J Family Motel Group Pty Ltd v Baset Super Pty Ltd

The Lease

1. In 2006, Mr and Mrs Turner bought the motel. On 1 July 2012, they leased the motel to their company, Baset Pty Ltd, for five years with six options to renew the Lease for further five year terms. The tenant could only exercise an option if the tenant served a notice not later than four months before expiry of the Lease: cl 2.2(f)(i).
2. Rent was initially $130,000 per annum. The rent was to be reviewed on the anniversary of the Commencement Date and adjusted in accordance with the Consumer Price Index (CPI) "other than on exercise of the Option to renew": cl 3.2; Item 8.
3. Before the expiry of each term of the Lease, the rent would be adjusted to "current market rent", being the best annual rent that could be reasonably obtained for the premises and having regard to the rental values of comparable premises: cl 1.1. Clause 3.3(a) provided that, 60 days prior to the expiration of the lease, the landlord would give notice to the tenant of the rent which the landlord considered to be current market rent: cl 3.3(a). If the tenant did not accept the landlord's assessment of current market rent, then the rent would be determined by a licensed valuer nominated by the Australian Property Institute (NSW Division), who would give a binding expert determination: cl 3.3(b).
4. The Lease contained two 'rachet' clauses, being a clause in a lease which provides that the rent payable by the tenant after a rent review must not be less than the rent payable immediately before the rent review. First, in respect of the annual rent review for CPI, cl 3.2(b) provided that the reviewed rent "must not be less than the Rent paid before the Review Date". Second, cl 3.2(c) provided that, on each review date which was the commencement of a fresh five-year period pursuant to the exercise of an option, "the rent shall be the higher of" the rent pursuant to cl 3.2 (being the rent adjusted for CPI) and the Current Market Rent determined under cl 3.3.
5. In the event that the Lease came to an end, cl 2.4 provided: 2.4 Holding over If the Tenant remains in occupation of the Motel after the Expiry Date, without having validly exercised any option for renewal then available to such Tenant, then the occupation: (a) is to be on a monthly tenancy; and (b) is to be on the same terms and conditions as this Lease so far as they relate to a monthly tenancy; and (c) may be terminated by either party by giving the other party 1 month's written notice and (d) under a rental to be subject to review by the application of the CPI.
6. In 2014, Baset transferred the Lease to Alacritous Pty Ltd and Triple Gen Pty Ltd. The Lease was twice varied, in particular, the term was increased to 10 years, expiring on 30 June 2022, and the number of options was reduced from six to five. (The landlord contends in these proceedings that the Lease ended on 30 June 2022, as the tenant failed to exercise the option.)
7. In 2017, Mr Peng and his wife, Qiong (Judy) Zhou, incorporated the plaintiff, which bought the motel business from Alacritous and Triple Gen. The Lease was assigned to the plaintiff. Mr Peng and his wife guaranteed the plaintiff's performance of the Lease.
8. In 2018, Mr and Mrs Turner transferred the property to Motel 359 Bare Pty Ltd for $1.6 million. In 2021, Motel 359 Bare transferred the property to the defendant for $1.6 million. Where the Turners' solicitor appears to have acted for both transferor and transferee on both transactions, I infer that the transfer of the property may have been relevant to restructuring rather than arms-length sales. In any event, the result is that the landlord owns the land subject to the Lease to the tenant.

Dispute

1. On 23 February 2022, the landlord served a Notice of Breach of Covenant, which is not in evidence but apparently related to repairs and maintenance: see [48]. Mr Peng busied himself sourcing legal advice in respect of the notice and addressing the matters raised. He was unaware that the option had to be exercised on 28 February 2022 and did not exercise the option. On 29 April 2022, the landlord's solicitor informed the tenant that, as the option had not been exercised, the Lease expired on 30 June 2022 and the tenant was required to vacate on that date.
2. On 20 May 2022, the tenant retained a solicitor. On 23 May 2022, the tenant's solicitor served a Notice of Exercise of Option. On 24 June 2022, the tenant commenced proceedings against the landlord in this Court, seeking relief against forfeiture of the Lease, together with a declaration that the tenant had exercised the option to renew the Lease for a further five-year term. In the alternative, the tenant sought an order that the landlord offer the property to the tenant for sale for $1.6 million under cl 5.8 of the Lease. (Clause 5.8(9) of the Lease provided that the landlord must offer the motel to the tenant before selling the motel to another.) The landlord filed a cross-claim, which is not in evidence.

The Deed

1. On 15 May 2023, the parties executed a Deed. The recitals noted the "Various Disputes" which had arisen between the parties, including the Notice of Breach of Covenant, the assertion that the tenant had not exercised the option, and the proceedings including the cross-claim. By cl 2.1, "The Parties agree to settle the Dispute" on the terms in the Deed, where cl 1.1 defined "Dispute" as follows: Dispute or Disputes means all disputes between the Parties whether notified to date or not: (a) which are the subject of the Proceedings or which relate to any of the allegations raised in the Proceedings; and/or (b) in connection with the Lease.
2. Further, Parties were the landlord and tenant and the directors of those companies: page 1. Proceedings meant the proceedings in this Court including the cross-claim and a motion filed by the tenant (seeking determination of the issue as to whether the landlord was obliged to offer the property to the tenant for $1.6 million under cl 5.8 of the lease): cl 1.1; recital G. Lease was the Lease dated 1 July 2012 as varied: cl 1.1.
3. Critically, cl 2.2 of the Deed provided: 2.2 Sale of Land By the Contract (dated the same day as this Deed) Baset sells and J Family purchases the Land for the purchase price calculated as being the Current Market Value plus the Costs, plus or minus the adjustments referred to in the Contract, where the Current Market Value is to be determined as follows: (a) If not already, within 2 days of the date hereof the Parties will in accordance with the terms of the Lease jointly apply to the President of the Australian Property Institute (NSW Division) to have nominated a licensed valuer to value the Current Market Rent as of 1 July 2022 of the Land and Improvements in accordance with Lease AH235519S, and in particular Clause 1.1 and Clause 3.3(b) of that Lease, and otherwise complying with that clause and the Parties are bound by the determination of that licensed valuer for the determination of the Current Market Rent commencing 1 July 2022. (b) Within 7 days of receipt of the Current Market Rent determined by Clause 2.2(a) above the Parties will each provide the other with the names of three independent licensed valuers together with their curriculum vitae who have not less than 5 years' experience in the valuation of land & freehold motels in New South Wales and include a declaration of any dealings they have had with the legal representatives or their Parties. (c) Within 5 days of receipt of the three independent valuers from each party the other party will nominate one of the valuers. (d) Within 5 days of the nomination of each valuer the Parties will submit to each valuer the letter of agreed instructions in the form set out in Schedule 1 hereto for each valuer to then determine the Current Market Value of Baset in the Land and Improvements on the basis that from 1 July 2022 the freehold interest of the Land and Improvements and is subject to the Lease as varied by registered Variation of Lease AM581629, except that the number of options specified is four (4) options (for further terms of five (5) years each) and the rent for the further lease is the Current Market Rent determined in accordance with Clause 2.2(a) above. The Parties will each pay the valuation fee of each valuer equally. The Parties are bound by the determination of each licensed valuer. (e) On receipt of each Current Market Value determined by the two valuers referred to at Clause 2.2(d) above, Baset and J Family agree that the purchase price for the Contract is the average of the two valuations referred to at Clause 2.2(d), plus the Costs (as defined, being $100,000.00), plus all adjustments as referred to in the Contract. (f) For clarity, at completion of the Contract, J Family will pay to Baset, as an adjustment in the Contract, all rent calculated from 1 July 2022 at the Current Market Rent determined by Clause 2.2(a), with Baset to allow J Family credit for all rent J Family has actually paid Baset for the period commencing 1 July 2022 to Date of Completion.
4. Relevantly, cl 1.1 contained the following definitions: Completion means completion of the Contract. Completion Date means a date being six months from the receipt by the parties of the Current Market Value pursuant to Clause 2.2(e) of this Agreement. Contract means the contract for sale of land dated on the same date as this Deed … a copy of which is attached at Schedule 2 hereto. Costs means legal costs of $100,000 payable by J Family to Baset in addition to the Current Market Value on Completion of the Contract. Current Market Rent means the determination made by a licensed valuer for the Land and Improvements … as determined by the procedure set out in Clause 1.1 and Clause 3.3(b) of the Lease. Current Market Value means the average of the two selected licensed valuations of the freehold interest of Baset in the Land and Improvements on the basis that from 1 July 2022 the said freehold interest of Baset in the Land Improvements is the subject of the lease.
5. Schedule 1 to the Deed was a joint letter of instruction to the valuers under cl 2.2(d). The joint letter of instruction presupposed that the valuation of the Current Market Rent as of 1 July 2022 (the Rental Valuation) had been obtained under cl 2.2(a) of the Deed. The valuer was to determine the current market value of the land and improvements, being the subject of the Lease "except that the number of options specified is 4 options … and the rent for the further lease is the Current Market Rent that has been determined for the period commencing 1 July 2022 by [add date and name of appointed valuer that has valued the Current Market Rent]." Schedule 2 to the Deed was the Contract.
6. Clause 2.3 provided that the Parties would file Consent Orders in the form set out in Schedule 3 within seven days from the date of the Deed. Schedule 3 were consent orders dismissing the claim and cross-claim.
7. Clause 3 contained releases, including relevantly: 3.2 Release by Baset, Bruce and Susan On and from the date of this Deed, Baset, Bruce and Susan releases each of J Family, Jack and Judy from all actions, proceedings, accounts, rights, claims, demands, liabilities, costs and expenses wherever and however arising, known or unknown arising out of or relating in any way to the Dispute. 3.3 Bar to claims Except in relation to a breach of the terms of this Deed this Deed may be pleaded as a full and complete defence by any party words related body corporate to any claim by on behalf of the other party or its Related Body Corporate in relation to any matter in respect of which the Parties have been released under this Deed.
8. Clause 1.1 defined Claim as follows: Claim means any dispute, arbitration, cost, debt, cause of action, liability, claim, proceedings, suit or demand in respect of damages and any other benefit verdict and judgement whatever both at law or in equity arising under the provisions of any statute, award or determination whether or not known at the date of this Deed (excluding any breach of this Deed);
9. Clause 3.4 contained a covenant not to sue "in relation to any matter which is the subject of the releases in this Deed", other than to enforce the Deed.
10. Clauses concerning confidentiality, warranties and non-disparagement followed. Clause 7 contained "General" provisions, including that each party would promptly do and perform all further acts and execute and deliver all further documents required by law or reasonably requested by the other part to give effect to the Deed: cl 7.5.

