Plaintiff v Defendant

2 In 2003, Foster's Group Limited decided to divest its Leisure and Hospitality Division, comprising the group's hotel, gaming and retail liquor operations, including 105 venues in Australia. The freehold property portfolio is owned by the ALE Direct Property Trust. ALH is owned by a joint venture consisting of Woolworths (75%) and The Bruce Mathieson Group (25%), and was delisted in 2004. ALH is the largest hotel gaming operator in Victoria.

3 The determinations concerned 19 gaming hotel premises. Since the commencement of this proceeding, ALE has sold three of the hotels. As a result, this proceeding now concerns the determinations made in relation to 16 gaming hotel premises. The parties selected the Bayswater Hotel (780 Mountain Highway, Bayswater, Victoria 3153) as representative of the 16 hotels on the basis that the Court's determination of the issues in dispute in relation to the Bayswater Hotel would also apply to the determinations relating to the other 15 hotels. I will address the determination relating to the Bayswater Hotel on this basis.

4 Under the leases, rent is subject to rent reviews linked to CPI annually, with a review subject to a 10% cap and collar after 15 years, and a review without cap and collar at the commencement of each further term. The rent reviews in dispute are the determinations after 15 years. They are effective from 2018, and were completed in September 2020. The proceeding concerns how rent is to be determined under the rent review methodology contained in the leases.

5 ALE seeks to challenge the determinations, and contends that they were not made in accordance with the leases, relying on two grounds which may be briefly summarised as follows:

(a) the valuer erred in interpreting the leases as directing her to disregard the usual market approach to assessing rent for the premises, which involved the estimate of EBITDAR on the assumption that the business at the premises is treated as a going concern operating on 'good average management by a hypothetical incoming tenant' ('valuation methodology ground'); and

(b) the valuer impermissibly took into consideration submissions made by ALH as to its actual EBITDA figures in respect of business conducted from the premises for the previous three years ('EBITDA information ground').

6 ALE seeks, among other things, a declaration that the determinations are not in accordance with the leases and are not binding on the parties.

7 The construction of the leases has previously been the subject of litigation on a different issue. While at that time there were some differences in text, the previous decisions provide assistance and insights as to the proper construction of the leases.[1]

8 The parties filed a statement of agreed facts under s 191 of the Evidence Act 2008 (Vic). The agreed facts include the following material facts.

9 At all material times, ALE was the lessor and ALH was the lessee of the following leases:

(a) a lease dated 4 November 2003 in respect of the Bayswater Hotel, 780 Mountain Highway, Bayswater, Victoria 3153;

(b) a lease dated 19 June 2006 in respect of the Berwick Inn Hotel, 1 High Street, Berwick, Victoria 3806;

(c) a lease dated 4 November 2003 in respect of the Blackburn Hotel, 111 Whitehorse Road, Blackburn, Victoria 3130;

(d) a lease dated 4 November 2003 in respect of the Burvale Hotel, 385-395 Burwood Highway, Vermont South, Victoria 3133;

(e) a lease dated 4 November 2003 in respect of Cramer's Hotel, 1 Cramer Street, Preston, Victoria 3072;

(f) a lease dated 4 November 2003 in respect of the Doncaster Inn Hotel, 855 Doncaster Road, Doncaster, Victoria 3108;

(g) a lease dated 4 November 2003 in respect of the Ferntree Gully Hotel and Motel, 1130-2 Burwood Highway, Ferntree Gully, Victoria 3156;

(h) a lease dated 4 November 2003 in respect of the Club Hotel, 848 Burwood Highway, Ferntree Gully, Victoria 3156;

(i) a lease dated 4 November 2003 in respect of the Meadow Inn Hotel, 1431-1435 Sydney Road, Fawkner, Victoria 3060;

(j) a lease dated 4 November 2003 in respect of the Mitcham Hotel, 566 Maroondah Highway, Mitcham, Victoria 3132;

(k) a lease dated 4 November 2003 in respect of the Olinda Creek Hotel, 161 Main Street, Lilydale, Victoria 3140;

(l) a lease dated 4 November 2003 in respect of the Pier Hotel, 508 Nepean Highway, Frankston, Victoria 3199;

(m) a lease dated 4 November 2003 in respect of the Prince Mark Hotel, 2 Power Road, Doveton, Victoria 3177;

(n) a lease dated 4 November 2003 in respect of the Sandbelt Hotel, 630-646 South Road, Moorabbin, Victoria 3189;

(o) a lease dated 4 November 2003 in respect of the Sandringham Hotel, 118-120 Beach Road, Sandringham, Victoria 3191; and

(p) a lease dated 4 November 2003 in respect of the Village Green Hotel, Cnr Springvale Road and Ferntree Gully Road, Mulgrave, Victoria 3170.

