1. The applicant tenant operates a Supported Residential Service ('SRS') in Ballarat. On 1 June 2001 it leased the premises from the former owner/operator - Grangeville Pty Ltd which has since gone into liquidation. The term of the lease commencing on 1 June 2001, was for 6 years with an option for two further terms of 6 years. The respondent landlord became the owner of the property in August 2002.
2. At the commencement of the lease the tenant operated the SRS under a certificate of registration issued by the Department of Human Services ('DHS') which was transferred to it by Grangeville, the previous operator of the facility. This certificate allowed for 66 beds. The tenant subsequently obtained approval to operate 68 beds, sometime in 2002. The rent for the last year of the initial term (1 June 2006 to 31 May 2007) was $188,338 per annum (plus GST) calculated at the rate of $53.26 per resident per week, on the basis of 68 licensed beds.
3. On 20 February 2007 the tenant gave the landlord written notice that it wished to renew the lease for a period of 6 years. The parties were unable to agree the rent payable for the period commencing 1 June 2007. On 22 October 2007 they agreed the rent payable from 1 June 2007 would be determined by an independent valuer, in accordance with the process set out in clause 7 of the Lease ('the lease resolution agreement'). Malcolm Collins, then of DTZ Australia (Vic) Pty Ltd was appointed valuer and issued his determination on 9 January 2009. He determined that the market rental for the period from 1 June 2007 was $145,340 per annum net exclusive of GST calculated at the rate of $65 per resident per week on the basis of 43 licensed beds.
4. During the period 1 June 2007 to 31 December 2008 the tenant paid rent totalling $321,552.90 inclusive of GST. The tenant says that based on the valuer's determination the market rental payable for that period was $256,864.22 inclusive of GST and it is therefore entitled to a credit of $64,688.68 for that period plus or minus any adjustment taking into account amounts paid since 1 January 2009.
5. By application filed on 24 April 2009, the tenant seeks specific performance of the lease and the lease resolution agreement and in particular that the landlord:
   1. Prepare and execute a Deed of Renewal of Lease;
   2. Provide the Deed to the Applicant for execution;
   3. Credit the applicant the sum of $64,688.68

1. The tenant's as set out in its final submissions has been amended slightly and it now seeks:

(a) an order that the Respondent perform the agreement to lease and execute a new deed of lease and counterpart and deliver up the original executed deed and a counterpart for execution by the Applicant;

(b) a declaration that the rental is $159,874 per annum inclusive of GST as at the 1st June 2007;

(c) an order that the Respondent pay or give a credit for overpaid rental with interest;

1. On 2 July 2009 the landlord filed its defence and counterclaim. It seeks a declaration that the expert determination was not made in accordance with the resolution agreement or the lease, that the parties are not bound by it; and that the rent for the first year of the new lease commencing 1 June 2007 is $229,840 exclusive of GST. Alternatively an order that the matter be remitted back to the valuer for expert determination or that the tribunal appoint an independent valuer to determine the market rent for the further term of the lease.
2. Mr Best of Counsel appeared on behalf of the tenant, and Mr Castelan of Counsel appeared on behalf of the landlord. I have been assisted by their carefully prepared submissions.
3. Mr Smyth, a director of the tenant, gave evidence, and I also heard from the valuer, Mr Collins, who had been subpoenaed by the landlord to produce his file and give evidence. Whilst noting the tenant's objections, having regard to s98 of the Victorian Civil and Administrative Tribunal Act 1998 I considered I would be assisted by his evidence in relation to the information he had been provided by the parties, and allowed him to be called in relation to this discrete issue. The landlord did not call any other witnesses.
4. The primary question to be determined is whether the parties are bound by the valuation. The parties have approached this question from dramatically differing perspectives. The tenant maintains I can only be concerned with whether the valuation was carried out in accordance with the agreement between the parties and the valuer ('the valuation agreement'). The landlord argues I must having regard to both the resolution agreement and the valuation agreement and, in particular, whether it was within the contemplation of the parties that the rent for the first year of the further term could be less than the rent previously paid.
5. I am satisfied that the tenant's position is the correct one. I must determine whether Mr Collins has carried out his expert determination in accordance with the terms of the valuation agreement. It matters not whether the outcome - his determination as to the fair market rent - accords with the parties' expectations. When they entered into the resolution agreement they agreed on a process to resolve their dispute as to the appropriate rent. They agreed to appoint an independent valuer and that the valuation should be carried out in accordance with the process set out in clause 7.4 of the lease, which clearly specifies the matters which are to be taken into account and those which are not. Further, not only does clause 7.4(h) provide the valuer's decision will be final and binding on the parties, under the valuation agreement they agreed to be bound by the rental determination.