The Contract

1. The Contract was also executed on 15 May 2023, by which the landlord sold the land and improvements to the tenant for a price to be determined in accordance with special condition 46. Special condition 46 provided: 46. PURCHASE PRICE By Deed of even date herewith the Vendor and Purchaser agreed to settle proceedings 2022/184696 being proceedings in the Supreme Court of NSW - Real Property List and agreed that the Purchase Price is determined as set out in the said Deed, notably Clause 2.2(a) to (h).
2. The date for completion of the Contract was as per special condition 47, which provided: 47. COMPLETION DATE Completion Date is the date being six months from the receipt by the parties of the Current Market Value pursuant to Clause 2.2(e) of the Deed of even date.
3. Standard condition 14 provided for adjustments on completion. The landlord was entitled to the rents up to and including the adjustment date and the parties were to make the necessary adjustments on completion: cll 14.1 and 14.2.

Rental Valuation

1. In accordance with cl 2.2(a) of the Deed, the landlord and tenant made a joint application to the Australian Property Institute to nominate a valuer to determine the rent for the motel as at 1 July 2022. James Lockwood was appointed.
2. The parties provided submissions to Mr Lockwood. The tenant provided a valuation by Paul Waterhouse, which included details of comparable motels. The tenants proposed that rent of $176,250 per annum was appropriate. The landlord's submissions included a summary of comparable motels and proposed that rent of $351,000 (excluding GST) was appropriate.
3. On 28 June 2023, Mr Lockwood inspected the motel. On 26 July 2023, Mr Lockwood provided the Rental Valuation. Mr Lockwood reviewed the quality of facilities, room configuration, competitors and customer ratings. Mr Lockwood noted that he had been provided with occupancy and revenue figures from 2015 to 2021. He assessed occupancy data, noting the effects of the Covid-19 pandemic in 2020 and 2021, and adopted an occupancy of 52.5%. With an average roof tariff of $105 a night (excluding GST), he estimated that annual revenue was $1,127,527. Where Mr Lockwood had not been provided with profit and loss statements for the motel, he used industry standards as a starting point and considered that motel expenses would be in the order of 50% of revenue. Mr Lockwood reviewed the Lease and its provisions concerning "current market rent". He reviewed the parties' submissions. He undertook his own review of comparable motels. Mr Lockwood concluded that market rent as at 1 July 2022 was $252,000 per annum plus GST and outgoings.

Letters of instruction

1. In accordance with cl 2.2(b) of the Deed, the landlord nominated three licensed valuers, from whom the tenant chose Scott Robertson. The tenant nominated three licensed valuers, from whom the landlord chose John Sanidas.
2. Problems immediately arose as the tenant was unhappy with the Rental Valuation and did not want it to be provided to the property valuer. Clause 2.2(d) of the Deed provided that the Rental Valuation as at 1 July 2022 would be provided to the property valuer, and that is ultimately what happened. A second problem arose as, a further year having now passed since 1 July 2022, the landlord wanted to review the rent and provide that increased rental to the property valuers as well. This was not envisaged by cl 2.2(d) of the Deed. Ultimately, the parties agreed to various notations being added to the joint letters of instruction to the valuers in respect of this matter.
3. On 17 August 2023, the landlord notified the tenant that rent for the period commencing 1 July 2023 was increased to $268,639.61 plus GST and outgoings, to allow for CPI. On 25 August 2023, the tenant's solicitor replied that the Deed provided that any adjustments in rent would be made as at the date of settlement of the Contract; presumably this was a reference to cl 2.2(f) of the Deed.
4. On 5 December 2023, Mr Sanidas and Mr Robertson received joint letters of instruction, appointing them to determine as an expert the current market value of the land and improvements as at the date of their valuation. Further: The said freehold interest of [the landlord] in the land and improvements, is that the land and improvements are the subject of a further Lease on the same terms as the [registered] Lease … as varied … except that the number of options specified is 4 options … and the rent for the further Lease is the Current Market Rent that has been determined for the period commencing 1 July 2022 by James Lockwood …
5. The letters of instruction gave background information on the landlord and tenant and the disputes between them. The valuers were advised that they were appointed as an expert whose determination was conclusive and binding on the parties. The valuers were provided with copies of the Lease and variations, the Rental Valuation, the landlord's letter of 17 August 2023 (increasing the rent for the period commencing 1 July 2023) and the Notice of Breach of Covenant dated 23 February 2022 (which the landlord stated remained outstanding). The experts were instructed to make assumptions, relevantly: Assumptions. While you are required to value the freehold interest, for the purpose of your valuation, you are asked to assume the following matters: … 2. From 1 July 2022, the freehold interest has been subject to a lease on the same terms as the Lease, as varied … containing the following modifications: (a) the Lease provides four options for further terms of 5 years each, rather than five options; and (b) the Rent for the Lease is the Current Market Rent as set out in the Rental Valuation … as increased for the annual period commencing 1 July 2023 to $268,639.61 (plus GST and outgoings).
6. The experts were provided with agreed notations in respect of the recent rent review, essentially, that the rent review was not in the original letter of instruction agreed by the parties under the Deed. Further, the reviewed rent of $268,639.61 (plus GST and outgoings) calculated by the landlord was not agreed by the tenant, "both parties accept that it is open for you to calculate the reviewed rent."
7. The letters of instruction specified the contents of the valuation report, including: "3. Your report will be prepared pursuant to and you will comply with the attached Expert Witness Code of Conduct; 4. Include the facts, and the assumptions of facts, upon which each of your opinions expressed in the report are based. …"
8. The attached Expert Witness Code of Conduct required that an expert report for use in court must clearly state inter alia the reasons for the opinion expressed: cl 3(e).
9. Finally, the experts were asked to note: 1. Neither of the parties is permitted to communicate with you directly (save for making the appointment for inspection by you); 2. All further instructions to you must be in writing and be counter signed by each of the solicitors representing the parties;
10. As will be seen, these matters were observed in the breach.