10 The leases were varied pursuant to a Relationship Deed dated 29 April 2011, and a Deed of Variation of Leases dated 27 April 2011. No issue arises out of these variations.

11 In May 2019, Samantha Freeman, a valuer of Knight Frank Valuation & Advisory Victoria, was appointed by ALE and ALH to determine the Current Rent of the premises in respect of each lease as at the relevant rent review date in accordance with clause 4.3 of each of the leases.

(a) ALE provided submissions to the valuer in relation to the determination of the Current Rent in respect of each lease;

(b) ALH provided submissions to the valuer in relation to the determination of the Current Rent in respect of each lease, including rental valuation reports ('Cropley reports') prepared by Peter Grieve of Cropley Commercial ('Cropley'); and

(c) ALH's auditors provided actual historic EBITDA information to the valuer ('EBITDA information').[2]

13 The Cropley reports assessed the Current Rent of each premises as at the relevant rent review date based on the application of a rental ratio to an assessed EBITDAR,[3] which was based on the EBITDA information subject to adjustments.

14 The EBITDA information was provided to the valuer on a confidential basis, and was not disclosed to ALE.

15 On 11 September 2020, the valuer returned written determinations setting out her determination of the Current Rent for each of the premises under the leases.

16 Clause 1 of each of the leases contains the following relevant definitions:

"Current Rent" means the current annual Rent of the Premises on a relevant Rent Review Date agreed or determined under this Lease.

...

"EBITDA" means operational earnings before interest, tax, depreciation and amortisation, calculated in accordance with the Accounting Standards (within the meaning of the Corporations Act) as issued by the Australian Accounting Standards Board from time to time and, to the extent that, any matter is not covered by the Accounting Standards, means generally accepted accounting principles consistently applied by the Tenant over the previous 3 years.

...

"Rent" means initially the amount specified in item 7 of the reference schedule and then that amount as adjusted from time to time under this Lease.

"Rent Assessment" means an assessment of the Current Rent as at a Rent Review Date.

...

"Rent Review Date" means each of the dates specified in item 9 of the reference schedule.

"Rent Review Method" means the method of reviewing the Rent on each Rent Review Date as specified in item 9 of the reference schedule.

...

"Valuation Methodology" means the principles for the determination of the Rent and value of assets set out in Schedule 1.

"Valuer" means a person who:

(a) at the time of appointment is a current full valuer member of the API of not less than 5 years' standing;

(b) has been actively engaged in the commercial property market for the year before the relevant Rent Review Date;

(c) has at least 5 years' experience in valuing the kind of premises the subject of this Lease;

(d) at all times during the currency of the appointment is not prohibited or restricted from making a determination; and

(e) agrees to accept the terms of appointment under this Lease.

17 Clause 4 of the leases provides for rent reviews, and includes the following provisions:

4 RENT REVIEWS

4.1 Rent Review procedure

The Rent must be reviewed on each Rent Review Date in accordance with the relevant Rent Review Method and the terms in this clause 4.

...

If the Rent Review Method for a Rent Review Date refers to or includes a reference to Current Rent, the Rent must be reviewed as at that Rent Review Date in accordance with the procedural steps and the time period for each step provided in the following table:

(a) The Landlord must give a Rent Notice to the Tenant.

At any time before or after the relevant Rent Review Date but before the earlier of the next Rent Review Date and the Expiry Date.

Only if the Landlord has not given a Rent Notice under paragraph (a) within 30 Business Days after the relevant Rent Review Date, the Tenant may give a Rent Notice until the earlier of the next Rent Review Date and the Expiry Date.

(c) Either party may give a Rent Dispute Notice to the other which must include the disputing party's assessment of the Current Rent. If a party fails to give a Rent Dispute Notice to the other within the time period, then on expiry of the time period a party is deemed to have given a Rent Dispute Notice to the other and the provisions of paragraph (d) apply.