1. The relevant provisions of clause 7.4 of the lease dated 1 June 2001 are:

7.4 (a) If either party disputes the new rent nominated under clause 7.3(a), the procedure in clause 7.4(b) must be followed. Each time limit in clause 7.4(b) is consecutive. If a time limited is not kept, the right attached is lost.

7.4 (b) [sets out the procedure for appointing a valuer]

(c) [provides the tenant must pay the current rent until the dispute is resolved]

(d) In deciding the new rent, the valuer must take into account:

1. the Permitted use
2. the fair market rent for the Premises;
3. the provisions of this lease;
   1. the rent payable for premises comparable to the Premises;
   2. that the basis for the determination is:
      1. the Premises are vacant and available for leasing by a willing landlord to a willing tenant;

7.4 (e) The valuer must not take into account the following factors:

1. the value of the Tenant's property;
2. any goodwill attributable to the Premises due to the Tenant's business; (emphasis added)

7.4(h) The decision is final and binding on the parties.

1. Under the resolution agreement the parties agreed to appoint a valuer to determine the rent for the first year of the new lease, commencing on 1 June 2007. They also agreed they would not provide submissions to the valuer. On 12 December 2007 Mr Collins wrote to the parties and I set out the following relevant extracts from his 6 page letter:

I have been asked to undertake a formal Determination of the above premises subject to the terms of the current lease extant over the property.

It is to be acknowledged by both parties that formal representation has not been made to the Australian Property Institute for Determination to be undertaken through its participation. [as required by clause 7.4(b) of the lease] Instead, it has been referred to me by an external source and I have been asked to put a proposal to both parties.

Under the terms of the lease particular issues must be followed with the market rent review situation referred to in Clauses 7.3 and 7.4 of the lease. Clause 7.4 in particular nominated the required course of action.

It is my view that establishing this rent may be a potentially difficult exercise given the unique purpose of the property (permitted use being Residential Care Facility), and the lack of comparable evidence available to undertake such a valuation.

The market rent review presents a "rental opportunity" under the Retail Leases Act 2003 in my view and as such, both that Act and the relevant aged care legislation, orders or regulations affecting the subject property must be fully taken into account in establishing its market rental.

1. A copy of this letter was signed by both parties, with Mr Meeuwsen of the landlord making various handwritten amendments which the parties agree form part of the valuation agreement.
2. On 16 June 2008, Mr Collins again wrote to the parties. As will be seen from the following relevant extracts from that 3 page letter the terms of his appointment were very broad, and he put the parties on notice of a number of issues which he described as 'contentious':

- Neither party want to provide me with any submissions;

- I am instructed to determine the lease, using my professional judgement, based solely on my inspection, investigations and interpretation of the lease

There are a number of contentious issues in relation to this determination. For example, Clause 7.4(d) of the lease requires me to determine that the premises are vacant and available for leasing by a willing landlord to a willing tenant.

This will require me to make assessments as to the permitted use and the likely bed numbers under current legislation. There are also a range of other issues that I may need to seek legal, town planning or other advice about (as stated in my letter of 12 December 2007) to enable me to then make an informed judgement, using my professional skill as a valuer, in determining the rent for the demised premises.