Property valuations

1. Mr Robertson inspected the property. On 19 January 2024, Mr Robertson provided his report, valuing the land and improvements at $4.35 million. Mr Robertson reviewed the details of the Lease, noting that the tenants were holding over. Despite this, he was to assume "4 x 5 year option period." Mr Robertson accepted the rent review, "If we are to ignore the holding over by the lessee, the CPI increase is warranted." As such, the current passing rent was $268,640. Mr Robertson noted that freehold investment motels were "rarely traded assets", with "demand typically linked to lease terms and conditions". He reviewed comparable sales, being motels in each of Orange, Parkes, Wagga Wagga, Wentworth and Cooma. The average yield indicated by these sales was 6.17%.
2. Mr Robertson relied on the capitalisation of net annual rent and direct comparison methods of valuation. Mr Robertson explained that the income capitalisation approach considers the income that an asset will generate over its useful life and indicates value by converting income into a capital sum, using an appropriate discount rate. Mr Robertson applied the average yield of 6.17% to the net annual rent of $268,640, resulting in a figure of some $4.35 million. Turning to the direct comparison approach, Mr Robertson looked at the sales prices achieved by the five motels earlier mentioned and came to the same figure.
3. On 23 January 2024, the landlord's solicitor sent a letter to the tenant, demanding unpaid rent, council and water rates.
4. Mr Sanidas inspected the property. On 1 February 2024, Mr Sanidas emailed the parties' solicitors, requesting the "actual current rent figure being paid by the tenant". The landlord's solicitor promptly replied, referring Mr Sanidas to the Rental Valuation and the landlord's letter of 17 August 2023 increasing the rent from 1 July 2023. Further: "Whilst we do not see that it is relevant, with respect to payment of rent (and outgoings), there is current correspondence (January 2024) from our firm regarding rent and outgoings. Our client is prepared to provide a copy of this letter to you but will not do so without the prior consent of [the tenant's solicitor]."
5. I note that the communiqué from the landlord's solicitor was not "countersigned by each of the solicitors representing the parties", contrary to the joint letter of instruction. Proceeding in like fashion, the tenant's solicitor then replied to Mr Sanidas as well: (emphasis in original) "We are instructed the 'actual current rent figure being paid by the tenant to the landlord' is $168,857.16 p.m. … With respect we will request the valuer to ignore the contents of the letter [from the landlord's solicitor] on the grounds that it is not an answer to your question."
6. Later that afternoon, Mr Sanidas replied to both solicitors, "Please provide the monthly or annual rent figure being paid now - I am confused". The tenant's solicitor promptly replied - albeit not in writing countersigned by the landlord's solicitor - that "the "actual current rent figure being paid by the tenant to the landlord" is $14,923.81 per month (inclusive GST)." The landlord's solicitor replied separately, repeating his earlier reference to the Rental Valuation and the further rent review from 1 July 2023, adding: "In part payment the tenant has been paying only $14,928.81 to the Landlord each calendar month. Again we request consent from [the tenant's solicitor] to forward you a copy of our letter to [the tenant's solicitor] dated 23 January 2023 dealing with rent and outgoings from 1 July 2022.
7. The tenant's solicitors replied, "We do NOT consent" to the landlord's letter of 23 January 2024 being provided to Mr Sanidas. The parties' solicitors sent several further emails repeating their respective positions in respect of the information sought by Mr Sanidas. On 6 February 2024, the landlord's solicitor added that, while the tenant was currently making payment of $14,928.81 per month to the landlord, the landlord "does not agree that this is the actual current rent that is payable by the tenant"; the landlord had written to the tenant regarding actual current rent payable but had not been given consent to provide that letter to Mr Sanidas.
8. On 8 February 2024, Mr Sanidas provided his report, valuing the property at $2.1 million. Mr Sanidas noted that he had been briefed with the Expert Code of Conduct, which he had read and with which he agreed to be bound. Mr Sanidas referred to the recent sales history of the property, being that the landlord had purchased the site in 2021 for $1.6 million. Mr Sandias referred to the Lease, the Rental Valuation and the rent review from 1 July 2023. Further: 2.5 The rent currently being paid by the tenant to the landlord is $179,145.72 per annum or $14,928.81 per month 2.6 A market rent determination was made by James Lockwood of Acumentis Regional Pty Ltd because the parties were unable to agree on a market rent to apply as at the review date
9. Mr Sanidas described the property and improvements. He listed the documents provided, including the Rental Valuation ("55-page"), the rent review letter of 17 August 2023 and the Notice of Breach of 23 February 2022 "advising the tenant that property repairs and maintenance remains outstanding".
10. Mr Sanidas reported that he had also adopted the capitalisation of net rent (income) approach to assess market value, "In my opinion the primary valuation methodology is the capitalisation of net sustainable rent (income) approach and supported by the direct sales comparison method." (emphasis added). Mr Sanidas advised that he had regard to "the current and market rent paid under the lease and other rents being paid by other motel operators". Further, "I have adjusted the market rent where I consider relevant to account for the age condition and design as well as, onsite facilities, amenity and the star rating … of the motel". Mr Sanidas advised that, following a review of the "net market rent I then applied an initial yield into the net market rent to determine the freehold market value subject to considered market adjustments". To support the income approach, he then adopted the direct sales comparison approach and analysed sales of comparable motels in the area and surrounding areas.
11. Mr Sanidas was of the view that the Rental Valuation and the 2023 rent review exceeded market rent having regard to rent charged on four Tamworth motels. In particular, the Rental Valuation "is almost the same rent … as the rent being paid [for] a significantly superior motel facility" in Tamworth. Having regard to this, Mr Sanidas explained, "Our capitalisation approach will therefore capitalise the market rent and add on the value of the profit rent where applicable to the core market value". Mr Sanidas calculated the present value of the profit rent over the remaining term of the "lease term certain". He noted that the motel rooms presented in poor condition and required some degree of rectification work. Mr Sanidas assumed that a hypothetical purchaser would take such capital expenditure factors into account to operate a sustainable business enterprise. Mr Sanidas adopted a market net rental for the motel of $228,093.
12. Mr Sanidas explained, "The Capitalisation approach has been selected as the primary method of valuation. Under this approach, the assessed net rent market income as at the date of valuation is capitalised at an appropriate market yield to establish the property's core market value fully leased subject always to capital adjustments where necessary …". Where the gross market rent assumed 100% occupancy, Mr Sanidas adopted a 15% vacancy allowance due to the smaller sized rooms and condition of the rooms. (This reduced the market net rental to $186,597). He also adopted a capital expenditure allowance of $100 per metre for capital upgrades. Mr Sanidas capitalised his estimated market net rental by using a yield of 9%. He deducted from this capital expenditure in Year 1 of $100 per metre. He then added back the present value between the contract rent and market rent for the remaining period until the next market review date of 30 June 2027. The result was a freehold value of $2.07 million.
13. Mr Sanidas then considered direct market sales evidence within the Tamworth region and further afield. Four Tamworth sales were considered and four sales further afield (in Narrandera, Wagga Wagga, Parkes and Oberon). By these means, he arrived at a direct sales comparison of $1.9 million. In the result, he settled on the figure of $2.1 million. His report concluded with a summary table of the calculations undertaken by both the capitalisation approach and direct comparison approach, together with a sensitivity analysis.