Within 20 Business Days after a party gives a Rent Notice.

(d) On receipt by a party of a Rent Dispute Notice or if a Rent Dispute Notice has been deemed to have been given to a party under paragraph (c), the parties must try to agree on the Current Rent. If the parties agree within the time period, the Current Rent as agreed will be the Rent as at that Rent Review Date.

Within 15 Business Days after a party gives or is deemed to have given a Rent Dispute Notice under paragraph (c).

(e) If the parties do not agree on the Current Rent within the time period under paragraph (d), a Valuer must be appointed to determine the Current Rent for the Premises. The parties must use Reasonable Endeavours to agree on the Valuer to be appointed.

Within 20 Business Days after a party gives or is deemed to give a Rent Dispute Notice under paragraph (c).

(f) If the parties cannot agree on the Valuer to be appointed within the time period in paragraph (e), either party may request the President of the API to nominate a Valuer.

At any time after the expiry of the time period in paragraph (e).

(g) The Valuer agreed on by the parties or nominated by the President of the API (as applicable) must be instructed to notify the parties that it accepts its appointment as Valuer and the terms of its appointment under this clause 4.3 and clause 4.5.

Within 10 Business Days after the agreement or nomination of the Valuer.

(h) Either party may make submissions to the Valuer as to the Current Rent if that party gives a complete copy of the submission to the other party at the same time.

Within 10 Business Days after the Valuer's acceptance of its appointment.

(i) The Valuer must determine the Current Rent in accordance with clause 4.6 and clause 4.10. The Current Rent determined by the Valuer is the Current Rent as at that Rent Review Date.

Within 20 Business Days after the Valuer's acceptance of its appointment.

(j) If the Valuer fails to comply with paragraphs (g) and (i), clause 4.6 or clause 4.9, either party may request the President of the API to nominate another Valuer until the Current Rent is determined under this clause 4.

Despite this clause 4, the parties may at any time agree on the Current Rent for the Premises and the Current Rent as agreed will be the Rent as at that Rent Review Date.

Any Valuer appointed under this Lease:

(a) must give a written valuation providing complete details of the reasons for the determination;

(b) acts as an expert and not as an arbitrator; and

(c) must consider submissions from the parties.

The Current Rent must be determined as at the relevant Rent Review Date in accordance with the matters set out in Part A of the Valuation Methodology.

Subject to clause 4.9, a Valuer's determination is final and binding on the parties.

Despite anything else in this Lease, the Current Rent as at the Rent Review Date occurring on the 15th anniversary of the Commencement Date must not be more than 10% greater nor 10% less than the Rent payable immediately prior to that Rent Review Date...[4]

(a) Within 10 Business Days of appointment of a Valuer under clause 4.3(g) or the commencement of any valuation process under this Lease which requires a determination of market rent, the Tenant must arrange for its auditor to provide to the Valuer copies of the EBITDA figures for the business of the Tenant conducted from the Premises ... for the previous 3 financial years and provide to the Landlord at the same time a copy of the covering letter to the Valuer enclosing the information which identifies the information provided to the Valuer. This information will be provided to the Valuer on a confidential basis and on the basis that the Valuer must not disclose the information to the Landlord.

(b) Neither party is entitled to make submissions to the Valuer in respect of the information disclosed to the Valuer under paragraph (a).

Any submissions made by a party to a Valuer in relation to that Valuer's determination of the Current Rent under clause 4.3 or any other valuation process under this Lease which requires a determination of market rent must be in writing and that party must provide a copy of the submission to the other party at the same time it provides it to the Valuer.

...

18 Clause 37 was inserted into most leases under cl 21.3(h) of the Relationship Deed,[5] and provides in relation to valuations:

Despite any other provision of this Lease, in any circumstances where a Valuer (as defined in clause 1.1 or Schedule 3 of the Lease, as applicable) or valuer is required or directed to carry out a valuation, the parties agree that:

(a) the Valuer or valuer must be instructed to treat EBITDA from any business operated from the Land or any improvements on the Land as EBITDA of the Tenant, irrespective of which person operates that business or owns the improvements, and to include it in the assessment; and

(b) where the valuer or Valuer is required to asses or to determine Current Rent, Market Rent, Market Value or the current value of the Option Assets under this Lease, the Valuer or valuer must be instructed to regard the Future Works as though they were not Tenant's Items but were Landlord's Items and formed part of the Building (and therefore, the Premises).

