Victorian Civil and Administrative Tribunal|2003-10-22

Justbake Pty Ltd v Otranto Nominees Pty Ltd [2003] VCAT 1490 (22 October 2003)

Retail Tenancies List - valuer determining market rental - whether market rental determined in accordance with the lease - whether valid determination - whether mistake made by valuer vitiates valuation - Retail Tenancies Reform Act 1999 s.12(5)

RESPONDENT: Otranto Nominees Pty Ltd (ACN 005 162 756)

1. I declare that the determination of the valuer Darrell Simpson made 22 November 2002 is final and binding upon the parties.

2. I declare that the current rental value of the premises being 175 Carlisle Street, Balaclava, as at 13 August 2002 and determined by the said Darrell Simpson is $47,300 per annum.

3. The annual rental for the premises at 175 Carlisle Street, Balaclava, for the year commencing 13 August 2002, is fixed at $47,300.

For the Applicant: Mr S Chizik of counsel instructed by Edward M Sztal

For the Respondent: Ms Harris of counsel instructed by Arnold Bloch

1. The respondent is the owner of premises at 175 Carlisle Street, Balaclava ("the premises").

2. The applicant is the tenant of those premises and since 13 August 1990 has carried on business thereon as a cake shop.

3. There were leases in respect of the premises entered into by the applicant as tenant in 1990, 1993 and 1996, which leases are not relevant to this application.

4. By a lease dated 8 September 1999, the respondent agreed to lease the premises to the applicant for a term of three years commencing 13 August 1999 with a commencing rental of $36,791 ("the lease"). The lease provided for two further terms of three years each. The present proceedings involve a dispute as to the rental that the applicant should pay for the premises for the first further term of the lease commencing on 13 August 2002. It is common ground between the parties that the option for the first further term of the lease has been validly exercised by the applicant.

5. Clause 5 of the lease provides for the exercise of the option :

"The annual rental for the first year of the renewed term to be an amount determined in accordance with the provisions of clause 6 hereof and otherwise upon the same terms and conditions as herein contained ... but the renewed lease shall provide that any further renewed lease shall not contain any such provisions with the intent that there shall be two renewals thereof and no more and so that upon the exercise of the last option of renewal such renewed lease shall contain no further option of renewal and provided further that the lease entered into as a consequence of the second renewal term hereby granted shall include the clause annexed hereto and marked 'A'. ..."

6. Clause 6 provides the machinery for fixing the rent for the further term which ultimately falls upon a valuer, which the parties do not dispute in this case has been correctly appointed.

7. Clause 6.4 sets out the method by which the valuer shall determine the rent. It states :

"The valuer so appointed shall determine the current market rent of the demised premises in accordance with the principles set out in Section 12(5) of the Retail Tenancies Reform Act 1998 and the valuer so appointed shall call for and if submitted consider submissions from the parties.

The valuer shall act as an expert and not as an arbitrator and his determination shall be final and binding on the parties hereto".

8. Clause "A" of the lease provides the method by which goods and services tax (GST) shall be payable. However, it is agreed by the parties that that clause does not operate until the second further term of the lease and thus I am not concerned with that clause in this proceeding.

9. Pursuant to the provisions of the lease W B Simpson and Son were appointed to determine the rental of the premises in accordance with the terms and conditions of the lease. Pursuant to that appointment a determination was made in writing on 22 November 2002 by W B Simpson and Son ("the determination"). The valuer made his determination in paragraph 8 of the determination and he therein stated as follows :

"I determine the rental of the subject property in accordance with the terms and conditions of the lease as at the 13th August 2002 at $47,300 per annum.

I am instructed that the lessor is registered for GST, and the rental determined is inclusive of GST. Schedule "A" to the lease provides for the lessee to pay the GST to the lessor.

A review opportunity, on or after July 2000, is defined in sub-section 13(5)(b) of the A New Tax System (Goods and Services Tax Transition) Act 1999 as an opportunity that arises under the agreement for the supplier under the agreement (acting either alone or with the agreement of one or more of the other parties to the agreement) to conduct, on or after 1 July 2000, a general review, renegotiation or alteration of the consideration.

A review based on market rates - a 'market review' - is a 'general review negotiation or alteration of the consideration'. An opportunity to conduct a market review on or after 1 July 2000 is a review opportunity.

Where a valuer is required to determine a rental according to market values, this will constitute a review opportunity. The rental charged by a supplier after a review opportunity will not be GST-free. The valuer must therefore determine the rental as a GST inclusive price.

Thus the rental determined comprises market rental of $43,000 per annum plus GST $4,300 per annum, total amount payable.

Forty-seven thousand, three hundred dollars per annum ($47,300 p.a.).

In addition, outgoings shall be payable pursuant to the lease".