I would like to emphasis that this is not a precise science. The parties may well disagree with the assessments I make, but given the very broad brief you have provided to me I would like you to confirm that:

• I have the mandate from the landlord and the tenant to use my professional judgement in relation to these matters of contention;
• Both parties are comfortable with me doing so and will accept my decision as final and binding on them;

Once you confirm this appointment (referenced in my letter dated 12 December 2007 amended by each party) and attend to the outstanding initial fee issues stated above, I can conduct an inspection within 14 days of confirmation from both parties. (emphasis added)

1. The letter of 16 June 2008 was signed on behalf of the tenant. It was not signed by or on behalf of the landlord. However, it is clear by its conduct that the landlord accepted that the matters set out in the 12 December and 16 June letters comprise the valuation agreement. Mr Meeuwsen attended an inspection of the premises with Mr Collins and Mr Smyth of the tenant. He also responded to Mr Collins request to provide certain information, and as far as I am aware the landlord has paid Mr Collins' fees.
2. So, in his letter of 12 December 2007 Mr Collins made it quite clear that in determining the new rent he would do so in accordance with the requirements of clause 7.4, and in his letter of 16 June 2008 that he would have to take into account 'the likely bed numbers under current legislation'. No objection or qualification to this methodology was raised by or on behalf of the landlord at that time, although a number of handwritten amendments were made to the letter of 17 December.
3. On 4 July 2008 Mr Collins wrote to both parties confirming he would inspect the premises on 7 July 2008 and seeking detailed information including the number of single and double rooms, vacancy rates, and the current lease arrangement. Both parties provided him with information although the landlord alleges that in doing so, the tenant has breached the resolution agreement - I will discuss this later.

1. The Rental Determination, which is a comprehensive 32 page document, was issued on 9 January 2009. As he said he would do in his letters of 17 December 2007 and 16 June 2008, Mr Collins reviewed the applicable DHS Guidelines[1] and concluded:

At best therefore, given that I believe DHS will issue a new registration for 43 licensed places, the right to the income generated from the additional 25 beds, is in my opinion either "property" that belongs solely to the tenant, or is 'Goodwill" attributable to the premises due to the tenant's business run on the premises.

For the avoidance of doubt, I have assessed the rental on the demised premises as at 1 June 2007 adopting 43 licensed places issued to 43 individual rooms as being the basis for this Determination under the terms and conditions of the lease extant on the premises

1. He noted a significant variation in rentals for "pension only" facilities varying between $33 and $100 plus per bed and concluded:

In my view, rental for the subject property lies within the range between $50 and $80 per resident place per week.

This rental has been Determined based upon the central assumption that DHS will licence Kallara, as per the lease requirements at Clause 7.4, with 43 licensed places.

I have inspected the demised premises, received and taken account of the copy lease provided to me, and investigated, considered and referred to information, rental evidence and advice sourced in the market as part of my Determination process.

In my view, having reviewed available "pension only" evidence, the appropriate rental to attach to Kallara under the terms and conditions of the lease is $65 per resident per place per week.

$65 x 43 x 52 $145,340 net per annum exclusive of GST.

1. It is clearly established that an expert determination may only be reviewed by courts and tribunals where there has been fraud, collusion or mistake. There is no suggestion of fraud or collusion here. The landlord contends the rental determination is reviewable because the valuer has made a mistake (by assessing the fair market rent on the basis of 43 beds not 68 beds) and further that a rental valuation which was less than the previous rent was not within the contemplation of the parties when they engaged the valuer. I accept that the rental valuation can only be reviewed where it can be demonstrated that it was not carried out in accordance with the contract of valuation. The comments by McHugh J A (as he then was) in Legal & General Life of Australia Ltd v Hudson Pty Ltd (1985) 1 NSWLR 314 at 335 to 336 are apt.

the question whether a valuation is binding depends upon the terms of the contract, express or implied (at 335)

Here, the contract of valuation clearly provides that the parties agreed to be bound by the rental determination; and

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 [for example, where the valuation relates to the wrong premises] (at 335)

But a valuation which is the result of the mistaken application of the principles of valuation may still be in accordance with the terms of the agreement. In each cases the critical question must always be: Was the valuation made in accordance with the terms of the 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 not have taken into account. The question is not whether there is an error in the discretionary judgement of the valuer. It is whether the valuation complies with the terms of the contract. (at 335-336)

1. Further, in Eureka Funds Management Limited & Anor v Freehills Services Pty Ltd [2006] VSC 461, Hargrave J said:

In the case of mistake, the Court will only intervene where the expert's determination is not made in accordance with the contract. In particular, subject to limited exceptions which are not relevant to this case, a court will not intervene whether the expert has made a mistake in the process of reaching his or her determination.

