DATE OF SUBMISSION OF APPLICANT'S WRITTEN SUBMISSIONS

DATE OF RECEIPT OF RESPONDENTS' WRITTEN SUBMISSIONS

Eastern Central Real Estate PTY Ltd v Dubravko Jurkovic & Bojan Krajcar (Building and Property) [2021] VCAT 1041

1 The Tribunal, having determined that the applicant is entitled to a declaration, lists the proceeding for a directions hearing on 7 October 2021 at 9:30am at which the precise terms of the declaration and any other appropriate orders can be determined.

2 The applicant has leave for costs and reimbursement of fees. Any such applications can be made at the directions hearing.

1 Eastern Central Real Estate Pty Ltd (ACN: 101 415 034) (the Managing Agent) is the Managing Agent of a 23-lot subdivision at 52-54 George Street, Doncaster East, Victoria (the Property). The Property is conducted as a nursing home. The lots comprising the subdivision are owned by a number of individual lot owners. The first respondent, Mr Dubravko Jurkovic, is a trustee of his superannuation fund, which holds 3 lots. The second respondent, Bojan Krajcar, is personally a lot owner and is also a director and shareholder of the trustee of his superannuation fund, Krajcar Family Pty Ltd, which holds another lot.

2 The lots are leased by the respective lot owners to the proprietors of the nursing home, Mr Patrick Brophy and Ms Ingrid Brophy (the Tenants). The Managing Agent collects the rent and outgoings payable by tenants under the respective leases, and has the responsibility of dispersing rent and outgoings to the lot owners in accordance with their respective entitlements. At the heart of the case is a dispute between Mr Jurkovic and Mr Krajcar on the one hand and all the other lot owners (the Other Owners) on the other hand as to the manner in which the rent is to be distributed.

3 The position of the Other Owners is that the rent is to be determined in accordance with an agreement struck between all of owners and the Tenants at a mediation conducted by the Tribunal and recorded in terms of settlement dated 8 October 2013 (the Terms of Settlement). Under the Terms of Settlement, the rent is to be allocated to the individual lot owners in proportion to their individual lot entitlement. Mr Jurkovic, through his superannuation fund, will be disadvantaged in a relatively minor way if the rent is distributed in this way, and Mr Jurkovic contends that the rent is to be distributed in the manner set out in his lease. Mr Krajcar directly, and indirectly through his superannuation fund, be heavily disadvantaged if the rent is distributed in the manner set out in the Terms of Settlement, and he also says the rent is to be distributed in the manner set out in his lease.

4 The Managing Agent has been threatened with action if it distributes the rent in accordance with the Terms of Settlement. The Managing Agent has come to the Tribunal seeking directions.

5 The hearing began before me on 7 April 2021 and continued for the next two days. As by the end of the third day the hearing had not concluded, it was adjourned part heard until 16 April 2021. The proceedings finished that day, but the parties were given leave to file written submissions.

6 The applicant filed closing submissions dated 11 May 2021, and each of the respondents filed closing submissions on 1 June 2021.

7 At the hearing, the Managing Agent was represented by Mr Luke Virgona of counsel. A director of the Managing Agent, Mr George Mash, gave evidence. Mr Jurkovic represented himself, and gave evidence. Mr Robert Glavas of counsel appeared on behalf of Mr Krajcar. Mr Krajcar gave evidence.

8 All the Other Owners together with the Tenants (Mr Brophy and Ms Brophy) were joined as parties to the proceeding. The Tenants advised the Tribunal before the hearing that they would not be participating. A number of the Other Owners did attend during the hearing, and on the final day a number of them gave evidence. The individuals who gave evidence were Mr A Interlandis, Mr M F Vella, Mr V H Varas, Mr R D Vimpani, Mr S A Kuzemi, Mr M J Williams, Ms S M Williams and Ms B Hetherington. After the hearing, Mr Interlandis took the trouble to file a submission in response to the respondents' final submissions.

9 In its amended points of claim the Managing Agent principally seeks:

(a) an order pursuant to s 184(2)(k) of Australian Consumer and Fair Trading Act 2012 (the ACLTFA) restraining Mr Jurkovic and Mr Krajcar from interfering with, or otherwise preventing, the applicant from distributing the rental proceeds in accordance with clause 22.7(v) of the Master Lease.

(b) a declaration pursuant to s 124 of the Victorian Civil and Administrative Tribunal Act 1998 (the VCAT Act) that the Managing Agent is entitled to distribute the rental proceeds in accordance with the proportions set out in clause 22.7(v) of the Master Lease. The Managing Agent also seeks cost and any other order that the Tribunal deems appropriate.

10 During the hearing, the Managing Agent sought to amend the relief sought by asking for two further orders. The respondents objected to both proposed amendments. In the event, I allowed one further order to be sought, namely an order preventing Mr Jurkovic and Mr Krajcar. from representing to third parties that they have authority to act on behalf of the lot owners of the 23 lots.