10. Under a heading "Valuation Rationale" the valuer, inter alia, makes the following points :

"I have carried out a survey of rents being paid for retail premises in the Balaclava shopping precinct. I note a general range of rentals from $22,500 per annum to $49,000 per annum with tenants paying outgoings and GST ...

The determination is made in accordance with the following definition of market rental :

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

11. By a letter dated 4 February 2003, the solicitors for the respondent, Arnold Bloch Leibler, wrote to the valuer, Mr Darrell Simpson of W B Simpson & Son, in the following terms :

"A difference of opinion has arisen between landlord and tenant in relation to your rental determination.

There is an error in your determination in point 8. Schedule "A" to the lease provides that the lessee pay GST to the lessor only during the option period which will commence in August 2005. Under the present Lease, the tenant is not required to reimburse GST to the landlord in addition to the rental.

However, this error does not appear, to us, to affect your determination of the current annual rental payable by the tenant under the lease. In fact, you state also in point 8 that the rental determined is inclusive of GST. Our understanding of your determination is that the current market rental payable by the tenant under the existing lease for the period commencing August 2002, should be $47,300 per annum from which the landlord will be required to pay its own GST. The solicitor for the tenant is interpreting your determination of current market rental at $43,000 per annum as the amount paid by the tenant to the landlord.

We would be pleased if you would confirm that your rental determination based on the rental being a GST inclusive is, in fact, $47,300 per annum and that the tenant should pay that amount to the landlord ...".

12. In reply to the letter from Arnold Bloch Leibler dated 4 February 2000, Mr Darrell Simpson wrote as follows :

"We confirm that, following normal commercial practice, our determination is $47,300 per annum which the tenant must pay to the landlord. Assuming that the landlord is registered for GST, the landlord would pay GST of $4300 from the annual payment".

13. As I have previously noted, clause 6.4 of the lease requires the rental to be determined in accordance with the principles set out in s.12(5) of the Retail Tenancies Reform Act 1998. That section reads as follows :

"(5) If the current market rent is to be used as the formula or basis for rent review, the current market rent is to be taken to be the rent obtainable at the time of the review in a free and open market, between a willing landlord and a willing tenant in an arm's length transaction, where -

(a) the parties have each acted knowledgeably, prudently and without compulsion; and

(b) the retail premises were vacant and to be let on similar terms as are contained in the current retail premises lease; and

(c) all other relevant factors, matters or variables used in proper land valuation practice have been taken into account".

14. I note at this time that a new tax system was introduced in this country which came into operation on 1 July 2000. The new tax system involved the payment of GST. It was argued that the relevant part of the legislation to this proceeding is s.13 of A New Tax System (Goods and Services Tax Transition) Act 1999 (Cth). That Act received Royal Assent on 8 July 1999 which was precisely two months prior to the date appearing on the lease. The relevant parts of s.13 of the New Tax System (Goods and Services Tax Transition) Act 1999 read as follows :

(a) a written agreement specifically identifies a supply and identifies the consideration in money, or a way of working out the consideration in money, for the supply; and

(b) the agreement was made before the day on which this Act received the Royal Assent.

(2) The supply is GST-free to the extent that it is made before the earlier of the following :

(b) if a review opportunity arises on or after the day of Royal Assent - when that opportunity arises.

review opportunity, for an agreement to which this section applies, means an opportunity that arises under the agreement :

(a) for the supplier under the agreement (acting either alone or with the agreement of one or more of the other parties to the agreement) to change the consideration directly or indirectly because of the imposition of GST; or

(b) for the supplier under the agreement (acting either alone or with the agreement of one or more of the other parties to the agreement) to conduct, on or after 1 July 2000, a general review, renegotiation or alteration of the consideration; ..."

15. While realising that this section can have no application to this proceeding, because the lease was made after the day of Royal Assent, I have quoted the same because it was referred to both in the valuer's determination and in argument before me. However, in light of the provisions of s.13(1)(b), this provision does not appear to be relevant in relation to the proceeding herein.

16. The parties agreed that both the lease and the further term were subject to GST. That is that payments of rental made pursuant to the lease attracted GST. Both parties agreed that the landlord was required to remit to the Australian Taxation Office the appropriate amount of GST from the rental it received.

17. Mr Chizik, on behalf of the applicant, submitted that the valuer did not act in accordance with the lease in that the valuer took into account GST and that the true valuation is to market value which the valuer found to be $43,000 per annum. He submitted that the GST is irrelevant and was not a question for the valuer, as the burden of GST was something that was agreed between the parties to be paid by the landlord in this particular case.

18. Mr Chizik further stated that the definition of "market rental" used by the valuer (quoted above) was different from that referred to in the Retail Tenancies Reform Act 1998 s.12(5) in that it did not refer to the criteria in 12(5)(b), "to be let on similar terms as are contained in the current retail premises lease". That is, he submitted, without GST. Under these circumstances, Mr Chizik submitted that the valuer is mistaken and therefore the parties should not be bound by the determination.

