Victorian Civil and Administrative Tribunal|2015-10-21|Before: Mr P, McHugh JA

The Applicant's application for declaratory relief is dismissed.

I direct the Principal Registrar to redact all references to financial data set out in the Reasons attached to these orders before the Reasons are published on any public domain.

Pursuant to s 146(4)(b) of the Victorian Civil and Administrative Tribunal Act 1998, no person other than a party to the proceeding or their legal representatives may inspect the Tribunal's file of this proceeding unless the Tribunal orders otherwise.

The Applicant is the registered proprietor of retail premises located in Greville Street, Prahran. It leases those premises to the Respondent for use as a restaurant and bar, pursuant to a lease dated 23 December 2009 for a term of five years with three further options of five years each ('the Lease'). The Lease provides that upon the commencement of each further term, the rent is to be reviewed to market.
Following the expiration of the first term of the Lease, the parties jointly appointed and engaged Kire Georgievski of CBRE ('the Valuer') to conduct a market review of the rent. On 3 June 2014, the Valuer produced a Rental Determination Report in which he determined that the market rent for the premises, as of 11 March 2014, was $... per annum exclusive of GST ('the Determination').
The Respondent lessee ('the Tenant') disputed the Determination, which has led to the parties falling into dispute. That has prompted the Applicant landlord ('the Landlord') to issue this proceeding, in which it seeks a declaration that the Determination is binding on the parties.

Mr Best of counsel, who appeared on behalf of the Tenant, submitted, correctly in my view, that the Determination will be vitiated in the following circumstances:
- (a) if the Valuer acts outside the four corners of the contract or on a wholly erroneous principle; or
- (b) if the Valuer misconceived his function, asked himself wrong question; or applied the wrong test.
In Legal & General Life of Australia Ltd v A Hudson Pty Ltd,[1] McHugh JA set out the relevant principles as follows:

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... It will 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 a 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... 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 a 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 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 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.[2]

According to the Landlord, the Determination comprises two elements. The first element is an assessment of market rent using comparative market methodology, which entails comparing similar tenancies and then forming an opinion based on that comparative data. The second element is an assessment of market rent using trading profits methodology. This latter method of valuation utilises gross earnings or net profit of the trading enterprise and then applying a percentage ratio in order to determine what the market rent is.
The Tenant disputes that the two assessments set out in the Determination report are distinct. It contends that the Determination was assessed only using comparative market methodology and that any discussion or analysis based upon trading profits methodology was simply an adjunct to the primary assessment, and undertaken as a check only.
This issue is critical because the Landlord concedes that the Determination, insofar as it was made using a comparative market methodology, is erroneous and not in accordance with the contract. This is because the Valuer incorrectly measured the gross lettable area used for retail purposes ('the GLAR').[3] Therefore, the lettable area, measured in square metres and used in his calculation, was incorrect and the valuation based on this methodology is thereby vitiated.
However, the Landlord contends that the Determination is still valid because the Valuer has also assessed market rent by using trading profits methodology. Mr Hopper of counsel, who appeared on behalf of the Landlord, submitted that it was open for the Tribunal to read the Determination report, such that those parts which assessed the market rent based upon comparative market methodology could be ignored and only those parts which assessed market rent using trading profits methodology are taken into account. He submitted that, in those circumstances, the Determination could still be declared valid and binding on the parties.
In response, the Tenant contends that even if it could be said that the Determination was derived through the adoption of a trading profits methodology, the Determination was still vitiated because the Valuer failed to give detailed reasons or specify relevant matters, which he was required to do under s 37(6)(b) and (c) of the Retail Leases Act 2003 ('the Act').
Given the concession made by the Landlord in relation to the assessment based on a comparative market methodology, the remaining issues for determination can be summarised as follows:
- (a) Is the Determination based on an assessment using the trading profits methodology?
- (b) Did the Valuer give detailed reasons and specify relevant matters in accordance with s 37(6)(b) and (c) of the Act?

