy signage/exposure concerns for medical specialists that are generally appointment/referral destinations as opposed to a general practice operation that still attracts 'walk-ins'.

The land lord has indicated that the preferred use for the non-hospital tenancies is for medical and diagnostic consulting suites."

[8] The applicant contends that Mr Thorne's determination is not in accordance with clause 15.4.4 of the lease. It contends that the determination should have been undertaken on a subjective basis - that is, what he should have determined was the rent payable under the particular lease between the particular parties (which included the permitted use being that of a health and fitness centre), and not the market rent between a lessor and a lessee who were hypothetically at arms' length. The central issue in this application is whether the valuation complies with the terms of the lease, and not whether there was some error in the discretionary judgment of the valuer.[1]

[9] The further lease is in all relevant respects on the same terms and conditions as the original lease: in other words, it contains the same restriction on the use of the demised premises. The primary method for establishing the rent for the first year is by agreement of the parties (clause 15.4.3), and it is only where the parties do not agree that a valuer is to be appointed. That is a strong indicator that the valuer is to do what the parties cannot agree to do, and so to take into account all the considerations which would affect the minds of the parties when negotiating to a conclusion. See the observation of Moynihan J in Wickham Properties Pty Ltd v Astor Motel Pty Ltd,[2] where His Honour was commenting upon the decisions in cases such as Lear v Blizzard[3] and Jefferies v RC Dimock Ltd.[4]

[10] In Lear[5] a lease for a petrol station contained an option to renew for a further 21 years "at a rent to be agreed between the parties ... or in default of agreement at a rent to be determined by a single arbitrator".[6] Tudor Evans J held that the clause required the arbitrator to determine the rent subjectively - that is, by considering all the circumstances and deciding what would be a fair rent between the particular parties. In doing so His Honour placed great emphasis on the fact that the arbitrator was only to be involved if the parties failed to reach agreement: the focus of the clause was the agreement between the parties, not merely the objective premises. In this way the earlier case of Ponsford v HMS Aerosols Ltd,[7] where the focus of the clause was squarely on "the demised premises", was distinguished.[8] In Lear the clause required the arbitrator to perform the task that the parties themselves failed to do.

[11] Similarly, in Jefferies,[9] the lease contained a rent review clause in these terms: "the rental fixed at each review shall be such rental as is agreed upon by the Landlord and the Tenant and if they cannot agree to be determined by Arbitration".[10] The court held, referring to Lear, that the clause required the arbitrator to determine, subjectively and considering all the circumstances, a fair rent as between the particular parties.

[12] By contrast, in Wickham,[11] a compromise agreement[12] contained a rental clause in these terms: "the rental to be paid pursuant to such lease be fixed by determination of a valuer mutually agreed upon by the parties ... who in determining such rental shall have due regard to comparable rent in the City of Brisbane for premises of comparable age, position and architectural qualification".[13] This clause was substantively different from the clauses in the previous two cases: the valuer was the only means of determining the rent, not the alternative method in case of failure of the parties to agree. Further, the valuer was explicitly directed to have regard to objective considerations. These two factors caused the court to distinguish Lear and Jefferies and hold that the rent must be determined objectively.

[13] In the present case the rental is to be determined by agreement between the parties, and in the event of failure to agree, by an appointed valuer. It is therefore directly analogous to Lear and Jefferies: the valuer is to perform the task that the parties have been unable to do themselves, and so must determine the rent subjectively.

[14] The requirement that the valuer have regard to rents for comparable premises (if any) in the locality of the demised premises does not limit the scope of his task; on the contrary it is a prescription of one matter to be taken into account in the broader inquiry into what would be a reasonable rent for the parties to have agreed having regard to all the circumstances.[14] In Ricciardello the relevant clause expressly provided that the requirement that the valuer have regard to rents for comparable premises not limit the scope of his inquiry. Even though the present lease does not contain such an express provision, on its proper construction the requirement that the valuer consider rents for comparable premises does not limit the scope of his inquiry.