19. Ms Harris, on behalf of the respondent, submitted that where parties agree to an expert making a determination and agree that the determination will be binding, the courts will not interfere with the valuation in the absence of fraud, collusion, conflict of interest, or mistake in the narrow defined sense. I pause here to state that the applicant says that the valuer has made a mistake in the sense that he has not determined the market value in accordance with the lease and s.12(5) of the Retail Tenancies Reform Act 1998. There is no suggestion in this case of fraud, collusion or conflict of interest.

20. Ms Harris relied on the decision of Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 at 335. His Honour McHugh JJA there stated :

"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. This was pointed out by Sir David Cairns in the Court of Appeal in Baber v Kenwood Manufacturing Co Ltd (at 181). A valuation obtained by fraud or collusion can usually be disregarded even in an action at law. ..... 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 the 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 judgement and agree to be bound by his decision. .... But as between the parties to the main agreement the valuation can stand even though it was made negligently. While mistake or error on the part of the valuer is not 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 the 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 therms 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 error in the discretion judgment of the valuer. It is whether the valuation complies with the terms of the contract".

21. In Commonwealth of Australia v Wawbe Pty Ltd & Pinebark Park Pty Ltd (unreported 25 September 1998 Supreme Court of Victoria), Gillard J at para 39 agreed with McHugh JJA's statement of the law and then stated that the question is "Whether the valuation complies with the terms of the contract?". At paras 44 and 45, his Honour posed a number of questions in the following terms :

"44. The trend of the authorities establish that the mistake must be of a kind which demonstrates that the valuer did not perform his task as required by the contract making allowance for the fact that the valuer in construing the agreement, where necessary, is a valuer and not a lawyer.

45. In my opinion it follows that the court should consider three questions -

(i) What did the parties agree to remit to the expert?

(ii) Did the valuer make a mistake and if so what was the nature of the mistake?

(iii) Is the mistake of such a kind which demonstrate that the valuation was not made in accordance with the terms of the contract and accordingly does not bind the parties?

22. The first question posed by Gillard J "What did the parties agree to remit to the expert?" can be simply answered by reference to clause 6.4 of the lease which I have referred to above. That is, the current market rent of the premises in accordance with the principles set out in s.12(5) of the Retail Tenancies Reform Act 1998.

23. The second question posed by Gillard J is, "Did the valuer make a mistake and if so what was the nature of the mistake?". In the valuer's determination, by the use of the words "Schedule 'A' to the lease provides for the lessee to pay the GST to the lessor" clearly that is a mistake. That is not what the lease provided. The lease provided that the GST was to be paid by the lessor in the second further term of the lease but did not make such provision for the first further term of the lease. Further, it is clear that s.13 of A New Tax System (Goods and Services Tax Transition) Act 1999 does not apply to this situation. Clearly, the valuer was of the impression that it did. However, bearing in mind that it was agreed between the parties that GST was payable on the lease, it does not seem to matter whether that liability arose from s.13 or from the substantive provisions of the relevant GST legislation.

24. In spite of Mr Chizik's submission that the valuer ignored the provisions of s.12(5) of the Retail Tenancies Reform Act 1998 in particular s.12(5)(b), in my view that is not necessarily correct. In stating similar words to the beginning of s.12(5), the valuer was stating the general principles of definition of "market rental", he was not intending it to be an all inclusive definition. Therefore, it would be wrong to assume that he did not take into account the provisions of s.12(5)(b).

25. I note, that the valuer in the letter to which I have referred dated 12 February 2003 makes it clear that even in spite of him believing wrongly that clause "A" of the lease applied, his determination is still $47,300.

26. The final question that must now be asked is "Whether the mistake of such a kind which demonstrates that the valuation was not made in accordance with the terms of the contract". This question was considered by the Supreme Court of New South Wales in Orti-Tullo v Sadek (unreported 2001 NSWSC 855 28 September 2001 Bryson J). At para 20 his Honour set out counsel's argument in the following terms :

"Central to the plaintiffs' argument is formulation of the mistake on which the attack on the valuation is based. In his written submissions counsel said that the question is whether the valuer assessed the current market rent for the premises as at 1 August 2000 in accordance with cl.2.2.4 of the Lease. Counsel there said that the valuer's rental determination was exclusive of GST or, to put it slightly differently, did not allow for the impact of GST on the lessors. It was also said that the overall result for the parties of the rental determination is that the lessors will receive $54,545 as rent, the lessees will pay $60,000 as rent and receive an input tax credit of $5,454; and counsel contended that this demonstrates that the valuer failed to determine the current market rent for the premises in accordance with cl.2.2.4".

