Corpco No 23 P/L v JS Hemingway Investments P/L [2002] QSC 321

Williams Graham & Carman solicitors for the applicant

Sykes, Pearson and Miller solicitors for the respondent

[1] MUIR J: The applicant carries on the restaurant business "MaMensa" in Hotel Laguna, Hastings Street, Noosa in premises rented by it from the respondent. On

28 August 2000 the applicant exercised an option under which it had the right to be granted a new lease for a further term of four years ("the Second Extended Term") on the same terms and conditions as those contained in the then existing lease with the exception of clause 16.2 (the second option for renewal clause). Clause 16.2 provides that in default of agreement the Annual Rental of the first Rental Year of the Second Extended Term shall be determined by a registered valuer acting as an expert and not as an arbitrator in such sum as is determined to be the fair market rental of the Demised Premises.

[2] As the applicant and the respondent were unable to agree on a valuer the third party was appointed for the purpose by the President of the Australian Property Institute - Queensland Division. His determination, made by means of a document dated 10 January 2001, did not meet with the applicant's approval and by originating application the applicant sought declarations including one that the determination is invalid.

[3] The respondent subsequently issued a third party claim against the valuer and an order was made that the valuer be bound by findings of fact and law on the trial of the applicant's claims against the respondent.

[4] The applicant seeks to impugn the rental determination on a number of grounds and it is convenient to consider each in turn.

Alleged failure by the valuer to take into consideration the apportionment required by clause 21 of the lease.

"The parties acknowledge and agree that the apportionment of the commencing annual rental in Item 1 of the First Appendix hereto is a fair and reasonable apportionment between Lots 29 and 31 which comprise the demised premises and the parties further covenant and agree that upon a rent determination as provided for upon a renewal of any term hereunder or as prescribed in the Second Appendix the valuers shall take into consideration the apportionment."

[6] A note at the foot of page 6 of the determination reads:

"Clause 21 states that `valuers shall take into consideration the apportionment' of rent actually `acknowledged and agreed' by the parties, which I have done. It does not state I must ensure the apportionment is maintainable".

[7] The second appendix makes provision, amongst other things, for annual rental reviews during the term of the lease.

[8] The applicant submits that clause 21 requires the apportionment to be maintained throughout the original term of the lease and the terms of new leases arising from the exercise of options. It is said that there is little point in the clause if the apportionment is not to be maintained.

[9] The valuer was not in error. His note records part of the relevant content of clause 21. As the note states, clause 21 does not require that the apportionment be maintained. The apportionment struck by the parties at the commencement of the lease was agreed to be "fair and reasonable". But circumstances change and the respective values of Lots 29 and 31 and the benefits able to be deprived therefrom are capable of fluctuating. That is why clause 21, rather than requiring the apportionment in the first appendix to be maintained, provides that the apportionment will be, in effect, a reference point on future rent determinations.

The determination does not comply with the lease in that it does not value lot 29 as a restaurant and lot 31 as a conference room in conformity with the certificate of classification

[10] The applicant's argument is as follows. A certificate of classification issued by the Noosa Shire Council dated 29 October 1992 permitted lot 29 to be used for restaurant purposes but restricted the use of lot 31 to use as a "conference room". The valuer's determination was erroneous in failing, contrary to the provisions of the lease, to value lot 29 as a restaurant and lot 31 as a conference room. Clause 5.20 of the lease obliges the lessee to comply with regulations, ordinances and by laws. It follows that the lessee can use lot 31 only as a conference room and the valuer should have valued it as such. The valuer's error can be detected in the second note at the foot of page 6 in which he states "the permitted use applies to `The whole of the Land'".

[11] It is argued also that the assertion "how and in what manner it chooses to use the demised area is at its discretion" in the second paragraph on page 11 of the determination is wrong.