[15] Even if a consideration of "comparable premises" would require consideration merely of premises with comparable physical characteristics regardless of their permitted uses,[15] here the valuer is obliged to take into account more than rents for comparable premises. He is obliged to take into account all the circumstances which would have been in the parties' minds, including the restriction of the use of the demised premises.

[16] In my view the prescription that the valuer act as an expert and not as an arbitrator relates to the process by which he is to undertake his task; it does not bear upon the scope of that task, which is to be gleaned from the rest of clause 15.4.4 in the context of the lease as whole, including clauses 4.1.1 and 15.4.3.

[17] In oral submissions, counsel for the respondent argued that the appointment of a valuer, rather than an arbitrator, indicated that an objective approach to the determination of the rent should be followed. In support of this she argued that the arbitral process is inherently more subjective than a valuation, because the parties are able to present their perspectives in a quasi-judicial forum. An independent valuation, she argued, is detached and objective. This argument is unconvincing in light of the above analysis. Where the valuer is required by the clause in the lease to have regard to all the circumstances in determining a fair rent as between the particular parties, the process is no longer objective.

[18] Counsel for the respondent relied on Lear and Thomas Bates & Son Ltd v Wyndham's (Lingerie) Ltd[16] to support the contention that the appointment of an arbitrator is indicative of a subjective approach. This proposition was not considered in either case, which turned on the wording of the clauses in question, not the character of the appointee.

[19] Counsel for the respondent conceded that the nature of the task set in the clause, rather than the character of the person appointed to perform it, is paramount when she analysed Email Ltd v Robert Bray (Langwarrin) Pty Ltd.[17] In that case a lease agreement provided that rent shall be mutually agreed by the parties and, where there was a failure to agree, the rent should be "as determined as a reasonable rental by a single certified valuer".[18] The valuer's task was held to be a subjective one because of the wording of the clause.[19]

[20] Thus I consider that the valuer's task under clause 15.4.4 is to undertake the valuation on a subjective basis. Mr Thorne's valuation, performed on an objective basis, does not conform to the terms of the lease, and so is not final and binding on the parties.

[21] I will hear the parties on the form of orders to be made, and on costs.

[1] Legal and General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 at 335 - 336 per McHugh JA.

[2] [1994] 1 Qd R 211 at 220 ("Wickham").

[3] [1983] 3 All ER 662 ("Lear").

[4] [1987] NZHC 520; [1987] 1 NZLR 419 ("Jefferies").

[5] [1983] 3 All ER 662.

[6] Lear [1983] 3 All ER 662 at 664 (emphasis added).

[7] [1979] AC 63 (Ponsford).

[8] In Ponsford, the rent was to be agreed by the parties and, if the parties failed to agree, an independent surveyor was to be appointed to determine "a reasonable rent for the demised premises". This case highlights the need to analyse each lease independently and carefully: the fact that the independent expert is only required to determine the rent if the parties fail to reach agreement does not automatically make that task a subjective one. The clause in Ponsford was materially different from the clause in this case and the other cases relied on, which explains the different result.

[9] [1987] NZHC 520; [1987] 1 NZLR 419.

[10] Jefferies [1987] NZHC 520; [1987] 1 NZLR 419 at 420 (emphasis added).

[11] [1994] 1 Qd R 211.

[12] In this case the respondent sought to exercise an option in the original lease, and the appellant disputed its entitlement. The proceeding that followed was compromised by way of agreement.

[13] Wickham [1994] 1 Qd R 211 at 217.

[14] See Ricciardello v Caltex Oil (Australia) Pty Ltd [1991] ANZ ConvR 445 at 450 per Malcolm CJ ("Ricciardello").

[15] De Iacovo v Lacanale [1957] VicRp 78; [1957] VR 553

[16] [1980] EWCA Civ 3; [1981] 1 All ER 1077.

[17] [1984] VicRp 2; [1984] VR 16 ("Email").

[18] Email [1984] VicRp 2; [1984] VR 16 at 18.

[19] Email [1984] VicRp 2; [1984] VR 16 at 21.