19 Schedule 1 pt A of the leases sets out the valuation methodology, and is in these terms:

The instructions to a Valuer appointed under clause 4.3 of the Lease must require the Valuer to assess the Current Rent taking into account the following matters.

• The terms and conditions of the Lease and assume that all covenants on the part of the Landlord and the Tenant under the Lease have been fully performed and observed on time.
• Assume a total term of lease commensurate with the initial Term plus all Further Terms of the Lease.
• The use conducted on the Premises as at the relevant Rent Review Date and any use for which the Premises may be used in accordance with this Lease and all relevant Laws.

• The rent shall be a fair rent for the Premises only and shall disregard:

• any value attributable to licences, goodwill, Tenant's items, the development rights granted to the Tenant as set out in Schedule 3 and Structural Works undertaken by the Tenant ... ("excluded items"). All the excluded items remain and are deemed to remain in the ownership of the Tenant;
• any impaired condition of the Premises if that condition results from any work carried out or not carried out on the Premises by the Tenant or from any breach under the Lease by the Tenant;
• any sublease or other sub-tenancy agreement or occupational arrangement in respect of the Premises and any rental, fees or other money payable under any of them; and
• the existence of any rent-free period, financial contribution, allowance or inducement, whether in cash or kind, or other concession:
  • given to the Tenant to secure the tenancy the subject of the Lease;

• given to the tenant of any comparable premises; and

• customarily or likely to be offered to tenants.

• Rents for comparable premises in similar locations ascribed on a per square metre basis taking account of the size and configuration, operating areas, storage areas and areas of surplus or non-utilised area of the Premises ...
• If the Premises have been damaged, destroyed or rendered inaccessible in whole or part, assume that they have been reinstated or made accessible (as appropriate).
• The Rent as at the Commencement Date of the initial Term was a net amount arrived at by reducing the gross amount by an amount estimated by Rider Hunt Terotech Capital Expenditure Report dated 31 July 2003 to represent the amount which the Tenant would be required to expend to comply with its obligations to perform Structural Works and maintenance, repairs and replacements of a capital nature under the terms of this Lease.[6]
• The information provided to the Valuer by the Tenant under clause 4.11 of the Lease.
• Submissions provided by the Landlord and Tenant (other than in relation to information provided to the Valuer by the Tenant under clause 4.11 of the Lease).
• In the case of the Rent Review occurring in year 15 of the Term,[7] consider clause 4.9 of the Lease.

20 Schedule 3 of the leases is headed 'Future Development Provisions'. Clause 1 contains the following definitions:

1. DEFINITIONS

Words defined in the Lease have the same meaning in this Schedule 3 and the following definitions also apply (except that where there is any inconsistency between definitions in the Lease and this Schedule 3, definitions in this Schedule 3 apply).

...

Market Rent means the current market rent for the Premises determined having regard to the matters set out in Part A of Schedule 1 (Valuation Methodology).

Market Value means the then current market value of the Premises being the amount for which the Premises should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing, where the parties had each acted knowledgeably, prudently and without compulsion ...

21 Clause 2.3 of sch 3 contains criteria for final development proposals, and includes the following:

2.3 Criteria for Final Development Proposals

Subject to any matters agreed between the Tenant and the Landlord during the process outlined in clause 2.2, each Final Development Proposal must provide the following information and address the following issues.

...

(e) Include a worked up feasibility study which includes:

...

(v) for the purpose of identifying any proposed payments or rent adjustments as anticipated by clause 2.7:

...

(C) valuations showing:

(1) the then current Market Value of the Premises and an estimate of the Market Value of that part of the Premises and the Development which the Landlord will still own once the proposed Development is carried out, including applicable capitalisation rates;

(2) the Market Rent to be paid by the Tenant after the proposed Development is carried out based on the Market Value of that part of the Premises which the Landlord will own after the Development is carried out assessed in sub-paragraph (C)(1) ...