His Honour then commented on the effect of the GST :

"24. On its face the letter is a statement of the obvious as, in the absence of some contractual undertaking dealing with the subject, a lessee is not liable to pay the lessor, as part of the rent or otherwise, any sum in respect of GST. On the other hand the existence of GST is likely to have some effect on economic behaviour and on current market rental_._

34. The view is reasonably open that the incidence of GST on rent received is not a primary concern of the valuer, and is not a prominent consideration at all in determining the current market rent for the premises. The market could respond in various ways to the incidence of GST. Current market rent conceivably could rise at the introduction of GST so as to give lessors the same net return as they previously had, but markets can behave in many ways, and it is conceivable that with the commencement of GST the market might not respond at all, or might respond so as to return only part of the tax liability of the lessors. There might be some movement in market rent which gave them much more. Conceivably GST could have no market impact and the amount of money which lessees generally were prepared to pay for premises may not have changed when lessors came under a new tax system. It would be plainly erroneous to determine what the current market rent was as of 1 August 2000 and then adjust upwards so as to return that amount net of GST to the lessor. What reasoning the valuer employed is unknown, and it is not shown by the brief statement in his letter of 10 November 2000.

35. In my opinion it has not been established by the terms of the determination or otherwise on the evidence that the valuer made a mistake with respect to his treatment of GST in determining the current market rent, or a mistake of any other kind. There is no evidence tending to show that the assessment of $60,000 as the current market rental is improbable or unreliable. No mistake of the valuer has been established or exposed to consideration of its effect in the law as stated by McHugh JA.

36. A mistake of the kind which was asserted by the plaintiffs' counsel to have taken place, although it was not established, would not in my view have been a mistake of the kind which is open to examination by the Court if it had been established. The supposed mistake would not be analogous to a mistake as to the identity of the property. Failing to have regard to some factual matters which should be regarded, whether the incidence of a tax or otherwise, is not a mistake of the kind on which the Court can act. What the valuer decided was the current market value was a matter of fact and of valuing principle which the parties left it to him to resolve. His determination says that he did determine the matter referred to him and his letter of 10 November does not qualify that statement". (underlining supplied)

27. If the valuer had made a determination of $43,000 plus GST of $4,300 that would, in my view, be a mistake that would have been open to examination. However, a careful reading of the determination does not lead me to that conclusion. It is noted, that at the beginning of the determination section of the valuation, the valuer has said, "I determine the rental of the subject property in accordance with the terms and conditions of the lease as at 13 August 2002 at $47,300 per annum". It will be noticed, that there is no mention there whatsoever of the break-up between GST and rental. When the valuer says "thus the rental determined comprises market rental $43,000 per annum plus GST $4,300 per annum, the total amount payable" (underlining supplied), I take this statement to be no more than saying that the landlord can keep $43,000 of the rental and he is required to remit $4,300 to the government. This is particularly so in light of the highlighted words under that which read $47,300 per annum. Fortification for this view as to what the valuer intended comes from the letter of the valuer to which I have referred and which is dated 12 February 2003.

28. Thus, in my view, reading the valuation as a whole, the valuer did not come to his determination by calculating the market rental and adding GST to that figure. What he in fact did was calculate the market rental in accordance with the terms of the lease and then deduct the amount of GST that the landlord would be required to pay. Thus, in my view, the mistake that the valuer has made is not the kind of mistake which demonstrates that the valuation was not made in accordance with the terms of the contract. In determining the rental at $47,300 it is probable that the valuer took into account the GST had on "economic behaviour and on current market rental" (see Orti-Tullo case paragraph 24). However, that did not mean that he went outside the terms of the lease, because the GST is relevant to "current market rental" as used in s.12(5) of the Retail Tenancies Reform Act 1998.

29. It necessarily follows, that I am not of the view that the determination should be set aside.

30. Mr Chizik submitted, that I should not only set aside the determination of the valuer but that I should find that the annual rental value of the property as determined by market rental is $43,000. He stated that I have the power and the information before me to fix the rental and I should do so as the Full Court of the Supreme Court did in Karenlee Nominees Pty Ltd v Gollin [1983] VicRp 61; [1983] VR 657. However, having come to the conclusion which I have above, in my view, I do not need to decide this point.

31. Thus in conclusion, the applicant's application herein will be dismissed and I will make the orders sought by the respondent in its counter-claim.

Tenancies Reform Act 1999

New Tax System (Goods and Services Tax Transition) Act 1999

Tax System (Goods and Services Tax Transition) Act 1999

Retail Tenancies Reform Act 1998

Tenancies Reform Act 1998

Justbake Pty Ltd v Otranto Nominees Pty Ltd [2003] VCAT 1490

At a glance

Court

Decision date

Source

Judgment (82 paragraphs)

Justbake Pty Ltd v Otranto Nominees Pty Ltd [2003] VCAT 1490 (22 October 2003)

Parties

Legislation Cited (5)

Cases Cited (1)