[12] The applicant does not dispute that there is town planning consent for the use of lot 31 as a restaurant. Its point is that such use is unlawful in the absence of a building permit under the Building Act. The respondent accepts that there is no such permit but argues that the valuer has not erred in his approach, or if he has, the error is not one which results in a determination which has not complied with the terms of the lease.

[13] It is further submitted that the valuer's task was to arrive at the fair market rental for the premises, and the way in which he performs his role is not stipulated in the lease but is left to his skill and judgment.

[14] I can detect no error in the note referred to in paragraph [11] hereof. Clause 1.19 and item 2 of the first appendix to the lease describe the permitted use as "Licensed restaurant, bar, café and shop, convention and function room, pool room, billiard room and games room". There is no differentiation in the permitted use of lots 29 and 31.

[15] I do not consider that the applicant's reliance on cl 5.20 is soundly based. It is correct that the applicant is required to observe the requirements of statutes and subordinate legislation in relation to the use of the demised premises. But there is no contractual impediment to the applicant's use of lot 31 for restaurant purposes. Town planning approval exists. All that is required is building approval. The valuer found that "the highest and best use of the demised premises is for restaurant purposes". There is no challenge to the validity of that conclusion. He further concluded that "How and in what manner the Lessee chooses to use the demised area is at its discretion". That opinion, although criticised, is also correct if, as I consider to be the case, it is implicit in it that the lessee must act lawfully and in accordance with the terms of the lease.

[16] Under cl 5.23 the obligation is on the lessee to obtain all approvals necessary to permit any use of the demised premises intended by the lessee. The applicant, by one of its directors, swears that the applicant does not intend to use lot 31 for restaurant purposes. That may be accepted (subject to there being room for doubt about how to categorise the applicant's actual and intended use) but the valuer's assessment is concerned with the assessment of the rent hypothetical prospective tenants will be prepared to pay, not with an existing lessee's actual and intended use of the demised premises. The existing lessee's actual use of the demised premises may have some evidentiary value but it can hardly be determinative of the question of highest and best use.

[17] It is submitted by the applicant that it cannot be assumed that the necessary building approval will be obtainable at all or at a cost which warrants its being obtained. The valuer, however, as an expert, was entitled to draw on his expertise in order to form his conclusions in this regard. There is no evidence which shows his conclusions in this regard to be wrong.

[18] Moreover, even if the valuer could be shown to have committed factual errors in this regard, it does not follow that the determination would fail. The principles relevant to challenging the valuer's rental determination are discussed in the following passage from the reasons for judgment of McHugh JA in Legal & General Life of Australia Ltd v A Hudson Pty Ltd:[1]

"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 be 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 forms 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. 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". (emphasis added)

[19] That expression of principle has been referred to with approval or applied in a number of subsequent cases.[2]

[20] In Legal & General the instrument of lease expressly provided that the valuer's determination was final and binding. There is no such express stipulation in the lease but, in my view, McHugh JA's statement of principle nevertheless has application.

[21] In Strang Patrick Stevedoring Pty Ltd v James Patrick & Co[3] it was argued that McHugh JA's expression of principle did not apply where the lease did not provide that the valuer's determination was final. In rejecting the argument Giles J said:[4]

"But I do not think that it is necessary that there be an express provision that the determination be final and binding. Where the parties have agreed that the rent or the price named or described shall be that determined by a valuer (and always assuming, of course, that the valuer has acted honestly and impartially) the valuer's determination is not to be put aside simply because one of the parties does not like the result. It is intended to have some effect, and generally the effect is that it will fix the rent or the price: that is so whether or not the parties have expressly stated that the valuation will be final and binding".

[22] Santow J in Holt v Cox[5] concluded that whether a valuer's determination should be regarded as final and binding in the absence of an express provision to that effect depended on the implication of a term in that regard.[6] He was of the view that, in the absence of indication to the contrary in the relevant contract, the implication would normally be made where parties agree in writing that the relevant matter be determined by a valuer acting as an expert.