11 By a lease dated 6 October 2010, the Tenants took a lease of the Property from Calipman Pty Ltd (Calipman). At the time, Calipman was not the registered proprietor of all the lots. It was the registered proprietor of lots 1, 10 and 23 only. The Tribunal assumes that at the time Calipman had been authorised by the lot owners other than itself to enter into the lease. At the time Calipman also held a lease of the common property from the owners' corporation.

12 Disputes arose between the parties in relation to their respective legal entitlements, which resulted in a proceeding at the Tribunal. There was a mediation, and a settlement was achieved which was reflected in terms of settlement signed on 8 October 2013 (the Terms of Settlement). As the Terms of Settlement are fundamental to the dispute which has arisen, it is necessary to examine its terms in some detail.

13 The operative parts of the Terms of Settlement included the following:

1. The lease made between the Tenants and Calipman would be surrendered at settlement.
2. All leases made by Drewmark Pty Ltd (a company which shared a director with Calipman) would be surrendered at settlement.

1. The Tenants were to enter into a new lease with each registered proprietor, on specified terms.

1. Calipman would surrender its lease of the common property.
2. The lot owners would appoint an owners corporation manager to manage the common property.
3. If any registered proprietor sold or assigned a lease the parties must incorporate all necessary terms to ensure any purchaser or assignee was bound by the Terms of Settlement.

14 The Terms of Settlement provided that the new lease entered into between the Tenants and each registered proprietor would contain the following terms:

1. The starting rental for the entire property would be $212,000 plus GST.
2. The outgoings would be borne by the Tenants.

1. The lease would commence on 24 November 2013 and would be for a term of five years, but they would be five further options of five years each.

1. Annual increases of rent would be at CPI as set out in the current lease between the Tenants and Calipman, with a market review at each option.
2. The terms of the lease would otherwise be identical to the current lease between the Tenants and Calipman.
3. There would be a market valuation at the commencement of each further term.
4. The clause in the lease between the Tenants and Calipman concerning market valuation would not be reproduced in the new lease, but a new clause would be inserted requiring the valuer to determine the market value "by assessing the Property as a whole property and the individual rent to be received by each lot owner is to be determined as a fraction of that amount equivalent to that lot owners lot entitlement (as set out in the plan of subdivision)."

15 The parties to the Terms of Settlement also agreed that the individual leases (to be made between each lot owner and the Tenants) would contain provisions to the following effect:

1. A single rental would be agreed for the entire Property (including the common property) and the rent due to each registered proprietor of a lot would be proportionate, as agreed by the Terms of Settlement.
2. A licensed real estate agent would be appointed to manage the Property, chosen by a simple majority of owners, or in the event of disagreement, the president of the of the real estate institute (sic).

1. Any and all costs related to ownership of the building or any responsibility of a lot owner as a landlord was to be borne according to lot liability as (as per the plan of subdivision).

1. At all times that the leases to the Tenants remained on foot, "it is a fundamental term of each lease that the agent remain in place and have full authorisation to negotiate and act on behalf of each registered proprietor."
2. All notices due under the lease or any law could only be sent to the Agent (on behalf of any registered proprietor).
3. Each registered proprietor would share the cost of the Agent in proportion according to lot liability (as per the plan of subdivision).
4. Should a party fail to execute a lease in line with these Terms of Settlement, within 21 days any other party could apply to the Tribunal for the lease to be signed by the Principal Registrar on that party's behalf.
5. The registered proprietors agreed that for all expenses and decisions expected to be less than $1,000, the agent was authorised to make a decision on behalf of all owners and that all owners would be bound by the decision.
6. In the event that a decision or expense was expected to be more than $1,000, the Agent would seek instructions and be authorised to act if he received instructions from a simple majority. In the event of disagreement (either by stalemate or an inability to reach a full majority), the agent would be authorised to make a decision on behalf of all registered proprietors in accordance with the legal obligations of a retail premises landlord and the owners agreed to fully indemnify the agent for any such decision.

16 An important feature of the arrangement put in place by the Terms of Settlement was that the distribution of rent amounts each of the lot owners in accordance with clause 22.7 of the new leases was to take effect only after the renewal of the respective leases for a further term. For the initial five year term, the following arrangements would apply:

1. Of the agreed annual rental of $212,000, Calipman in respect of its three units (lots 1, 10 and 23) would receive $62,000 plus GST in total.
2. The remaining registered proprietors would receive $7,500 plus GST per lot, but each of these figures would be increased in line with CPI;

1. The Tenants were to pay an agreed figure in respect of rent and an agreed figure in respect of outgoings into trust.

1. Out of the sum paid into trust, $9,000 would be paid to each of the 20 registered proprietors other than Calipman (a total of $180,000), and the balance would be paid to Calipman. All such payments would be made by 31 October 2013.