Further dispute

1. Both parties cavilled with the expert determinations. On 9 February 2024, the landlord's solicitor wrote to Mr Sanidas, advising that his report "does not appear to have been prepared in accordance with the written instruction to you … Our client does not accept your rational[e] or your finding" and would provide further instructions within 28 days. On 16 February 2024, the tenant's solicitor wrote to Mr Robertson, advising that his client was of the opinion that his valuation did not reflect the proper market price, where the chosen comparables were not in Tamworth but from "much wealthier towns".
2. On 16 February 2024, the tenant's solicitor advised the landlord's solicitor, "Notwithstanding the glaring inconsistencies in the valuation of Robertson our client is prepared to accept the average of the 2 valuations plus the Costs as the purchase price for the contract in order to move forward and complete the transaction without further delay". On 25 March 2024, the tenant's solicitor emailed the landlord's solicitor again, noting that the purchase price for the contract for sale of land was now $3.325 million and settlement was due on 8 August 2024. On 3 May 2024, the tenant's solicitor advised that the tenant had nominated Northern Motel Investment Pty Ltd as purchaser, being a related company. There was no reply.
3. On 24 May 2024, the landlord issued a Notice of Termination of the Lease on the basis that the Lease had expired on 30 June 2022. It was said that the tenant had remained in occupation on a monthly tenancy, which could be terminated on one month's written notice, which was now given. The monthly tenancy was terminated from the end of 30 June 2024.
4. On 19 June 2024, the tenant commenced these proceedings, seeking an order that the landlord specifically perform its obligations under the Contract, together with a declaration that the Notice of Termination of the Lease was void. Mr Peng said that if the tenant is forced to vacate the motel, he will lose the business which he paid for as the business is based on the premises and cannot be sold without the Lease or relocated. He primarily relies on the income from this business to support his wife and children. He also has a debt of $800,000, which he borrowed from his extended family to purchase the motel business in 2017. Mr Peng said that he and his wife have spent hours in the administration of the motel without pay. Having gone through the Covid pandemic and the reduction in tourism, he believes that the business is just starting to turn around financially.
5. On 1 July 2024, Pike J granted an interim injunction restraining the landlord from dealing with the property or acting on the purported termination of the Lease. Mr Peng and the tenant provided usual undertakings as to damages. Mr Peng provided $250,000 as security for the undertakings.
6. On 17 July 2024, the landlord filed a cross-summons, seeking an order for possession and judgment for unpaid rent and outgoings. As calculated by Mr Turner, rent owing from the 2022 financial year is $103,224.06. A further $116,417.88 is owing for the 2024 financial year. When unpaid rates and insurance are added, the amount owing as at 30 June 2024 is $234,038.46. These figures are based on the Rental Valuation and broadly accord with the amount which the tenant proposed to pay on settlement on 8 August 2024 in respect of unpaid rent, insurance and rates.

What was the expert's task?

1. The first question is whether the parties are bound by Mr Sanidas' valuation.
2. The tenant submitted that Mr Sanidas followed the joint instructions, which asked him to assume "that the rent under the further lease was the current market rent as determined by [the Rental Valuation]." Mr Sanidas did that. He identified the making of a "market rent determination" and identified the rent payable from 1 July 2023 as calculated from that figure: at [2.4]. Mr Sanidas identified that the market rent was below the passing rent, and identified that in consequence, his capitalisation approach will therefore "capitalise the market rent and add on the value of the profit rent where applicable to the core market value": at [14]. Having determined a market rent, Mr Sanidas added back the present value between the 'contract rent' and the market rent for the remaining period (approximately 3.4 years) until the next review date of 30 June 2027. Mr Sanidas also took into account outgoings and an expected vacancy rate of 15%. The tenant submitted that Mr Sanidas was only required to assume that the rent for the further lease was the Rental Valuation which, by adding on the value of the difference between the Rental Valuation and the market rent, he did. The joint instructions did not, and it would not have been appropriate for them to, further proscribe how Mr Sanidas was to apply the assumptions given in his calculations.
3. The tenants submitted that the Lease had not expired. There was a holding-over. The parties had agreed to revise the rent by the Deed. Mr Lockwood's task was to determine the rent which would be paid until settlement. But his task was not to determine the value of the freehold interests. The settlement recorded in the Deed proceeded on the basis that the tenant had exercised the option for a further lease commencing on 1 July 2022; Mr Lockwood's role was to determine the rent that was payable on the date on which the option was (hypothetically) exercised. Where the Deed was made on 15 May 2023, the parties agreed that they were bound by the Rental Valuation for the current market rent commencing as of 1 July 2022. This was the first stage of the settlement between the parties.
4. The landlord submitted that the Rental Valuation was not separate to the property valuations but formed part of the process for determining the current market value by which the purchase price would be fixed. The landlord submitted that Mr Sanidas failed to determine the value of the landlord's freehold interest in accordance with the Deed with the result that the parties are not bound by his valuation. Mr Sanidas failed to value the landlord's freehold interest on the assumed basis that, from 1 July 2022, that interest was subject to a further lease on the same terms as the Lease save that rent was in accordance with the Rental Valuation. It was not within the contractual contemplation of the parties to the Deed that the property valuers would carry out the valuation by adjusting the market rent determined by Mr Lockwood. Mr Sanidas misconstrued the Deed and undertook the same exercise as the Rental Valuation: Strike Australia Pty Ltd v Data Base Corporate Pty Ltd [2019] NSWCA 205 at [44]-[49] (per Basten JA).
5. The landlord submitted that the Deed imposed a limitation on Mr Sanidas which fettered his discretion in valuing the landlord's interest in the property such that he was contractually restricted from carrying out his valuation on a basis which effectively contradicted the market rent valuation of Mr Lockwood: Strike Australia Pty Ltd v Data Base Corporate Pty Ltd [2019] NSWCA 205 at [140]. Were it otherwise, then obtaining the Rental Valuation made no commercial sense. Consistently with this, the joint letter of instruction required Mr Sanidas' valuation to be carried out on the basis that the rent for the further lease is the current market rent that has been determined by Mr Lockwood "for the period commencing 1 July 2022", not "as at 1 July 2022". The period commencing 1 July 2022 was clearly a reference to the five year term of the assumed further lease commencing on 1 July 2022. Hence, the instruction to Mr Sanidas was that he was required to carry out his valuation on the basis that the current market rent (as at the date of his valuation) is the current market rent determined by Mr Lockwood for the term of the further lease commencing 1 July 2022 (and continuing until its expiration on 30 June 2027).
6. The landlord submitted that the surrounding circumstances were that the tenant and the purchaser under the Contract were the same. The terms of the Deed, by requiring the rental valuer and property valuers to act on an assumed basis that a further lease with a five year term (and four options of five year terms) was in force, despite the parties being in dispute, made plain that the tenant would pay the price that the landlord would obtain on the open market. The hypothetical purchaser would receive an income stream by way of the rent payable under the assumed further lease. These considerations were said to make it unlikely that it was the objective intention of the parties for the property valuers to value the property by reference to the market rent of the property rather than by reference to the rent payable under the further lease.
7. Further, the landlord submitted that the capitalisation of income method involves valuing a property by capitalising the (pre-tax) net rental income the property produces at a capitalisation rate based on the yield reflected in contemporaneous sales of comparable income producing properties: North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd (formerly Shellbelt Pty Ltd) [2016] VSC 1 at [336], citing Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4th ed, 2003) at p 371. (This decision was overturned on appeal, where the Court of Appeal noted in Masters Home Improvement Pty Ltd v North East Solution Pty Ltd [2017] VSCA 88, "To the extent that the judge may have relied on Mr Lonergan's text book, this was not well founded. Mr Lonergan was not a witness, his text book was not in evidence and was not put to any witness who adopted what was said in it": at [434].) Mr Sanidas' reasons for capitalising market rent (rather than the rental income under the assumed further lease), discounting the market rent by a vacancy allowance (which would not affect the rent being received by the hypothetical purchaser under the scenario put in place by the Deed) and in reducing the derived market value by a capital expenditure allowance considered necessary "to operate a sustainable business enterprise" (when the hotel enterprise was not being run by the hypothetical purchaser) demonstrated that he misconstrued his valuation exercise under the Deed.