Can the Landlord rely on the trading profits methodology assessment?

As indicated above, the Landlord contends, that notwithstanding that the assessment derived through comparative market analysis is vitiated, the Determination is still valid because the Valuer has also assessed market rent by using a trading profits methodology. Mr Hopper submitted that the Valuer appears to have used the trading profits methodology as his primary methodology. He submitted that since Serene Hotels Pty Ltd v Epping Hotels Pty Ltd,[4] any question over validity of using the trading profits methodology for valuing market rent of licensed hotels is now beyond doubt.
Mr Best conceded that it was open for a valuer to use trading profits methodology in certain cases, although he did not concede that the present case fell into that category. However, Mr Best submitted that in the present case, the Determination was simply not based upon an assessment of the market rent using trading profits methodology. It was based upon the Valuer using comparative market methodology. Therefore, he submitted that any analysis using trading profits methodology was irrelevant and did not cure the Determination.
Mr Best submitted that the Valuer determined the rental to be $... per annum plus GST. This was derived by using comparative market methodology on a dollar-per-square-metre basis. In his Determination report, the Valuer stated:

6 Rental Evidence

The submissions provided by both the Landlord and Tenant discussed rental on a rate per square metre basis.

The evidence supporting our contention of current market rental for the Ladro Restaurant is provided in the following section, which provides rental information for a number of licensed premises within close proximity to the subject property which are considered to have a high similarity to the demised premises...

6.2 Demised Premises - Specialised Use

In my opinion the specialised nature of the Demised Premises is clearly such that an assessment of market rental cannot simply be assessed using general retail premises rentals as comparative data and that forecast trading must also be a consideration...

Based on trading profits methodology, the Valuer assessed the market rent to be $... per annum plus GST. This amount is $2,000 less than the actual Determination of market rent of $.... Mr Best submitted that in those circumstances, it is clear that the Valuer did not determine market rent of $... per annum plus GST using trading profits methodology. Rather, his use of this methodology was employed as a check to verify his assessment using comparative market methodology.
Mr Best submitted that in those circumstances it is irrelevant whether the Valuer erred in employing trading profits methodology or whether trading profits methodology contravened the Act because it was not the methodology by which he determined market rent.
Moreover, Mr Best argued that it was not for the Tribunal to substitute its own opinion or view of the valuation in any circumstance. He referred me to Karenlee Nominees Pty Ltd v Gollin & Co Ltd,[5] where the Full Court stated:

We say at the outset, however, that on no view is the question whether, in the ordinary sense of the words, the judge who is deciding the issue would himself act upon the valuation...[6]

What appears to have occurred is that the learned trial Judge made an assessment of the accuracy of Mr Jepson's valuation as compared to other valuations as though he had to choose between them. There was, in our opinion, no issue in the case as to the true valuation, and the Court was not a valuation court.[7]

I accept that the Tribunal is not vested with jurisdiction to act as a valuation court. My task is to assess the Determination to determine whether it is in accordance with the contract and the Act. I do not have jurisdiction to substitute one valuation for another.
In my view, Mr Best's submission has merit. It appears from a plain reading of the Determination report that the assessment of market rent using trading profits methodology is an adjunct to corroborate the Determination derived by using comparative market methodology. The fact that the trading profits methodology valuation is $2,000 less than the amount of the Determination indicates, in my view, that the Determination is not derived from this valuation. Further, having regard to my comments above, I do not consider that this Tribunal has jurisdiction to substitute one valuation for another. Given that the Landlord concedes that the valuation derived through the adoption of the comparative market methodology is erroneous and not in accordance with the contract, I find that the Determination is vitiated on this ground.

Even if the valuation derived through the trading profits methodology could be elevated and constitute the Determination, I remain of the opinion that the Determination would still not comply with the Act.
The relevant parts of the Determination, which set out the reasoning behind the assessment derived through trading profits methodology, is set out under section 6.2 of the Determination report, which is entitled Demised Premises - Specialised Use, as follows:

In my opinion the specialised nature of the Demised Premises is clearly such that an assessment of market rental cannot simply be assessed using general retail premises rentals as comparative data and that forecast trading must also be a consideration.