17 It is to be noted that the Terms of Settlement did not refer to a Master Lease. However, a lease incorporating all the terms mandated by the Terms Settlement was prepared for unit 1, and was executed by the Tenants and Calipman on 24 December 2013. It was put into evidence. Reference to additional provision 22.6 confirms that a single annual rental amount was to be agreed for the Property (the Property Rent) and the rent due to each registered proprietor would be a proportion of the Property rent in accordance with the annexure to the lease marked "Schedule Three". Consistent with this clause, Item 6 of the Schedule to the lease provided that the starting rent was to be $11,300 plus GST per annum (being the landlord's agreed proportion of the Property Rent of $212,000 plus GST per annum). Furthermore, additional provision 22.7 made the required changes to the market review clause. Specifically, it deleted lease conditions 11.1.2, 11.1.3 11.1.6 (b) 11.3 11.5-which referred to market valuation, and substituted a new clause 22.7(v) which accurately reflected the market review clause set out in the Terms of Settlement.

18 It seems that the lease for unit 1 made between the Tenants and Calipman in December 2013 was used as a template for a number of other leases. It is not necessary to examine every lease put into evidence to determine whether it complied with the Terms of Settlement, because the only lot owners who are complaining about the terms of any of their leases are Mr Jurkovic and Mr Kajcar.

How Mr Jurkovic became involved in the property

19 Mr Jurkovic prepared a witness statement dated 31 March 2021. He adopted this of the hearing, and also gave oral evidence and was cross-examined. Mr Jurkovic gave evidence that he and his wife, as trustees of the Jurkovic Superannuation Fund, purchased units 1, 10, and 16 from Calipman in 2014. The lease for unit 10 made between the Tenants and Calipman on 24 December 2013 complied with the Terms of Settlement, and the lease for unit 16 also complied with those Terms. Mr Jurkovic also deposed that he had also acquired unit 23 from Calipman, but later sold this unit 23 to Mr Krajcar.

20 The initial term of the new leases expired in October 2018. In around April 2014 the matter of the renewal of the leases was raised at an annual general meeting of the Owners Corporation for the Property. Some two months later, the then managing agent, Teska Carson, wrote to each lot owner seeking authority to act in the lease renewal process. The correspondence pointed out that the respective lot owners' entitlements to rent would be altered upon renewal of their lease.

21 On 16 August 2018, the Tenants' solicitors wrote to Tesco Carson advising that the Tenant considered that rent then being paid to be "a fair market rent" but suggested that the commencing rent for the renewed term should be increased by CPI. That proposal was restated on 22 August 2018 when the Tenants, through their solicitors, exercised the option for the first further term of each of the leases.

22 The next development was that Teska Carson on 24 August 2018 wrote to all the lot owners, noting that they had received insufficient approval from lot owners to act in the renewal process, and would not be involved in that process.

23 On 13 November 2013, Teska Carson resigned as managing agent. Nothing turns on this however, because, as Mr Krajcar pointed out in his submissions, Teska Carson gave a 90 day notice of resignation, and accordingly they were still the managing agents until February 2019.[1]

24 David Frankel of Tesco Carson wrote to the Tenants on 20 November 2018 asserting that the leases provide for "a rental increase by CPI as of 24 November 2018".

25 This correspondence gives rise to one of the issues in this case, as Mr Krajcar asserts that this email created a binding agreement that the rent for the first year of the further term of the leases was to be increased by CPI only, with the consequence that clause 22.7 of the leases no longer had any operation.

26 On 5 February 2019, the applicant was appointed as the new managing agent for the property

27 The key order sought by the Managing Agent is a declaration pursuant to s124 of the VCAT Act that it is entitled to distribute the rental proceeds under each of the respective leases in accordance with clause 22.7(v) of the leases. I accept the submission made on behalf of Mr Krajcar that if the declaratory relief is refused, the injunctions sought by the Managing Agent are unjustifiable[2]. Because the Managing Agent's submissions responded to the manner in which Mr Jurkovic presented his defence to the claim of the hearing, it is convenient to deal with the arguments raised by the Managing Agent after Mr Jurkovic's defence to the claim has been considered.

MR JURKOVIC'S DEFENCE TO THE MANAGING AGENT'S CLAIM

28 Mr Jurkovic contends that the Managing Agent should not distribute the rent in accordance with each lot owner's entitlement as required by the Terms of Settlement because this is not consistent with the leases attached to the contracts of sale under which the superannuation fund acquired its units from Calipman. In the witness statement which he adopted at the hearing, at [11], sets out the differences between the lease made between the Tenants and Calipman in December 2013 (which he refers to as the "so-called Master Lease") and the leases he alleges that he and his wife signed. For instance in their lease, the market review clause is referred to in item 22.7 whereas in the Master Lease it is in item 22.8. In addition, all references to the Terms of Settlement have been erased from their leases. Mr Jurkovic says that under their leases, the proportion of the Property Rent due to each registered proprietor is to be found in Schedule Three.[3] He also says that that he has been advised that because he and his wife never received a "complete" lease, through no fault of their own, they were not bound by the Terms of Settlement. Whether this argument is a valid one is central to the case.