1. Whether the valuer was correct in determining that under the relevant Guidelines any new registration to operate an SRS would be for 43 beds, and not 68, is not a matter with which I am concerned. I am not persuaded that in reaching that conclusion the valuer has acted outside the terms of the contract of valuation under which he had a very broad brief and a mandate from the parties to use his 'professional judgement in relation to these matters of contention'[2]

1. The landlord contends the parties are not bound by the valuation because it was not in their reasonable contemplation that the valuer would determine the rent at a rate less than the rent previously paid. Both parties referred me to the comments of Nettle JA in AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173 where at [51] he said:

I agree with the judge that the question of whether it is open to review an expert determination on the ground of error is in the first place to be decided according to whether the determination answers the contractual description of what the expert was required to determine. I also agree with the judge that the question of whether an error in determination deprives the determination of compliance with the contractual description of what the expert was required to determine is in the first place to be answered according to whether the error occurred in respect of a task which the contract entrusted to the expert. As Mason, P. explained in Holt v. Cox, although mistake is not itself a ground for vitiation of a final and binding expert determination, a mistake may still be of such a nature that the resultant determination is beyond the realm of contractual contemplation - beyond anything which the parties may be supposed to have intended to be final and binding - and therefore susceptible to review.

53 Therein lies the distinction drawn in some of the authorities, and observed by the judge in this case, between an error in the exercise of a judgment, opinion or discretion entrusted to an expert, and an error which involves objective facts or a mere mechanical or arithmetical exercise. Subject to the contract in question, it is easier to suppose that parties to a contract contemplate that an error of the former kind be beyond the realm of review than it is to think that they intend to be fixed with errors of objective fact or in processes of mechanical calculation.

54 As this case demonstrates, however, matters are likely to be more complex where error occurs in the course of an exercise which is partly comprised of discretion, judgment or opinion and partly constituted of objective fact or mechanical calculation. In some such cases, the overriding discretionary or judgmental character of the exercise may so inform each step in the determination as to put even those steps which are matters of objective fact or mere mechanical calculation beyond the scope of permissible review. In other instances it may appear that, despite the overall character of the exercise, the various steps in the determination are severable, according to whether they are essentially discretionary or judgmental or simply matters of objective fact or mechanical calculation, and that those steps which are of the latter kind are within the scope of permissible review. The question in each case is what the parties should be presumed to have intended, and that is to be determined objectively from the terms of the contract, bearing in mind the context in which it was created. (emphasis added)

1. The parties agreed in October 2007 to refer their rental dispute to an independent valuer in accordance with the provisions of clause 7.4 of the lease. They may not have expected in doing so that the result would be a reduction in the rent. However, there is simply no evidence that the valuer has not carried out the valuation in accordance with the valuation agreement. The parties agreed they would not make submissions; the valuer drew their attention to a number of contentious issues and made it very plain that the valuation would be carried out within the scope of a very broad brief, and according to his professional expertise and discretion. As I noted above, apart from some minor handwritten amendments to the 17 December letter, which the tenant accepts form part of the valuation agreement, the landlord did not object to the methodology clearly set out by the valuer in the letters of 17 December 2007 and 16 June 2008 comprising the valuation agreement.

1. the Premises are vacant and available for leasing by a willing landlord to a willing tenant

1. The landlord contends this does not mean that the premises are 'bare' so to speak - that the fittings and fixtures have been removed, and that it does not have a current SRS registration for 68 beds. I do not agree. If it was intended that the valuation should be carried out as if the premises were available and ready for operation as the existing use and operation of the premises, this would have been provided for in clause 7.4(d). Instead, clause 7.4(d) sets out a number of factors which are to be taken into account by a valuer including the permitted use, (in this case, as an SRS not an SRS with 68 beds), the lease, and that the premises are vacant i.e. that they are available for rental to someone other than the existing tenant; not that the existing tenant proposes selling the business and seeking a transfer of its current registration. The registration is personal to the tenant and the directors - it is their property.