Consideration

1. Whether an expert determination is binding depends on whether the expert has performed the task stipulated by the contract. In Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314, McHugh JA explained at 335-336: (emphasis added) "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. … as between the parties … the valuation can stand even though it was made negligently. … but a valuation which is the result of the mistake in application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case the critical question must always be: Was the valuation made in accordance with the terms of the contract? … 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." See likewise Holt v Cox (1997) 23 ACSR 590 at 597 (Mason P); Heart Research Institute Ltd v Psiron Ltd [2002] NSWSC 646 at [23] (Einstein J); AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173 at [52]-[54] (Nettle JA, with whom Maxwell P and Bongiorno AJA agreed).
2. The rationale for this approach, in the context of valuations, was explained by Giles JA in Kanivah Holdings Pty Ltd v Holdsworth Properties Pty Ltd [2002] NSWCA 180 at [74]: "There is good reason for an expert valuation clause to operate in this way. There is not necessarily one correct valuation answer, and there is certainly likely to be room for dispute. This is what the parties to the contract seek to avoid, agreeing to rely on the honest and impartial decision of the valuer but also agreeing that they will be bound even if the valuer makes a mistake in doing what the contract says shall be done."
3. The expert may have to form a view on the construction of the contract in order to perform their task. In that event, the question is also whether the parties agreed to be bound by the expert's construction of the contract: Australian Vintage Ltd v Belvino Investments No 2 Pty Ltd [2015] NSWCA 275 at [78], [81] (Bathurst CJ). In that case, the expert had to consider three matters which were "all matters of judgment and were peculiarly within the qualification of the expert" and then to apply these matters to a formula, "By contrast, the construction of the formula was an objective matter outside of the expertise of such a person": at [84]. Whilst the expert needed to make a decision as to the manner in which the formula operated, it was unlikely that the parties intended to bind themselves to the expert's determination on that issue, nor did the fact that the decision was said to be final and binding compel a contrary conclusion: [81], [84]-[85]. Likewise in Strike Australia Pty Ltd v Data Base Corporate Pty Ltd [2019] NSWCA 205, a valuer mis-construed the contract, which required them to have regard to "comparable premises in the vicinity of" the subject premises. The parties were not bound by the valuer's construction of the contract, nor by the expert determination based on an incorrect interpretation of the contract: at [49] (Basten JA) and [140]-[145] (Ward JA).
4. Turning to the task assigned to Mr Sanidas, the Deed is a commercial contract. The Deed provided that the contra proferentum rule does not apply: cl 1.2(g). The relevant principles of construction are notorious, recently repeated in Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6 at [27], quoting Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544 at [16] (per Kiefel, Bell and Gordon JJ): "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."
5. As at the date of the Deed, the parties were in dispute as to whether the Lease had expired on 30 June 2022, whether the tenant had exercised an option for a further 5-year term or, in the alternative, whether the tenant was entitled to relief against forfeiture of the Lease. By the Deed, the parties resolved these issues by agreeing to sell the property to the tenant on terms. In particular, the purchase price would be the Current Market Value "to be determined" by the process described in cll 2.1(a) to (e) of the Deed.
6. The first step in that process was to obtain the Rental Valuation "to value the Current Market Rent as of 1 July 2022" utilising the procedure prescribed by cl 3.3(b) of the Lease: cl 2.2(a). The parties agreed to be bound by the Rental Valuation: cl 2.2(a). Having obtained the Rental Valuation, the parties agreed that the Current Market Rent would be a key input and assumption into the task to then be undertaken by the property valuers.
7. There were, in fact, two key assumptions recorded in cl 2.2(d) and the joint letter of instruction: the parties agreed that the property valuers would "determine the Current Market Value … on the basis that from 1 July 2022" the land "is subject to the Lease as varied … except that the number of options specified is four (4) options (for further terms of five (5) years each)" and the rent for the further lease is the Current Market Rent determined in accordance with Clause 2.2(a)": cl 2.2(d). The first assumption was that, rather than the tenant 'holding over', the tenant was occupying the motel under "the further lease". Second, the rent for the further lease was the Current Market Rent determined by the Rental Valuation.
8. As I read it, "the further lease" was a notional five-year lease commencing on 1 July 2022 and expiring on 30 June 2027, together with four options for further terms of five years each. Importantly, the "further lease" was subject to the terms of the Lease as varied, and with particular modifications. As such, the rent for the "further lease" as set out in the Rental Variation, would be reviewed annually for CPI: cl 3.2. At the end of the five-year term, the rent would be adjusted to "current market rent", in accordance with cl 3.3 of the Lease. As earlier mentioned, the provisions of the Lease meant that, even if the "current market rent" as determined at the end of the notional five-year term was less than the rent being charged at the end of that term, the rent for the new five-year term on exercise of the option would not be less.
9. The parties' agreement was faithfully repeated in the letter of instruction sent to the property valuers, albeit updated to include the rent review from 1 July 2023. As earlier described, the experts were instructed to make assumptions, including that the rent for "the further lease" was the Current Market Rent as set out in the Rental Valuation. The notations in the letter of instruction made plain that the tenant did not accept the rent review from 1 July 2023. The property valuers were to assume that the Rental Valuation applied from 1 July 2022. The property valuers were left with the task of determining an appropriate figure for rent from 1 July 2023. However, whilst the parties accepted that it was "open for you to calculate the reviewed rent", the Lease provided the formula by which the rent was to be reviewed on each anniversary, being in accordance with CPI. The letter of instruction did not leave the calculation of the rent for the period commencing 1 July 2023 'at large'.
10. In sum, the scope of the property valuer's authority, as conferred by the parties under the Deed, was to value the property on the assumptions set out in the letter of instruction, including on the basis that the rent for the five-year period commencing 1 July 2022 was as contained in the Rental Valuation and reviewed in accordance with the Lease. How the property valuer was otherwise to approach the task of valuing the land was left to the valuer.

Are the parties bound by Mr Sanidas' valuation?