29 It is clear why the leases that Mr Jurkovic and his wife received were so different to the so-called Master Lease. He said in his oral evidence that the leases he received were "forged" on behalf of Calipman.

30 A common theme of the evidence given by the Other Owners who attended the hearing and gave evidence was that Mr Jurkovic should have pursued Calipman rather than attempted to frustrate the operation of the Terms of Settlement. Under cross-examination, Mr Jurkovic advised that he had not pursued Calipman because of the cost of doing so. He said that because of the marginal loss his superannuation fund would suffer if the rent distribution arrangement set out in the Terms of Settlement was applied to its units, it would not be worth the fight.

31 Although Mr Jurkovic's case rested on the single proposition that the rent for his units was to be determined by the application of Schedule Three of his leases rather than the arrangement set out in the Terms of Settlement, he raised a number of arguments.

32 Although it was not his first point, he raised a jurisdictional issue, querying why the Retail Leases Act 2003 (the RLA) was being referred to. His concern was based on his understanding that it applied to disputes between landlords and tenants, rather than disputes between landlords who hold leases with a common tenant. This point is misconceived, because the Managing Agent is seeking relief not under the RLA but under the ACLFTA.

33 One of the first points raised by Mr Jurkovic in his final submissions was that it was "ridiculous" for the Managing Agent to seek an injunction restraining him from distributing the rental proceeds in accordance with clause 22.7(v) of the "Master Lease" as he has no power to prevent the Managing Agent from doing whatever it wants to do with the rent.[4] In support of this submission, he said that the Managing Agent had displayed its power by deciding to "freeze" the rent and then "unfreeze" some rent and pay the balance into our trust account.

34 Then Mr Jurkovic made a series of related criticisms of the principal of the Managing Agent, Mr George Mash. It was asserted that Mr Mash had "arbitrarily decided to take the VCAT role upfront and made his own ruling" that the Jurkovics were not entitled to the rents according to their leases. Hwas not working in the Jurkovics' financial interests but was favouring other lot owners and "bluntly ignoring his fiduciary duties". Critically, Mr Jurkovic asserted that it was impossible for the Managing Agent "to serve the best interest of all owners if there is a dispute between the lot owners".

35 I consider that in making these attacks, Mr Jurkovic amply demonstrates why it was necessary for the Managing Agent to bring this proceeding. In circumstances where the lot owners as a group could not resolve the dispute between Mr Jurkovic and Mr Krajcar on the one hand and the Other Owners on the other, it was necessary for the Managing Agent to seek a declaration as to the efficacy of the Terms of Settlement to bind all parties.

36 Mr Jurkovic makes an entirely separate attack on Mr Mash later in his final submissions, asserting that Mr Mash sent abusive emails to him and lied behind his back in connection with a campaign conducted by Mr Mash to win the support of members of the Owners Corporation to become managing agent.[5] . This attack is irrelevant to the current dispute, and no more need be said about it.

37 Mr Jurkovic also alleges that Mr Mash prevented him from exercising his duties as chairperson of the Owners Corporation.[6] This too is irrelevant to the proceeding, and can be put to one side.

THE MANAGING AGENT'S ARGUMENTS AS TO WHY THE DECLARATION SHOULD BE MADE

38 The Managing Agent's argument as to why the Tribunal should make a declaration that it is entitled to distribute the rental proceeds under each of the respective leases in accordance with clause 22.7(v) can be summarised as follows:

1. A dispute between the then lot owners was settled in October 2013 by the execution of Terms of Settlement.
2. The Terms of Settlement require the Tenants to enter into new leases with each lot owner.

1. Each new lease was to contain specific clauses including the clause relating to the assessment of rent.

1. That clause found its way into the leases as clause 22.7(v) and the plan of subdivision in respect of the Property (Plan of Subdivision 507062C) was included as Schedule 4 to the leases.
2. Although for the initial five year term the rental received for the Property was to be divided among the lot owners in accordance with Schedule three, the respective in entitlements to rent after renewal of the lease would be governed by clause 22.7(v).
3. All the leases have been renewed, and clause 22.7 "must have some work to do".
4. All the Jurkovic leases produced at the hearing contained the correct version of clause 22.7 and Mr Jurkovic has failed to produce a lease which does not contain the correct clause.
5. In any event, Mr Jurkovic is bound by clause 22.7 as mandated by the Terms of settlement because:

1. As clause 22.7 relates to rent, it is a covenant which affects the value of the demised premises and accordingly is an obligation which relates to the subject matter of the lease;

1. By operation of s142 the Property Law Act 1958 (the PLA), clause 22.7 binds the reversionary estate. 2. By operation of the common law, and s149 of the PLA, Mr Jurkovic through his superannuation fund became bound by the covenant.