Item 15 of the lease clearly identifies the permitted use of the property to be a licensed Bar and Restaurant which both the Landlord and Tenant have agreed to, namely the trade or business of a Licensed Bar and Restaurant in accordance with the Late Night (on-premises) Liquor Licence. In my view any prudent Landlord or Tenant would place significant regard to the potential trading performance or capacity of the premises in its deliberation of market rental. In doing so the attributes of the property and liquor licence must be taken into account...

In my view, having regard to the observations of present-day trading and taking into consideration the Late night (on-premises) Liquor Licence which permits 24-hour trading I consider it reasonable that, applying the notion of competent average management, a gross annual turnover for the business of $ is reasonably achievable from the premises.

To this projected trading turnover I have applied an 8.0% rental factor which equates to a rental of $... per annum plus GST.

8.0% is considered a reasonable rental factor to be applied, will typically vary from 7.0% to 10.0%, the variance relates to the perceived profitability of the business (which again emphasises the notion of profitable occupation or capacity to pay).

The adopted 8.0% is based upon our knowledge of the pricing structure operated at the leased Restaurant business and takes into account the business mix which comprises soft beverages (coffee/tea in-house & take-away), brunch on weekends, lunch from Friday to Sunday and evening meals seven days a week plus licensed trading of alcoholic beverages.

The adopted Rental Factor of 8.0% is a common and average ratio applied in the hospitality industry. By way of illustration we refer to the following detailed set of rental analysis which confirms the general rental to turnover ratio. This information is held on a confidential basis and cannot be used or disclosed outside the context of this rental determination.

Whilst the following rental information is of predominantly pub style venues the market application is relevant to all forms of premises which operate pursuant to a Liquor Licence. The rental ratios indicated all reflect the notion of a competent average management as this applies in respect of the trading acumen of each tenant...

Mr Best submitted that, insofar as the Determination could be said to be based on the Valuer's assessment using trading profits methodology, it fails to comply with the contract and in particular s 37 of the Act. Section 37(6)(b) and (c) of the Act state:

(6) The valuation must -

(a) be in writing; and

(b) contain detailed reasons for the specialist retail valuer's determination; and

(c) specify the matters to which the valuer had regard in making the determination.

Mr Best submitted that s 37(6)(c) requires that the Valuer specify in detail all matters which the Valuer considered and adopted in arriving at the Determination. In support of that submission, Mr Best referred me to a number of authorities in other jurisdictions which had similar legislation.
In Adwell Holdings Pty Ltd v Bourne,[8] Young CJ in Eq considered the requirement for a valuation to contain detailed reasons in the context of s 19 of the Retail Leases Act 1994 (NSW), as it was in force as at 1 August 2005. That provision stated:
- (1) A retail shop lease that provides for rent to be changed to current market rent is taken to include provision to the following effect:

...

(e) A valuation for the purposes of paragraph (b) is to be in writing, to contain detailed reasons for the specialist retail valuer's determination and to specify the matters to which the valuer had regard for the purposes of making his or her determination.

However, I would agree with Mr Sharpe that the contract required the valuer to give "detailed" reasons; this goes further than merely requiring "sufficient" reasons and requires the valuer to set out details as to how he or she arrived at the determination. Further, when it says that it is to specify the matters to which the valuer had regard, that does not just mean setting out by rote what is in the Act, but actually dealing with how those matters were considered in the process of making the valuation.[9]