[23] In WMC Resources v Leighton Contractors[7] Ipp J, with whose reasons the other members of the court agreed, did not consider the stipulation that the valuer's determination be "final and binding on the parties" was "relevant to the basic principles" stated by McHugh JA in Legal & General v Hudson. Those principles, in his Honour's opinion, had general application to valuations which called for the making of a discretionary judgment as opposed to determinations arrived at by the application of "fixed or readily available standard criteria".

[24] The approach in Strang Patrick Stevedoring was queried in Bank of South Australia v S A Health Commission,[8] but is consistent with dicta in Mayne Nickless Ltd v Solomon,[9] Karenlee Nominees Pty Ltd v Gollin & Co Ltd[10] and with leading English authorities.[11]

The valuer erred in including an allowance for the benefit the lessee gains from the Exclusive Use Areas.

"Although not forming part of the demised premises, there is no doubt that the Exclusive Use Areas are currently being used by and are therefore of value to the Lessee.

One could argue that the Lessor is not entitled to charge rent on the Exclusive Use Areas as they are not owned by it, however Clause 21 of the Lease states that "the Lessor hereby grants to the Lessee for the exclusive benefit of the Lessee, their executors, administrators and permitted assigns and their invitees a licence to use such Exclusive Use Areas throughout the occupancy by the Lessee of the demised premises".

The Clause further states "such exclusive use areas are to be used for the purpose of the Lessee's permitted business under this Lease".

Although maybe not entitled to charge a specific rent for the Exclusive Use Area, a willing, knowledgeable and prudent Lessee would make some (financial) allowance for the use of these areas when assessing the rent it would be prepared to pay for the demised premises."

[26] The subject building units plan confers on the registered owner of lots 29 and 31 the exclusive use and enjoyment of specified parts of the common property for purposes including: toilet facilities; storing refuse; positioning of gas cylinders and other purposes associated with the respective uses of the lots; car parking and storage.

[27] The proprietor of lot 29 is also given exclusive use of designated boat mooring pens and has the exclusive right to conduct a catering business within "the building complex".

[28] The valuer considered that "a willing, knowledgeable and prudent lessee" would make some financial allowance for use of the Exclusive Use Areas in assessing the rate it would be prepared to pay. Accordingly he made an allowance in his determination "for the benefit the lessee gains from the Exclusive Use Areas". The applicant argues that he erred in this regard as the requirement under the lease was to determine the market rent for the "demised premises" and not other areas.

[29] It is pointed out that the demised premises is defined to mean lots 29 and 31 and it is further said that support for the applicant's submission can be derived from clause 1.7 of the lease which, in defining "common property", includes the "Exclusive Use Areas" in the common property.

[30] I can detect nothing in the terms of the lease which prohibits the valuer from taking into account, when determining market value, the benefits a lessee may derive from the exclusive use provisions of the building units plan. Those provisions confer rights in relation to the demised premises which have substantial potential value to a lessee and are plainly matters which a prospective lessee would take into account in deciding whether to enter into a lease and the amount of rent it would be prepared to pay. [12] They are as much a characteristic of the demised premises as its location, aspect and exposure to the street. Even if I am wrong in this conclusion there is nothing in either the evidence or in the valuer's determination which suggests that if the valuer erred in taking such benefits into account he failed to act in accordance with the terms of the lease. He has merely acted as an expert and applied his expertise.

The determination by the valuer is contrary to the Retail Shop Leases Act 1984

[31] The applicant's argument in this regard proceeds as follows. Clause 16.2 of the lease requires "fair market rental" of the premises to be determined but the lease does not define the term. The valuer, in his determination, adopted a definition of "fair market rental" used by the Australian Property Institute which conflicted with that contained in the Retail Shop Leases Act (1984) in that it took into account -

" the estimated amount for which premises should rent as at the relevant date, between a willing lessor and a willing lessee in an arms length transaction, wherein the parties had each acted knowledgeably, prudently and without compulsion and having regard to the usual market terms and conditions for leases of similar premises."