39 I found the evidence of Mr Jurkovic about the leases he held to units 1, 10 and 16 to be inconsistent with his proposition that clause 22.7 had not been embodied in these leases. I have already noted that a lease incorporating all the terms mandated by the Terms of Settlement was prepared for unit 1 and was executed by the Tenants and Calipman on 24 December 2013. It was put into evidence. This lease appears to have been used as a template for a number of other leases. I have also referred above to evidence that the lease for unit 10 made between the Tenants and Calipman on 24 December 2013 complied with the Terms of Settlement, and the lease for unit 16 also complied with those Terms.

40 In its closing submissions, the Managing Agent directly asserted that each of the leases produced by Mr Jurkovic to the Tribunal contained the correct version of clause 22.7(v)[7]. Moreover, it was noted in those submissions that Mr Jurkovic was given an opportunity to produce whatever leases he had in his possession which it had clauses different to those contained in the leases of the Other Owners. He did not do this.[8]

41 While the Managing Agent's point is well made, I think it does not address Mr Jurkovic's main concern, which was that he says the leases that were attached to the contracts by which his super attenuation fund acquired its units did not contain the Terms of Settlement and that all references to the Terms had been erased[9].

42 In the circumstances, I will not determine the case as against Mr Jurkovic on the basis that he has failed to establish that the leases his superannuation fund holds are different to those held by the Other Owners. Rather, I will determine the case on the basis of the Managing Agent's alternative argument.

43 The first limb of the alternative argument is that clause 22.7 relates to rent, it is a covenant which affects the value of the demised premises. It clearly concerns the demised land: see Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (Gumland)[10] and accordingly is an obligation which relates to the subject matter of the lease.

44 The second limb of the Managing Agent's case is that s142 the PLA applies. Reference to this provision makes it clear that the point is well made. S 142(1) of the PLA provides:

The obligation under a condition or of a covenant entered into by a lessor with reference to the subject-matter of the lease shall, if and as far as the lessor has power to bind the reversionary estate immediately expectant on the term granted by the lease, be annexed and incident to and shall go with that reversionary estate... and may be taken advantage of and enforced by the person in whom the term is from time to time vested by conveyance, devolution in law, or otherwise; ...

45 The effect of this provision, in plain English, is that when Calipman entered with the Tenants into the lease over unit 1, for example, which contained clause 22.7 in the form mandated by the Terms of Settlement, and annexed the Terms of Settlement, the arrangement regarding rent set out within clause 22.7 ran with the land, and bound the subsequent purchasers.

46 If this result did not flow from the operation of s 142 of the PLA, it would arise in any event by operation of the common law: see Gumland.[11]

47 For these reasons, I find that Mr Jurkovic, through his superannuation fund, cannot avoid the effect of clause 22.7 and the Terms of Settlement. They affect each of the units at the Property his superannuation fund holds.

48 Although it is not critical to my decision, I note that Mr Krajcar's opposition to the making of the orders sought by the Managing Agent is not based on any argument that the leases that he and his company have with the Tenants are not subject to clause 22.7 as mandated by the Terms of Settlement. On the contrary, he accepts that the Terms of Settlement run with the land. He raises different arguments, which I will examine shortly.

49 Mr Krajcar is involved in the Property in two ways. Firstly, he and his wife as trustees of the Krajcar Doncaster Superannuation Trust purchased unit 23 from Mr Jurkovic in 2016. He and his wife purchased unit 18 in 2018. Mr Krajcar says there is no issue with the lease of unit 18. The lease of unit 23 has the same issues as the leases of the other properties owned by Mr Jurkovic. This is not surprising, as Mr Krajcar purchased the unit from Mr Jurkovic, who in turn purchased it from Calipman.

50 Mr Krajcar advances 2 defences[12]. Firstly, he says clause 22.7(v) of the leases (including those in which he has an interest) does not comply with s 35(2) of the RLA. Alternatively, he contends that as a result of an agreement entered into between the Tenants and Teska Carson in their capacity as managing agent, the rent for the Property was fixed for the first year of the further term. The proper construction of the leases precludes the Managing Agent from distributing the rental proceeds in proportion to the lot owner's entitlements as set out in the plan of subdivision.

Preliminary point concerning the application of the RLA to the lease for unit 23

51 During the hearing, I raised the question of whether the lease for unit 23 was a retail premises lease have regard to its use as a residence. The Managing Agent made no mention of the issue in its written submissions. Mr Krajcar, however, rose to the challenge and did make written submissions on the topic.

52 Mr Krajcar highlighted that under s 11(2) of the RLA, the Act applies to a lease of retail premises (as defined in section 4) at the time the lease is entered into or renewed. He points out that under s 9(1)(a) of the RLA, each lease was deemed to have been renewed when the option for renewal was exercised. As the Tenants remained in possession of the premises, the lease was deemed to have been entered into on the commencement of the further term (in October 2018).