Is the rent the 'fair market rent' for the premises?

1. The landlord contends that having regard to the mechanism set out in the lease for annual rent reviews, which contemplate an increase, that the valuer has not determined the 'fair market rent' for the premises as required by clause 7.4(d)(ii). In Spencer v The Commonwealth (1907) 5 CLER 418 at 432 Griffith CJ said:

In my judgement the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day i.e. whether there was in fact on that day a willing buyer, but by inquiring 'What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?'

Further, in Holt v Cox (1994) 15 ACSR 313 at [14] Santow J said that 'fair price' means 'what is fair, just and equitable in the circumstances, although there may be a range of prices which satisfy this criterion'.

1. However, whilst the landlord might not consider the rental determination to be a fair market rent for an SRS with a certificate to operate 68 beds, having determined the valuer has complied with the valuation agreement in making the determination, there is nothing to suggest that the valuation on the basis of a certificate to operate 43 beds is not a fair market rent.

1. Both parties referred me to a number of authorities, all of which I have carefully considered. For the sake of completeness there is another that I was referred to by the landlord which I should mention.
2. It was submitted by counsel for the landlord that the decision in Colin Marg Pty Ltd v Mackay Medical Investment Ltd [2006] QSC 181 was directly relevant. The relevant provision in the applicable lease provided:
   • 15.4.4 Should the Lessor and the Lessee not reach agreement as to the rental then the annual amount for the first year [of the further term] shall be determined by a registered Valuer nominated for that purpose (at the request of either the Lessor or the Lessee) by the President for the time being of the Real Estate Institute of Queensland and the person so nominated shall act as an expert and not as an Arbitrator and such Valuer shall have regard to rentals payable for comparable premises (if any) in the locality of the demised premises during the last three (3) months of the previous rent period and his decision shall be final and binding on the Lessor and the Lessees and the cost of obtaining such determination by such Valuer shall be borne by the Lessor and the Lessee in equal shares, but in no case shall the annual rental [be] so determined at a figure less than the yearly rental payable in the immediately preceeding rent period" (sic) (emphasis added)
3. However, as I raised with counsel during the hearing, neither clause 7.4 of the lease, nor the valuation agreement have the same qualification as in the last sentence of 15.4.4. It was not a term of the valuation agreement that the rental could not be less than the rental paid for the period up to 31 May 2007, which in any event would offend the provisions of the Retail Tenancies Reform Act 1998 and/or the Retail Leases Act 2003 (if these are retail premises and I make no finding about this at this time). Whilst in Colin Marg Wilson J concluded at [20]:

Thus I consider that the valuer's task under clause 15.4.4 is to undertake the valuation on a subjective basis.

this is readily distinguishable from the present case. Clause 7.4(d) and (e) of the lease, not being as confined as clause 15.4.4, impose an obligation on the valuer to undertake the valuation on an objective basis. Clause 15.4.4 simply requires the valuer to determine the rent having regard to rents for comparable premises over a three month period. Clause 7.4(d) sets out a number of additional factors to be taken into account which, in my view, mean the valuer is required to objectively determine the rent as if the premises were available for rent to a new tenant, having regard to the permitted use and the lease.

1. Counsel for the landlord observed in closing submissions, that if the parties are bound by this valuation the probable impact on rent and rent reviews for similar facilities could be significant. This might well be the case. However, it is not my task to determine whether the matters considered by Mr Collins were relevant or irrelevant (Karenlee Nominees Pty Ltd v Gollins & Co Ltd [1983] VicRp 61; [1983] 1 VR 657) rather I am required to determine whether he has carried out his valuation in accordance with the valuation agreement. It might well be unfair that the tenant effectively gains a windfall. But that is a possibility to which the landlord exposed itself when it entered into the 'resolution agreement' and agreed to the terms and conditions of the valuation agreement, in which Mr Collins clearly drew the parties' attention to what he described at the contentious issues. Further, the following comments by Gillard J are relevant. In Commonwealth v Wawbe [1998] VSC 82 his Honour said at [17]

The parties to a contract agree that the value is to be determined by an expert acting as such and using his own skill, judgement and experience. He is not a lawyer. His authority derives from the contract. The terms of the contract are to be considered by him. It would be contrary to the parties' common intention to expect the valuer to construe the contract and apply it as a court would. The parties have entrusted the task to an expert valuer, not a lawyer. They must be taken to accept the determination "warts and all" and subject to such deficiencies as one would expect in the circumstances. The parties put in place the procedure, they must accept the results unless it was contrary to their common intention.