Mr Best also referred to a number of other authorities including State tribunal decisions dealing with similar legislation, which he submitted were consistent with the approach taken by Young CJ in Adwell Holdings.[10]
Mr Best's criticism of the Determination focused on the assumption made by the Valuer that a gross annual turnover for the business of $... is reasonably achievable from the premises. He argued that detailed reasons were not given as to how the Valuer was able to assume that the premises could achieve a 26% increase in gross annual turnover from the trading figures set out in the profit and loss statements provided to him. Mr Best pointed to the fact that this arbitrary assumption of increase was made even more peculiar in circumstances where the trading figures furnished by the Tenant indicated a slight decline in sales from the year 2012 compared with the financial year ending 2013.
Mr Hopper submitted there were indications given in supplementary material supplied by the Valuer, following a request by the Tenant to provide further particulars, which expounded upon the Valuer's reasons set out in the Determination report. In particular, Mr Hopper pointed to email correspondence dated 2 July 2014 from the Valuer to the Tenant, which purported to answer a number questions raised by the Tenant. One of those questions included a request to explain what the Valuer meant by potential trading performance. The Valuer responded as follows:

The Permitted Use of the Lease states "Licensed Bar and Restaurant" - I have therefore taken this into account when assessing the rental. I have used both rate per square metre and had reference to potential trading...

Based on the liquor licence in place, and comparable venues in the region which I hold on file, I am of the opinion that a business at 162-162A Greville Street, Prahran would be able to generate $... per week in sales.

Mr Hopper also referred to a number of authorities in support of his submission that an omission from a determining valuer's report can only vitiate the determination if its presence would assist the Tribunal to determine whether the report should be set aside. Mr Hopper referred to Cavanagh Holdings Pty Ltd v Holdsworth Properties Pty Ltd [11]where Palmer J stated:

[61] The reasons the valuer gave were sufficient to enable the parties to see whether cl 1(d) had been complied with in the valuation exercise. Detailed reasons, such as provided by a judicial officer or arbitrator, are not required. This valuer was appointed to act as an expert and not as an arbitrator. Gillard J discussed the standard of reasons usually required of a valuer in Commonwealth v Wawbe Pty Ltd [1999] ANZ ConvR 597; V ConvR 54-599. I agree with his Honours observations. The form of the particular clause in this lease requiring "sufficient Reasons" does not detract from the force of what Gillard J said.

[62] In any event, even a judge does not have to detail every factor seen as relevant or irrelevant or itemise every fact taken into account. Judicial reasons are not required to elaborate. Rather they need to be such as indicate to the parties why and on what basis the decision was made. Step by step reasons to a conclusion not required.

[118] ... In my view, the requirement of cl 1(f) for "sufficient reasons" obliged Mr Norris to disclose what he did and why only to the extent necessary to enable the parties, with the assistance of their experts, to see whether he had complied with the requirements of cl 1(d) by having regard to the matters to which he was obliged to have regard, and by disregarding the matters which he was obliged to disregard....

In my opinion, Cavanagh Holdings Pty Ltd can be distinguished from the present case. In particular, in that case Palmer J considered whether the relevant clause in the lease requiring sufficient reasons had been met. However, in the present case, the Act requires not only detailed reasons but also requires the Valuer to specify the matters to which the Valuer had regard in making the Determination. In my view, s 37(6) of the Act goes further than simply requiring the Valuer to provide sufficient reasons.
In my view, there is very little detail given in the Valuer's reasons as to how the Valuer was able to conclude that $... was reasonably achievable by way of gross profits. The data, presumably relied upon and which was cited in the Determination report stated that the Tenant had achieved gross sales in the financial year ending 2013 of $... and in the previous financial year of $.... It is difficult if not impossible to discern from the Determination report how the Valuer was then able to conclude that an additional $536,782 was achievable in annual turnover for the business. The only indicator as to how that figure was derived is by the Valuer's supplementary comments:

Based on the liquor licence in place, and comparable venues in the region which I hold on file...