53 Mr Krajcar then summarised relevant parts of Mr Jurkovic's evidence, which was to the effect that three rooms in the premises were used as bedrooms for the facility manager and his wife and their children and the fourth room was used by employee nurses performing night shifts or by Mr Brophy. The kitchen area contained a switchboard on which call for assistance from residents could be monitored. It was submitted that on the basis of this evidence it could be inferred that the primary purpose of the facility was to provide accommodation to the facility manager and the night shift nurses.

54 It was also pointed out that favourable direct evidence as to the use of the premises was contained in the text of the lease itself, was provided at Item 15 of the Schedule that the permitted use is "supported residential service" and that the RLA applied.

55 In the circumstances, I find that the RLA does apply to the lease for unit 23.

56 To make sense of this defence, it is necessary to have regard to the text of clause 35 of the RLA. It reads:

(1) If a retail premises lease provides for a review of the rent payable under the lease or under a renewal of the lease, the lease must state -

(b) the basis or formula on which the reviews are to be made.

(2) The basis or formula on which a rent review is to be made must be one of the following -

(b) an independently published index of prices or wages;

(d) the current market rent of the retail premises;

(e) a basis or formula prescribed by the regulations.

Note For reviews based on the current market rent of the retail premises, see section 37.

(3) A provision in a retail premises lease is void to the extent that it purports to preclude, or prevents or enables a person to prevent, the reduction of the rent or to limit the extent to which the rent may be reduced.

(4) However, subsection (3) does not apply to a provision that uses -

(a) a basis or formula referred to in subsection (2)(a), (b) or (c); or

(b) a prescribed basis or formula referred to in subsection (2)(e) that is also prescribed as a basis or formula to which subsection (3) does not apply.

(5) A rent review is to be conducted as early as practicable within the time provided by the lease. If the landlord has not initiated the review within 90 days after the end of that time, the tenant may initiate the review.

(6) A rent review provision in a retail premises lease is void if the lease does not specify how the review is to be made.

(7) If a provision in a retail premises lease that provides for a review of the rent payable under the lease does not comply with subsection (2) or is void under subsection (6), the rent is to be -

(b) if there is no agreement within 30 days after the landlord gives the tenant, or the tenant gives the landlord, a written notice specifying an amount of rent for the purposes of the review, the amount determined by a specialist retail valuer appointed by the Small Business Commission as the current market rent of the retail premises. (8) The landlord and tenant are to pay the costs of a valuation referred to in subsection (7)(b) in equal shares.

(8) The landlord and tenant are to pay the costs of a valuation referred to in subsection (7)(b) in equal shares.

57 Mr Krajcar, in his submissions, advances his argument on the basis of the lease to unit 23, which he says is not materially different to the leases held by the Other Owners. Clause 22.7 reads:

For the assessment of market value of the Property, the valuer appointed by the parties or by the REIV or as appropriate is to determine the market value by assessing the Property as a whole property and the individual rent to be received by each lot owner is to be determined as a fraction of that amount equivalent to that lot owners lot entitlement (as set out in the plan of subdivision)'.

58 Mr Krajcar reproduces clause 22.7(v) as it appears in the lease to unit 23. It is essentially identical to that contained in the Terms of Settlement save for the facts that:

1. the phrase "each lot owner" is replaced by the phrase "each Registered Proprietor"; and
2. the plan of subdivision is identified specifically as plan of subdivision 507062C which is annexed to the Lease and is marked 'Schedule Four'.

59 Mr Krajcar then prepares his ground by referring to the definition of "the Property", which is: Lots 1-23, 52-54 George Street, Doncaster East Vic 3109 (being Volume:1066 Folios: 512-534 on Plan of Subdivision 507062C) including all common property.

60 Mr Krajcar also refers to Property Rent" which is defined as: the single agreed annual rental amount for the Property (as specified in item 6 and subject to item 16).

61 Mr Krajcar goes on to contend that the procedure established by clause 22.7(v) involves a two step process. Firstly, the Property Rent has to be established. Then, the rent to be received by each unit is calculated by multiplying the Property Rent by each unit's lot entitlement divided by the total lot entitlement. He demonstrates that under this formula, in the first year of the further term, the rent payable in respect of unit 23 will be $26,338.04 plus GST per annum, which is significantly less than the rental of $37,100 plus GST per annum payable during the initial term which was fixed by Schedule Three of the lease.

62 Mr Krajcar then turns his attention to the provisions of s 35 of the RLA. There is no issue under s 35(1). However, he argues that a problem arises under s 35(2), because the only one of the five potentially available bases for a rent review is (d), namely "the current market rent of the retail premises".

63 The problem identified by Mr Krajcar is that the term "retail premises" is defined in s 4(1) of the RLA as:

premises, not including any area intended for use as a residence, that under the terms of the lease relating to the premises are used, or are to be used, wholly or predominantly for-

1. the sale or hire of goods by retail or the retail provision of services...