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 not a lawyer.

1. It was a term of the resolution agreement that the parties would not make submissions to the valuer. As mentioned above, Mr Collins wrote to the parties on 4 July 2008 seeking certain information, some of which could be regarded as being commercially sensitive, and which he agreed to keep confidential. Both parties responded to the request for information, although the tenant responded more expansively but whether the material it provided can be regarded as submissions is another matter altogether.
2. The landlord contends that the tenant breached the agreement not to make submissions when it provided the valuer with copies of correspondence and communication between Mr Smyth and the tenant's solicitors, and between Mr Smyth and Mr Meeuwsen. Mr Smyth acknowledged, under cross examination, that perhaps he shouldn't have sent some of the documents to the valuer, particularly those concerning other unrelated issues between Mr Smyth and Mr Meeuwsen which confirm that the relationship between them is less than harmonious.
3. Included in the information Mr Smyth sent to the valuer were copies of correspondence between him and the tenant's solicitors. Of particular concern to the landlord was the copy of correspondence from Mr Smyth to the tenant's solicitors dated 12 April 2007 which included the following:

Note: A key factor is that we hold the registration for the current 68 beds. Because of our small room sizes, any subsequent registration would only allow for one person per room, reducing bed numbers to 42 ...Our room sizes are single, 10 square metres, double 14.5 square metres. Such reduction would represent drops in rental value for Mr Meeuwsen.

and the copy letter of 8 March 2007 from the tenant to the landlord:

The day may come, hopefully, not in our time, when Kallara may have to become an all single room facility with approx 41 or 42 beds in order to compete for residents (DHS have indicated that with any re-registration of the facility, this may be the case).

1. These letters were written well before the parties entered into the resolution agreement or the appointment of Mr Collins as the valuer. Mr Collins gave evidence under cross-examination that he had been influenced by the material he was provided by the tenant, but only to the extent that it provided him with background information. There is no evidence that they were provided to Mr Collins before he accepted the appointment as the valuer, and as I have noted a number of times, the need to refer to the relevant legislation and consider the likely bed numbers under current legislation were specific terms of the valuation agreement. As an aside, this correspondence confirms the landlord was on notice that on one interpretation of the relevant Guidelines any new tenant might only obtain registration for 41 or 42 beds although Mr Collins ultimately based his rental determination on 43 beds.
2. Even if I were satisfied that the tenant had breached the resolution agreement by providing copies of the correspondence referred to above, to the valuer, and I am not, this would not allow me to review the valuation. There is absolutely no evidence to support any contention that the valuation was not carried out in accordance with the valuation agreement.

1. Clause 7.4 sets out a clear mechanism for the valuation of the premises. Clause 7.4(d) sets out the factors which must be taken into account by the valuer and clause 7.4(e) sets out those matters which he must not take into account. The proper characterisation of the licence and the extra beds is irrelevant because the valuer is required to value the premises as if they were vacant and available for lease by a willing landlord to a willing tenant. I am satisfied the rental determination has been carried out in accordance with the valuation agreement. Accordingly, the parties are bound by the rental determination ($145,340 net per annum exclusive of GST effective 1 June 2007), the landlord is required to execute a new lease, and the tenant is entitled to a credit for any overpayment of rent.
2. At the conclusion of the hearing, counsel for the tenant requested I order the parties to agree short minutes of consent orders to give effect to these orders and in this instance, those are the orders I will make. I will also reserve the question of costs, noting the tenant has foreshadowed an application for costs if successful arguing the premises are not 'retail premises' and that accordingly s92 of the Retail Leases Act 2003 does not apply.

[1] Supported Residential Services Bed Number Guidelines June 1998