1. The next question is whether the valuation provided by Mr Sanidas complied with the terms of the Deed. The fact that Mr Sanidas sought further instructions from the parties in respect of the "actual current rent figure being paid by the tenant" may suggest that he did not understand the import of the assumptions he was asked to make. Mr Sanidas professed to be "confused" by the obtuse and conflicting instructions then provided. Obviously enough, the tenant was keen to rely on the lower rent actually being paid, as it would support a lower valuation. Nor did the tenant make it clear that the difference between the "actual" rent being paid and the Rental Valuation would have to be paid on Completion in any event. For its part, the landlord was keen to point out the rent that was supposed to be paid, as it would support a higher valuation. This was in circumstances where, contrary to the assumptions that the property valuers were asked to make - that the freehold interest was subject to an ongoing lease - the landlord maintained that the tenant was on a month-to-month tenancy only. Of course, none of this 'jostling for position' altered the bargain struck by the parties in the Deed, nor the task assigned to the expert for determination.
2. Looking at Mr Sanidas' report, he did note the Rental Valuation and the landlord's rent review from 1 July 2023 but also noted the actual rent being paid by the tenant. Mr Sanidas was clearly of the view that the market rent for the motel was less than the rent he was asked to assume (which I will refer to as the Assumed Rent). Unlike Mr Robertson's approach to income capitalisation - converting the Assumed Rent into a capital sum using a discount rate - Mr Sanidas made the assumption he was asked to make in respect of the Assumed Rent until the expiry of "the further lease" on 30 June 2027, and then assumed that the rent would go back to "current market rent" as defined in the Lease. To do this, Mr Sanidas assessed the market rent for the property and then added back the Assumed Rent, to the extent that it exceeded market rent, for the balance of the five-year term. Beyond this, his view of market rent prevailed.
3. More specifically, having formed the view that the Assumed Rent exceeded market rent, Mr Sanidas proposed to calculate the market value of the land by capitalising the market rent and then "add on the value of the profit rent … to the core market value." The profit rent, as I read it, was the present value of the difference between the Assumed Rent and the market rent over the 5-year term of "the further lease". Whilst the rent he was asked to assume, as varied by the landlord's review, was $268,639, Mr Sanidas considered that market rent was $228,093. Mr Sanidas then discounted market rent by 15% to allow for vacancies, reducing the estimated market rental to $186,597. Mr Sanidas said he did this as, "The initial rent adopted assumes 100% occupancy 100% of the time throughout the one year". As I read it, he was referring to market rent, not the Rental Valuation; if the reference was to the latter, then Mr Lockwood had already adopted an occupancy of 52.5%.
4. In any event, Mr Sanidas then capitalised the market rent "at an appropriate market yield" of 9% (resulting in $2,073,300) before deducting capital expenditure in the first year of $123,500 "to reflect capital upgrade". He then added back "PV of Overage Rent", to which a discount rate of 10% had been applied, and total $116,459. The result was a current market value of $2,066,259. As earlier described, Mr Sanidas then considered direct market sales evidence as an alternate means of valuation. His views on the rent he was instructed to assume continued to hold sway in this task, "I have adopted a reversionary rent at the next market review date because I do not consider the determined rent to be a sustainable market value for the freehold building assuming it was available to let in one line [or] as is".
5. That is, Mr Sanidas proceeded on the basis that the Assumed Rent applied for the remainer of the five-year term but thereafter reverted to his assessment of market rent. Where Mr Sanidas' assessment of market rent was less than the Assumed Rent, this meant that the rental income for subsequent five-year terms for each of the four options fell below the rent under the notional five-year lease then in existence. In doing so, Mr Sanidas strayed from the assumption he was required to make, which was that the "further lease" was "subject to a lease on the same terms as the Lease, as varied" save for specified modifications. As earlier described, the 'ratchet' clauses in the Lease had the effect that the rent payable by the tenant for any further term of five years could not be less than the rent payable at the end of the notional five-year lease then in existence. As such, his valuation was not made in accordance with the terms of the contract such that the parties are not bound by it.
6. Aside from this, the fact that the experts otherwise gathered different comparable sales and formed different views on how much weight should be placed on one sale or another, or chose different yields or discount rates, are classic exercises of judgement by a valuer which fell within their assigned task.

Did the expert give sufficient reasons?

1. The landlord also submitted that it was not bound by Mr Sanidas' expert determination as he failed to comply with the Expert Code of Conduct as instructed. Given the conclusion I have already reached, it is not strictly necessary to deal with this, but I will do so briefly.
2. The landlord submitted that Mr Sanidas failed to clearly state his opinions and failed to state, specify or provide the reasons for his opinions. If a contract requires an expert to make a determination in compliance with stated professional practice standards, a demonstrated breach of those standards can lead to the conclusion that the determination of the expert was not made in accordance with the contract: Haxglow Pty Ltd v Mirvac Retail Sub SPV Pty Ltd [2020] NSWSC 233 at [50] (per Darke J); Halifax Life Ltd v Equitable Life Assurance Society [2007] 1 Lloyd's Rep 528 at [80] (per Cresswell J). The Expert Witness Code of Conduct in NSW requires the expert to disclose his or her reasoning in the same manner held to be necessary in Makita (Aust) Pty Ltd v Sprowles (2001) 52 NSWLR 705; [2001] NSWCA 305: Australian Securities and Investments Commission (ASIC) v Rich (2005) 53 ACSR 110; [2005] NSWSC 149 at [306] (per Austin J). (This submission over-states the import of these authorities, which largely focus on the requirements of the Evidence Act 1995 (NSW) but do not equate the requirements of that Act with the Expert Witness Code of Conduct; Makita does not mention the code at all.).
3. The landlord submitted that Mr Sanidas failed to give any reasons why the value of the property should be determined by calculating the capitalised value of the market rent of the property rather than the rent payable under the assumed further lease. Mr Sanidas failed to give any reasons for adopting a figure of 15% as a vacancy allowance. Mr Sanidas capitalised his estimated market rent by using a yield of 9% without giving any reasons for adopting that yield. Mr Sanidas failed to give any explanation of his determination of the yield applied, nor disclose any comparable market sales subject to a lease involving the payment of rent. Mr Sanidas added back the present value of the "profit rent" using a discount rate of 10% without setting out any calculation of the "profit rent" or any reasons for adopting the discount rate of 10%.
4. The landlord submitted that these failures to give reasons were a material departure from the expert's instructions, which cannot properly be characterised as trivial: Veba Oil Supply & Trading GmbH v Petrotrade Inc [2002] 1 Lloyd's Rep 295 at 301 (per Simon Brown LJ); Halifax Life Ltd v Equitable Life Assurance Society [2007] 1 Lloyd's Rep 528 at [81] (per Cresswell J). They prevented the parties from having a full understanding of the reasoning behind the valuation, so as to inhibit the ability of the parties to determine whether Mr Sandias had otherwise carried out the task which he was contractually required to undertake.
5. The tenant submitted that the sufficiency of reasons was informed by the nature of the task to be performed. Here, the valuation exercise involved a large amount of discretion. Mr Sanidas' report was replete with explanation save in respect of the selected yield, this not being an objective matter but one in which he was expected to use his discretion.

Consideration

1. As earlier noted, Mr Sanidas was instructed to prepare his report in accordance with the Expert Witness Code of Conduct, which required that he clearly state the reasons for the opinion expressed. Further, Mr Sanidas was instructed to include the facts, and the assumption of facts, on which his opinions were based. The letter of instruction and the enclosed Expert Witness Code of Conduct did not, however, impose a contractual obligation on the expert to provide a report which met the requirements of admissibility under s 79 of the Evidence Act 1995 (NSW), as canvassed in Makita.
2. Whilst always subject to the terms of the particular contract, the extent of an expert's obligation to provide reasons is illustrated in Kanivah Holdings Pty Ltd v Holdsworth Properties Pty Ltd (2002) 11 BPR 20,201; [2002] NSWCA 180. The lease required the valuer to provide "sufficient written reasons" for a rental determination. Stein JA considered that the reasons needed to be sufficient to enable the parties to see whether the expert determination clause had been complied with, "Detailed reasons, such as [those] to be provided by a judicial officer or arbitrator, are not required. The valuer was appointed to act as an expert and not as an arbitrator": at [61]. In Shoalhaven City Council v Firedam Civil Engineering Pty Ltd [2011] HCA 38, French CJ, Crennan and Kiefel JJ endorsed this statement, adding that the content of the requirement to give reasons must also be informed by the nature of the issues to be determined: at [26].
3. In Haxglow, Darke J was prepared to accept that, where an expert was required to comply with a professional code of conduct when preparing a rental determination, a demonstrated breach of that code could lead to a conclusion that the determination was not made in accordance with the lease: at [50]. However, his Honour founded no non-compliance with the code. Following Kanivah Holdings and Shoalhaven City Council v Firedam Civil Engineering, Darke J observed that the reasons for a rental determination were "more than adequate to disclose the essence of his method and his reasoning … The reasons, read as a whole, were adequate in my opinion to allow the parties to reasonably assess whether the determination … was carried out in accordance with the instructions … and in accordance with the relevant provisions of the lease": at [46]. Further details were not ordinarily required in an expert determination, where questions of value inherently involve matters of judgment and opinion where exact reasoning may be difficult to expose: at [46].
4. As Bell P noted in Strike Australia Pty Ltd v Data Base Corporate Pty Ltd [2019] NSWCA 205, valuation is an art and not a science, requiring the exercise of judgment and the forming of opinions, with significant scope for legitimate variations in approach and method and where the steps in reasoning will not always be able to be articulated fully: at [9]-[14], citing Boland v Yates Property Corp Pty Ltd [1999] HCA 64; Western Australian Planning Commission v Arcus Shopfitters Pty Ltd [2003] WASCA 295; Secretary of State for Foreign Affairs v Charlesworth, Pilling and Co [1901] AC 373.
5. I consider that Mr Sanidas complied with his contractual obligation to set out the facts and assumptions on which he relied, and to clearly set out his reasons. I agree that he has not gone into great detail as to why he chose a particular yield or discount rate; selection of these particular percentages is classically a matter for the judgement of a valuer. The same could be said for some aspects of Mr Robertson's report, for example, exactly how he calculated the capitalised value of the market rent. The reports of Mr Robertson and Mr Sanidas contain similar levels of detail; both reports exceed 40 pages in length. But it is quite clear what Mr Sanidas has done, and why. The parties are able to ascertain whether he has carried out the assigned task in accordance with the letter of instruction. There is more than enough information for the parties to decide whether the expert performed the task assigned to them, and thus whether the parties are bound as agreed. This requirement is satisfied here.