In my view, that comment, even if embellished with further narrative as set out in the Determination report, does not provide adequate detail as to how the Valuer was able to say that it was reasonably achievable that projected sales were likely to be 26% higher than actual sales. One might speculate that the Valuer placed considerable emphasis on the fact that the Tenant traded up until 11 pm in circumstances where the 24 hour liquor licence allowed it to trade well beyond that time. However, having to speculate as to how the Valuer formed his opinion is, in my view, contrary to what is required under s 37(6) of the Act. Moreover, no detail was provided as to what other venues were used as a comparator. That, of itself, raises a number of questions: Did those other venues have similar GLAR? Did they have the same type of liquor licence? Were they also being operated as a restaurant/bar? Was their location proximate or did they cater for the same demographic clientele? Without those details, I consider the reasoning to be deficient and not in accordance with the Act. In Kumari v Goa,[12] the Queensland Retail Shop Lease Tribunal (as it then existed) considered a similar case and made the following observations, which I find are apt:

We are also satisfied the valuer has not complied with s31(1)(d), which requires "detailed reasons" for the determination...

The Valuer's concluding remarks are singularly brief and uninformative. He simply observes:

"Taking into account the attributes both positive and negative, the market evidence available indicates...

and then arrives at the all-important figure.

Nothing in these reasons for decision is meant to encourage a hypercritical approach to the decisions of specialist retail valuers. But due weight must be given to the legislature's demand for "detailed reasons", when not inconsiderable fees are charged for reports of this nature. It seems to us that this requirement is not satisfied by a decision padded with preliminary, non-contentious material, purportedly based on "a full consideration" of relevant facts, followed by a leap to judgement. We recall the advice of Sir Frank Kitto, former Justice of the High Court, to those called upon to give "detailed reasons". Such a task, involves more than -

"... [recitation of] the facts in a degree of pedestrian detail that scorns to [indicate] those that really bear on the problem ... and then, without carefully worked out steps of reasoning but with a 'blinding flash of light' ... produces the answer with all the assurance of the divine revelation".[13]

I further note that the Valuer adopted a methodology based upon gross receipts, rather than utilising a detailed EBIDTAR[14] calculation which Mr Best, correctly in my view, submits would have given some guidance as to the Valuer's assumptions and reasoning. In particular, in arriving at a Rental Factor of 8.0%, the Valuer utilised comparative percentage rent to turnover data from other licensed premises. However those premises, by and large, relate to hotel premises. There is no adequate explanation as to how the expenses of those other premises compare to the expenses of the restaurant/bar operated by the Tenant. In my view, it is difficult to reconcile how the permitted use of the subject premises equates to a hotel and in those circumstances, some explanation should have been given to justify how the average of the Rental Factor for the hotels is comparative.
Accordingly and for the reasons set out above, I find that the Determination is also vitiated on the ground that the Determination did not contain detailed reasons or adequately specify the matters to which the Valuer had regard in concluding that $... was reasonably achievable by way of gross profits.
That being the case, the Landlord's application for declaratory relief is dismissed.

[3] The acronym 'GLAR' means Gross Lettable Area Retail.

[10] Perri v Exego Pty Ltd [2009] NSWADT 170 at [53-56]; Anthony v Coffee Club [2000] QSC 198 at 198; Family and Kids Care Foundation Inc v Bilby Lay Enterprises Pty Ltd [2005] QRSLT 7; Kumari v Gao [2008] QRSLT 19.

[13] Why Write Judgments (1992) 66 ALJ 787 at 792.

[14] EBIDTAR means earnings before interest, depreciation, taxation, amortisation and rent.

Civil and Administrative Tribunal Act 1998

Higgins Nine Group Pty Ltd v Ladro Greville St Pty Ltd (Building and Property) [2015] VCAT 1687 (21 October 2015)

Higgins Nine Group Pty Ltd v Ladro Greville St Pty Ltd

At a glance

Court

Decision date

Before

Source

Judgment (37 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (2)

Higgins Nine Group Pty Ltd v Ladro Greville St Pty Ltd (Building and Property) [2015] VCAT 1687 (21 October 2015)