64 It follows, submits Mr Krajcar, that the retail premises referred to in s 35(2)(d) must be a premises which is the subject matter of the lease. This is not the case here, as the Property is not the subject matter of the lease. Accordingly, it is contended that clause 22.7(v) does not provide for a review to the current market rent of a retail premises.

65 Section 35(7) operates where a provision in a retail premises lease that provides for a review of the rent payable under the lease does not comply with subsection (2). Where s 35(7) is enlivened, the rent is to be as agreed between the landlord and tenant or the amount determined by a specialist retail valuer appointed by the Small Business Commission as the current market rent of the retail premises. The Tribunal is accordingly invited to conclude that the proper procedure is for the parties to follow s 35(7)(b)[13].

The Managing Agent's response to the section 35 argument

66 The Managing Agent's response is that even if Mr Krajcar's argument in respect of s35(2) is accepted, s 35(7) provides an answer to the argument. The provision empowers the Tribunal to strike down that part of clause 22.7(v) which deals with rent determination but still uphold the second part of the clause which deals with the manner in which the rent is to be distributed.

67 The Managing Agent invites me to accept that the two parts of clause 22.7(v) have different objectives. The Managing Agent does not label the different steps, but it is convenient to note that Mr Krajcar's adopts an identical analysis in his submissions, at [42], and refers to the first step as the "valuation term" and the second step as the "distribution term".

68 The first characterisation is clearly justified, but I do not accept the second. The second part of clause 22.7(v) in the unit 23 lease provides:

the individual rent to be received by each Registered Proprietor is to be determined as a proportion of that amount equivalent to that Registered Proprietor's lot entitlement (as set out in the plan of subdivision 507062C annexed to this Lease and marked 'Schedule Four').

69 In my view, it is clear that the second step in clause 22.7(v) is not just concerned with how the rent is to be distributed. It is also concerned with the determination of the rent to be received by each Registered Proprietor in respect of their particular lot.

70 As each particular lot is the subject of a retail premises lease, I find that clause 22.7(v) operates as a formula for the determination of the current market rent of retail premises and accordingly it falls within s 35(2) of the RLA.

71 This deals with the first of the submissions raised by Mr Krajcar.

The Managing Agent's fall-back argument based on s 37 of the RLA

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 subsections (2) to (6).

73 Section 37(2) of the RLA sets out a number of rules to be applied when the current market rent is being assessed. Section 37(3) provides:

If the landlord and tenant do not agree on what the amount of that rent is to be, it is to be determined by a valuation carried out by a specialist retail valuer appointed by -

2. if there is no agreement, the Small Business Commission -

and the landlord and tenant are to pay the costs of the valuation in equal shares.

74 The Managing Agent submits that s 37 of the RLA applies and that s 37(3) allows the parties to agree what "current market rent" means.

75 Mr Krajcar does not grapple with this submission about s 37(3), because he contends that s 37 does not apply. It does not apply because the leases do not provide "for a rent review to be made on the basis of the current market rent of the premises" which is the gateway established by clause 37(1).

76 I have found above that clause 22,7(v) does establish a formula for a rent review to be made on the basis of the current market rent of the premises, and it follows that I am satisfied that s 37 does apply.

77 Having established that, I highlight that s 37(3) clearly establishes a two-stage process. Firstly, the landlord and the tenant must have an opportunity to agree on what the amount of the rent is to be. Only if agreement cannot be determined, then it is to be determined by a valuation carried out by specialist retail valuer.

78 I accordingly accept the Managing Agent's submission that the parties are entitled to agree, under s 37(3), the rent. This is an important point, which I refer to below.

79 Mr Krajcar's second argument is premised on the proposition that by an agreement the Tenants and the owners through Teska Carson agreed that the Property Rent for the first year of the further term. It is highlighted that Teska Carson had "full of authorisation to negotiate and act on behalf of" the lot owners under clause 22.9 (iii) of the leases. The evidence for the agreement is said to exist in Teska Carson's email to the Tenants dated 20 November 2018 under which it was stated that the rent as of 24 November 2018 would increase by CPI, the Tenant's subsequent payment of rent on that basis, and Teska Carson's unqualified acceptance of that rent.

80 The Managing Agent does not appear to dispute that Teska Carson agreed the Property Rent for the purposes of clause 22.7(v).

81 Mr Krajcar goes on to highlight that the two-step process envisaged by clause 22.7(v) of the leases is linked by the conjunctive "and". He contends that the second step is contingent upon the first step. He submits, at [43]:

Put another way, the Property Rent is only apportioned according to lot entitlement under the distribution term if the parties have first engaged a valuer to determine the market value of the Property. The interdependency is reinforced by the use of the word "that amount" in the distribution term, which is a reference to the value of market valuation of the Property in the valuation term. This interdependency also means that the terms to be excised from each other and retain an independent meaning...