"10.(2) If provision is made in a retail shop lease for review of the amount of rent payable thereunder during the currency of the lease having regard to the market rent of the premises -

(a) the market rent shall be taken to be the rent that, having regard to the terms and conditions of the lease and such other matters that are relevant to the assessment of market rent, would be reasonably expected to be paid for the retail shop if it were unoccupied and offered for renting for the use to which the premises may be put in accordance with the lease".

[33] It is submitted that, as s 10(2) defines "market rent", it is not open to the valuer or the parties to a retail shop lease to provide their own definition of market rent.

[34] The applicant repeats its "exclusive use" argument, claiming that the valuer was not entitled to take the Exclusive Use Areas into account in determining market rental as the Act requires "a determination of market rental payable under a retail shop lease". The exclusive use areas, it is said, are not part of the "leased premises", they are "licensed areas" and cannot be taken into account.

[35] For similar reasons it is argued that the valuer could not comply with the requirements of s 10(2) if he valued lot 31 on the basis of a use inconsistent with the certificate of classification.

[36] Finally, it is asserted that the valuer failed to determine the rent "... to be paid for the retail shop if it were unoccupied and offered for renting for the use to which the premises may be put in accordance with the lease", as required by s 10(2).

[37] I reject the submissions in the preceding three paragraphs.

[38] For the reasons given earlier, a valuer determining market rent in accordance with the requirements of s 10(2) would be entitled to have regard to the benefits (if any) flowing from exclusive use areas. There is nothing in s 10(2) which requires rent determinations to be conducted on the artificial basis suggested by the applicant's argument. The valuer would also be entitled to have regard to any actual or potential use of the demised premises permitted by law at the time of the determination or which would be permitted at a subsequent time on the procuration of the necessary approvals. The basis of valuation under s 10(2) assumes an unoccupied premises and, presumably, contemplates that the hypothetical lessee will need to obtain whatever approvals are necessary in order to enable the carrying on of its business. Furthermore, s 10(2) defines "market rent" by reference to "the use to which the premises may be put in accordance with the lease". As discussed earlier, the permitted use is the same for lots 29 and 31 and include "licensed restaurant, bar, café and shop".

[39] Nor do I consider that the basis of valuation stated by the valuer has been shown to have any different practical effect to that provided for in s 10(2). Section 10(2), in my view, assumes "a willing lessor and a willing lessee in an arms length transaction (acting) without compulsion". It can be seen from p 11 of the determination that the valuer has assumed vacant possession. That is probably not surprising as he has quoted s 10(2) in full on p 7 of the determination under the heading "Act Details". It is implicit in that section of the determination, and from his statement of instructions, that he regarded s 10(2) as applicable to the task he was required to undertake.

[40] The respondent submits that s 10(2) has no application as it applies only where "provision is made... for review of the amount of rent payable thereunder during the currency of the lease" (emphasis added). It is contended that the task upon which the valuer was engaged under clause 16.3 is identified in paragraph 1 and is the determination of the rent for the first year of the term of the new lease. That, the respondent argues, is not a review of rent payable during "the currency of the lease".

[41] The fact that the assessment of market rental is made "at, or for the purposes of, the commencement of a new lease" does not prevent the assessment being in respect of rental payable "during the currency of the lease".

[42] There are, however, other reasons why it is difficult to conclude that s 10 of the Act has application to the facts under consideration.

[43] Upon the exercise of the second option (not more than six months and not less than three months prior to the expiration of the first extended term of the lease arising on exercise of the first option of renewal contained in the lease dated 23 September 1993 ("the existing lease") the applicant became entitled to be granted "a new lease" with a four year term commencing on the day after the expiration of the first extended term. The exercise of the option thus gave rise to an agreement for lease. One of its terms, by operation of clause 16.2, was that the rent for the first year of the four year term of the new lease be determined by a valuer.