Whether the Contract has been frustrated

1. The landlord submitted that, as a result of the parties not being bound by the valuation of Mr Sanidas, it was now not possible to fix a purchase price or settle the sale and purchase of the Property under the terms of the Contract. As a consequence, the Contract has been frustrated and the parties have been discharged from the obligation to perform their future duties under the Contract: Cao v ISPT Pty Ltd [2024] NSWCA 188; GR Evans & Co Pty Ltd v Watts (Supreme Court (NSW), 23 October 1986, unrep) (per Clarke J). The result of Mr Sanidas failing to carry out his appointed task under the Deed was that it is now not possible to calculate an average of two binding valuations of the freehold interest of the landlord within the meaning of the term "Current Market Value" in cl 1.1 of the Deed so as to determine the purchase price under the Contract for the purposes of cl 2.2 of the Deed and special condition 46 of the Contract. As a result, a completion date can never be fixed under cl 47 of the Sale Contract.
2. As it was not possible to complete the Contract, it was said to follow that an event has arisen that is fundamentally different to the contemplated performance of the Contract, with the result that the Contract has been frustrated and the parties have been discharged from the obligation to perform their future duties under the Contract (Cao v ISPT Pty Ltd [2024] NSWCA 188; GR Evans & Co. As a consequence, the parties have been discharged from their future obligations under the Contract to complete the sale and purchase of the Property.
3. The tenant submitted that the contract has not been frustrated as circumstances have not altered the context of performance so different from what the parties had assumed, as to render a radically or fundamentally different thing from what had been contracted for. By agreeing to be bound by a regime in which a purchase price would be conclusively determined by third parties, the parties assumed a risk that a valuer's determination would not meet their expectations or that the amount would not be what that party might have sought to otherwise achieve in a commercial negotiation. An unexpected, and even disappointing outcome of such a process for one or more of the parties does not render the outcome so radically or fundamentally different as to result in frustration. It is in fact the very outcome the parties had anticipated and agreed to each assume the risk for. As such, no frustration can arise. Further, the tenant submitted that the Deed, as opposed to the Contract, could not be frustrated where it had been partly performed. Clause 7.5 of the Deed required the parties to cooperate and there was no reason why Mr Sanidas could not be called upon to clarify or amend his valuation to save the parties' bargain. The market rent was not the rent identified by Mr Lockwood but, notwithstanding this, both valuers performed their task as given, exercising their discretion and expertise, which the Deed and letter of instruction left open to them without constraint.

Consideration

1. A contract, or part of a contract, is frustrated where, "without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract … It was not this that I promised to do": Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 729 (per Lord Radcliffe). As Mason J explained in Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337; [1982] HCA 24, "a contract will be frustrated when the parties enter into it on the common assumption that some particular thing or state of affairs essential to its performance will continue to exist or be available, neither party undertaking responsibility in that regard, and that common assumption proves to be mistaken": at 357; Woolworths Group Ltd v Gazcorp Pty Ltd [2022] NSWCA 19 at [212]-[221] (per Bell P).
2. As Kirk JA (Meagher JA and Griffiths AJA agreeing) recently observed in Cao v ISPT Pty Ltd [2024] NSWCA 188 at [29]: (citations omitted) "A finding of frustration is not lightly made. The mere incidence of expense or delay or onerousness is not sufficient. Nor are disappointed expectations. That is so in order that legitimate commercial expectations may be preserved and protected; imprudent commercial bargains cannot be aborted or modified merely because of an adverse change of circumstances."
3. The effect of frustration is not to avoid a contract from the beginning but to excuse the parties from performing future obligations. By close analogy to what follows on termination of a contract for breach, "an event of frustration will not remove, or negate, the existence or efficacy of what are already unconditionally accrued rights under the contract, from periods whilst the contract's performance was operative: Jamac Construction Group Pty Ltd v De Mol Investments Pty Ltd [2014] WASC 273 at [44] (per Martin J), applying McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476-477 (per Dixon J).
4. The landlord relied on GR Evans & Co, where the parties appointed an accountant to calculate a purchase price. The accountant provided a provisional view, but died before he had addressed the concerns of one of the parties and delivered any revised determination. Clarke J observed that the accountant's death had effected a frustration of the contract: at 9. That may well be right where the parties appointed a single expert, who has died part-way through their task.
5. There is no evidence that Mr Sanidas has suffered a similar fate to the accountant in GR Evans. If Mr Sanidas' valuation does not accord with the letter of instruction, such that the parties do not presently have two valuations from which an average may be calculated and the purchase price fixed, then I do not consider that the Contract has been frustrated.
6. The way forward in these circumstances was considered in AGL Victoria v SPI Networks, where the expert did not perform the task assigned by the contract, such that the determination was without effect. Nettle JA observed that the expert was bound to prepare a determination which did comply with the contract - not an amended determination but the determination which they were bound to prepare from the outset - and thereafter the parties would be bound by contract to comply with that determination: at [77]. This was followed in Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd (2013) 41 VR 636; [2013] VSCA 179, where Maxwell P noted, "If the determination given does not satisfy the terms of the contract, then it is of no effect and, at the option of the parties, must be done again": at [15].
7. The Contract has not been frustrated. The parties agreed that the purchase price would be determined in accordance with cl 2.2 of the Deed: special condition 46. The steps in cl 2.2 of the Deed are in train. The parties have completed the steps in subcl (a) to (d). The parties cannot presently calculate the purchase price as they have received one valuation which accords with cl 2.2(d), being that of Mr Robertson, but have yet to receive the second valuation which also complies with the requirements of that sub-clause. The Deed and Contract impose no time-limits by which the valuations must be received. It simply remains for the second valuation to be obtained.
8. Once a second valuation which fulfills the requirements of cl 2.2(d) is to hand, then the parties can complete the calculation of the purchase price in accordance with subcl 2.2(e) of the Deed. When this occurs, the purchase price will be ascertained in accordance with special condition 46 of the Contract. So too can the Completion Date of the Contract, which is six months from the receipt by the parties of the Current Market Value under cl 2.2(e) of the Deed.
9. The fact that completion of the purchase of the motel will be delayed does not mean that the Contract has been frustrated, where the contractual obligations remain capable of being performed and performance will not be "radically different from that which was undertaken by the contract" or what the parties promised to do: Davis Contractors. As Kirk JA noted in Cao, "The mere incidence of expense or delay or onerousness is not sufficient": at [29]. Nor is the landlord prejudiced by the delay where it remains entitled to the increased rent determined by the Rental Valuation on Completion.