82 In support of his argument, Mr Krajcar highlights that the placement of the term within clause 22.7, which is headed "Market review" indicates the connection of the distribution mechanism to the market review procedure, "the contingent distribution term is not enlivened."

83 The upshot, Mr Krajcar contends, is that the Tenants and the lot owners have agreed on the Property Rent, but the lot owners do not have an agreement as to how the rent is to be split.

84 The Managing Agent begins its submissions on this argument by referring to the legal principles applicable to the construction of a commercial contract and set out the following passages from the High Court decision in Ecosse Property Holdings Pty Ltd v Gee Dee Nominees[14], which was a case concerning the construction of a farm lease:

16 It is well established that the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean, rather than by reference to the subjectively stated intentions of the parties to the contract. In a practical sense, this requires that the reasonable businessperson be placed in the position of the parties. It is from that perspective that the court considers the circumstances surrounding the contract and the commercial purpose and objects to be achieved by it.

17...as was pointed out in the joint judgment in Electricity Generation Corporation v Woodside Energy Ltd, that the court is entitled to approach the task of construction of the clause on the basis that the parties intended to produce a commercial result, one which makes commercial sense.

85 The Managing Agent then goes on to submit to the Tribunal may look at the circumstances surrounding the entry into the leases where there is any ambiguity. It is not necessary, in my view, to discuss the authorities it refers to because I do not think clause 22.7(v) contains any ambiguity.

86 The present argument can be resolved simply by reference to the words of the clause. In short, the Managing Agent says that the two steps in the clause can be read disjunctively. Mr Krajcar says that they must be read together, and that unless the first step has been discharged the second step is not enlivened.

87 I do not accept Mr Krajcar's submission. As I have said, clause 22.7(v) involves two rent determinations. The first is a rent determination in respect of the entire Property. The second is a rent determination in relation to each individual lot.

88 While the words of clause 22.7(v) clearly envisages that the Property Rent was to be arrived at by a valuer assessing the Property as a whole property, the parties to the leases were not bound to appoint a valuer. As has been established, s 37(3) of the RLA creates an entitlement in the landlord and tenant to a retail premises lease to agree on the amount of rent to be paid and they do not necessarily have to have a valuation carried out. It is to be remembered that the words of s 37 are deemed to be incorporated in the lease by virtue of s 37(1), and by operation of s 94 of the RLA they are to prevail over any inconsistent words in the lease.

89 The upshot, in my view, is that clause 22.7(v) of Mr Krajcar's lease is deemed to read as follows, echoing the structure of s 37(3) of the RLA:

If the Registered Proprietors and the Tenants do not agree on the Property Rent, the valuer is to determine the market value by assessing the Property as a whole property to determine the Property Rent and the individual rent to be received by each Registered Proprietor is to be determined as a proportion of that amount equivalent to that Registered Proprietor's lot entitlement (as set out in the plan of subdivision 507062C annexed to this Lease and marked "Schedule Four")).

90 When the clause is read in this way, it can be seen that Mr Krajcar's argument that the second step of the clause is only enlivened if the first has been discharged (even if the argument is correct), is not a hindrance to the Managing Agent's case. The fact that the Property Rent has been agreed by the lot owners and the Tenants, as Mr Krajcar himself insists, means that step one has been completed. The second step is accordingly engaged, even on Mr Krajcar's analysis.

91 For these reasons, I find against Mr Krajcar in respect of his second submission also.

92 I have found against Mr Jurkovic in respect of his defence. I have also found against Mr Krajcar. I am of the view that a declaration should be made broadly in the terms proposed by the managing agent.

93 However, I am cognisant that Mr Krajcar has concerns about the wording of the declaration which ought to be made. He also contends that if the declaration is made, it will not be necessary to make other orders. In order to give Mr Jurkovic and Mr Krajcar an opportunity to be heard on the form of orders to be made, I will list the proceeding for a directions hearing. The parties can then also be heard on any other orders to be made.

94 At that directions hearing, the Managing Agent will have leave to apply for costs.

[1] Mr Krajcar's submissions, at [1(a)].

[2] Mr Krajcar's submissions, at [3(a)]

[3] See Mr Jurkovic's witness statement at [12] and his final submissions at [37].

[4] See Mr Jurkovic's final submissions at [1].

[5] Mr Jurkovic's submissions, at [25 and 26].

[6] Mr Jurkovic's submissions, at [27].

[7] Managing Agent's submissions, at [61].

[8] Managing Agent's submissions, at [62].

[9] Mr Jurkovic's submissions, at [61-65].

[10] [2008] HCA 10; (2008) 234 CLR 237 at 265-6,[75].

[11] [2008] HCA 10; (2008) 234 CLR 237 at 265-6,[75].

[12] Mr Krajcar's submissions, at [2].

[13] Mr Krajcar's submissions, at [22].

[14] (2017) 261 CLR 544; [2017] HCA 12, [16]-[17] (Kiefel, Bell and Gordon JJ)