[44] Section 10(1) and s 10(2) are not capable of applying to the operation of clause 16.2 of the existing lease. It provides for a review of the rent payable under the agreement for lease not for the rent payable under the existing lease.

[45] It is doubtful that the agreement for lease contains any provision for the determination of rent to be paid in the first year of its year term. Such rent stands to be determined by the "provision... made in" the existing lease. Clause 16.2 provides that the terms of the new lease are the same as the terms of the existing lease "with the exception of this clause which shall be omitted".

[46] Even if it could be said that provision for such rental determination is made in the agreement for lease, that provision would not appear to be one for "review of the amount of rent payable thereunder." The term "review", in the context of a rent review, connotes a determination which has reference to an existing rent. Clause 16.2 establishes both a new lease and a new rent.

[47] In reaching this conclusion I am conscious that interpretation of a statute is not merely a linguistic or semantic process and that the context of words used and the purpose of the statutory provisions must be borne in mind.[13] It might well be asked why the legislature would wish to exclude from the scope of the operation of the Act rent determinations upon exercise of options to renew. One possible answer is that the legislature did not regard it as appropriate to interfere with parties' freedom to set an initial rent at the commencement of a lease, whether or not that lease comes into existence as the result of the exercise of an option in an existing lease. Whatever the answer to this question may be, I think it would be inappropriate for me to strain the language of s 10(2) to include within its scope -

"provision ... made in a retail shop lease for review of the amount of rent payable [under a subsequent lease] during the currency of the [subsequent] lease" or so that it applies where "provision is made in a retail shop lease for [determination] of the amount of rent payable thereunder during the [first year of the term] of the lease."

[48] In view of the foregoing conclusions it is not necessary for me to resolve the other arguments raised by the parties.

[49] The remaining matter I must address is the argument that even if the 1984 Act did not apply, the task the valuer was instructed to perform was to determine the "fair market rental" of the demised premises "in accordance with clause 16.2 of the ... lease... and Section 10 of the Retail Shop Leases Act 1984". It was submitted that, in light of these instructions, if the valuer failed to comply with the Act's requirements he failed to value in accordance with the contract. It does not seem to me that the point leads anywhere. If there was any agreement as to such instructions (and that does not seem to be established) it would only require the valuer to value in accordance with cl 16.2 and s 10. It would not make it a term of any agreement that there be compliance with other provisions of the Act. I have already found that the evidence does not disclose that the valuer failed to comply with the requirements of s 10(2).

[50] For the above reasons, I order that the application be dismissed. I will hear submissions on costs.

[1] (1985) 1 NSWLR 314 at 335-6

[2] including Goldspa Australia Pty Ltd v Council of the City of Sydney [2001] NSWCA 246 at paras 31-33; Wickham Properties Pty Ltd v Astor Motel Pty Ltd [1994] 1 Qd R 211 at 214; Kaniwah Holdings Pty Ltd v Holdsworth Properties Pty Ltd [2002] NSW CA 180 at paras 45, 50 and Holt v Cox [1997] NSWSC 144; (1997) 23 ACSR 590 at 595.

[3 ] (1993) 32 NSWLR 583.

[5] (1994) 15 ACSR 313 at 333.

[6] The implied term approach was adopted in Horowitz-Graham Books Pty Ltd v Mid-City Centre Pty Ltd (1990) NSW Conv R 55-514.

[8] (1996) 65 SASR 409 at 415.

[9] [1980] Qd R 171.

[10] [1983] VicRp 61; [1983] 1 VR 657.

[11] Barber v Kenwood Manufacturing Co Ltd and Whinney Murray & Co (1997) 1 Ll Rep 175 and Campbell v Edwards (1976) 1 WLR 403.

[12] cf Re McCafferty [1994] 2 Qd R 538 at 544.

[13] See eg the observations of Steyn LJ in Arbuthnott v Fagan (unreported) 30 July 1993 CA set out in Charter Reinsurance Co Ltd v Fagan [1977] AC 313 at 326.