Whether the notice of termination of Lease is valid

1. The landlord submitted that the Lease expired on 30 June 2022. The tenant did not serve any notice of exercise of option within the time period required by the Lease. It was an accepted premise of the proceedings settled by the Deed that the tenant had not purported to serve any notice of exercise of option within the time period required by the Lease. The tenant has occupied the motel on a monthly tenancy since then, being on the same terms as the Lease and terminable on one month's notice: cl 2.4. The releases given under the Deed were given in relation to the "Lease", defined by the Settlement Deed to mean the Lease as varied. That lease expired. The monthly tenancy came into existence on and from 1 July 2022 and was not the Lease defined in the Deed but a separate and distinct tenancy. The tenant was in breach of its obligation to pay rent, outgoings and interest under the monthly tenancy. The landlord validly terminated the monthly tenancy from the end of 30 June 2024.
2. The landlord submitted that the monthly tenancy was on the same terms as the Lease, which included the requirement for the tenant to pay the rent by equal monthly instalments in advance on the first day of the month: cl 3.1. The monthly tenancy required that any provision or right under the tenancy may only be waived or varied in writing signed by the parties to be bound: cl 1.3(b). The Deed did not waive or vary any of the terms of the monthly tenancy. The Contract contained the standard terms that the landlord was entitled to rent up to and including the adjustment date and that the parties must make any necessary adjustment on completion. For the avoidance of doubt, the Deed clarified that, on the completion of the Contract, the adjustment for rent under the Contract was to be calculated on the basis that the rent from 1 July 2022 was the market rent determined by Mr Lockwood. There is no basis for implying a term into the Deed that the rent due monthly in advance under the express terms of the monthly tenancy was not required to be paid until the settlement of the Contract. Such a term would mean that the tenant would not yet have been obliged to pay any of the $572,703.60 of the rent as determined by Mr Lockwood from 1 July 2022 to 30 June 2024. Such a construction of Deed made no commercial sense and was not required to give business efficacy to the Deed.
3. The landlord submitted that, as the tenant was in breach of its obligation to pay rent under the monthly tenancy when the Notice of Termination was given on 22 May 2024, the landlord was entitled to rely on that ground for terminating the tenancy regardless of whether or not the tenancy was terminable on one month's notice (as provided for in the monthly tenancy). The result was that the landlord was entitled to the relief sought in the Cross-Summons for judgment for the unpaid rent and outgoings to 30 July 2024 (and to unpaid mesne profits from 1 July 2024) and judgment for possession of the Property with leave to issue a writ of possession.
4. The tenant submitted that the landlord was not entitled to terminate the Lease and seek judgment for unpaid rent, because the landlord released and covenanted not to sue the tenant in relation to any actions in relation to the Lease: cl 3.4 of the Deed. Further, cl 2.2(a) set out a process by which the property's Current Market Rent as at 1 July 2022 would be determined. Clause 2.2(e) provided that on completion of the contract for sale, the tenant would pay all Current Market Rent from 1 July 2022 with credit for the amounts already paid. The landlord was not entitled to the uplift in rent until completion of the Contract. Because of the landlord's own actions, that had not yet occurred. Mr Peng had given an undertaking to the Court, and paid $250,000 into his solicitor's trust account, to ensure this could occur on Completion. The landlord's assertion that any outstanding rent was payable now constituted a breach of the Deed, which the landlord was precluded from raising in these or any proceedings.
5. The tenant submitted that the landlord has sought to resile from its obligations under the Deed and the Contract and had purported to terminate the Lease. The tenant was entitled to performance of the Contract, where the landlord refused to perform its obligations and asserted it was no longer bound.

Consideration

1. As earlier mentioned, as at the date of the Deed, the parties were in dispute as to whether the Lease had expired on 30 June 2022, whether the tenant had exercised an option for a further 5-year term or, in the alternative, whether the tenant was entitled to relief against forfeiture of the Lease. By the Deed, the parties agreed to resolve these issues by selling the property to the tenant on terms. Whether the Lease had expired, whether the tenant was holding-over or had, as it asserted, validly exercised an option for a further 5-year term, fell within the definition of Dispute, which the parties agreed to resolve in this manner.
2. As has been canvassed in some detail, the parties agreed to settle the Dispute by following the steps set out in cl 2.2: obtaining the Rental Valuation, then obtaining two property valuations, then completing the purchase of the motel at the average of the two valuations plus $100,000 for the costs of the earlier proceedings, together with adjustments on Completion. That process has been delayed by the fact that Mr Sanidas' valuation does not comply with cl 2.2(d) of the Deed. At the moment, the average of two valuations cannot be calculated and the purchase price thereby determined, so that the parties can proceed to Completion.
3. I accept the tenant's submissions as to the effect of the release given by the landlord, the bar to claims and the covenant not to sue in cll 3.2 to 3.4 of the Deed. These provisions, together with the wide definition of Claim, prevent the landlord from asserting that the Lease has expired or seeking to terminate the Lease unless the tenant breaches the Deed. The tenant is not in breach of its obligations under the Deed. The tenant remains ready and willing to complete the purchase of the motel in accordance with the Deed once a second valuation, which accords with the requirements of cl 2.2(d) of the Deed, is to hand.
4. True it is that cl 1.3 of the Lease contains "General" provisions, including: (c) Waiver and variation: Any provision or right under this Lease may only be waived or varied in writing signed by the parties to be bound.
5. Assuming - contrary to the tenant's contention in the earlier proceedings that it had validly exercised the option - that the tenant was and is holding over, then the Parties' execution of the Deed was a variation in writing signed by the parties to be bound to a waiver or variation of the provision or rights under cl 2.4 of the Lease. That is what the Parties agreed in the Deed: during any 'holding over' between the execution of the Deed and Completion of the Contract, the tenant would continue in occupation and, on Completion, 'top up' any rent paid during this period to the level indicated by the Rental Valuation.

Entitlement to rent

1. Clause cl 2.2(f) of the Deed made plain that on Completion the tenant would pay the landlord all rent calculated from 1 July 2022 in accordance with the Rental Valuation, less whatever rent the tenant has already paid during the intervening period.
2. Mr Turner's calculation to the unpaid rent, for which judgment is sought, is based on the Rental Valuation. The landlord is not entitled to the higher rent determined in the Rental Valuation under the Lease. Whilst the Rental Valuation utilised the procedure described in cl 3.3(b) of the Lease, it was not an adjustment to "current market rent" under the Lease, where the landlord's position was that the Lease had expired and the tenant had failed to exercise an option for a further term. Under the Lease, the landlord is only entitled to CPI adjustments during any holding over: cl 2.4(d).
3. The Rental Valuation is binding on the parties under cl 2.2(a) of the Deed. The landlord's entitlement to the increased rent is conferred by cl 2.2(f) of the Deed. The landlord will be entitled to the increased rent under the Rental Valuation on Completion of the Contract, but is not presently so entitled.

Orders

1. For these reasons, I make the following orders: 1. Declare that, on the proper construction of the deed made between parties on 15 May 2023, the valuation of John Sanidas dated 7 February 2024 is not binding on the parties to the Deed. 2. Declare that the notice of termination of the Lease AH235519 as varied of 359-361 Goonoo Goonoo Road, Hillvue, New South Wales 2340 contained in Certificate of Title Folio Identifier 1/1111474 being Lot 1 Plan in DP 111474 ("Property") dated 24 May 2024 and served on the plaintiff on 24 May 2024 is void. 3. Further declare that the Contract for the sale and purchase of land in respect of the Property has not been frustrated and is binding. 4. Otherwise dismiss the Summons and Cross-Summons. 5. Order that the security paid to the plaintiff's solicitors by Rongtao (Jack) Peng be returned forthwith. 6. Direct the parties to notify any error or omissions within 7 days. 7. Direct the parties to provide any affidavits and submissions (limited to three pages) in respect of costs within 14 days, such application to be determined on the papers.

Amendments 05 November 2024 - Coversheet: Legislation cited (Cth) amended to (NSW) Minor typographical errors amended. 05 November 2024 - Order 5 amended: Order that the security paid to the plaintiff's solicitors by Rongtao (Jack) Peng be returned forthwith. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 05 November 2024