22 Clause 2.7 concerns adjustment mechanisms, and states:

Subject to anything to the contrary the parties may agree in writing (including in the Approved Development Proposal), and to clauses 2.8, 2.9 and 2.10 and without limiting any other compensation or adjustment which may be required to keep the Landlord, the RE, ALE Property Trust and ALE Direct Property Trust whole with respect to a Development, the compensation payable with respect to any Approved Development Proposal (including because of any incremental change in Market Value of the Premises) and the total consideration payable under the Lease following Practical Completion of a Development of the Premises will apply the following fundamental principles.

If the estimated Market Value set out in the Approved Development Proposal of that part of the Premises and a Development which the Landlord will own after the proposed Development is carried out is greater than the pre Development Market Value of the Premises agreed in the Approved Development Proposal:

...

(ii) the total consideration payable by the Tenant under the Lease will be adjusted from the next date for the payment of Rent under the Lease which occurs after the later of the date of Practical Completion of the Development and the date the payment in clause 2.7(a)(i) is made (Adjustment Up Date) by:

(A) varying the Rent to the Market Rent agreed in the Approved Development Proposal to apply after the Development is complete (but disregarding any caps or collars in the Lease); and

...

(iv) Rent reviews under the Lease will then continue to apply during the Term in the manner set out in the Lease with respect to the Rent...

If the estimated Market Value set out in the Approved Development Proposal of that part of the Premises and the Development which the Landlord will own after the proposed Development is carried out is less than the pre Development Market Value of the Premises agreed in the Approved Development Proposal:

...

(ii) the total consideration payable by the Tenant under the Lease will be adjusted from the next date for the payment of Rent under the Lease which occurs after the later of date of Practical Completion of the Development and the date the payment in clause 2.7(b)(i) is made (Adjustment Down Date) by:

(A) varying the Rent to the Market Rent agreed in the Approved Development Proposal to apply after the Development is complete (but disregarding any caps and collars in the Lease) ...

(iv) Rent reviews under the Lease will then continue to apply during the Term in the manner set out in the Lease with respect to the Rent...

23 In a covering letter dated 27 May 2019 to the valuer in respect of the Bayswater Hotel, ALE said as to the valuation methodology:

The Lease provides for the Rent to be reviewed to "Current Rent" as at 4 November 2018. Current Rent is defined as "the current annual Rent of the Premises on a relevant Rent Review Date agreed or determined under the Lease". The determination must be in accordance with the matters set out in Part A of Schedule 1 of the Lease (the Valuation Methodology).

As detailed in our submission and supporting information, when read in its entirety, the Valuation Methodology and rent review provisions in the Lease make clear that the parties intended that Current Rent be substantially similar to market rent.

ALE and ALH may have different views in relation to the interpretation of the Valuation Methodology and, in particular, the reference in Schedule 1 that the rent be "a fair rent for the Premises only" in the context of disregarding certain listed items. That reference is one of a number of factors that the determining valuer is to take into account and, in ALE's submission, it does not displace the overall characterisation of Current Rent as requiring a market-based approach.

Accordingly, the application of orthodox valuation principles in accordance with the Valuation Methodology and the terms of the Lease will produce a Current Rent that is substantially similar to a market rent for the Property:

• based on the operation of the licensed hotel as a going concern;

• assuming "good average management" by a tenant operating the hotel on a standalone basis;

• calculated on a "percentage of profits" basis;

• allowing for the tenant's "triple net" outgoing obligations;

• allowing, as the valuer sees fit, for the highest and best potential use of the property by the operator in order to enhance profitability throughout the term of the Lease; and
• importantly, taking into account the specific matters set out in Schedule 1 of the Lease, which includes a mix of market based objective factors and a number of specific subjective factors.

24 ALE's submissions to the valuer included rental valuation reports prepared by Charter Keck Cramer ('CKC') and Herron Todd White ('HTW'), supported by financial modelling. They also included a legal submission prepared by ALE's solicitors, which described the valuation methodology adopted by CKC and HTW in these terms:

CKC and HTW have valued the Current Rent on a net profit (EBITDAR) basis assuming that the premises is used as an operating hotel and gaming business (the profits method).

CKC's opinion, based on its experience of the market, is that the profits method, including the assumption of a hypothetical tenant scenario operating under "good average management", reflects the industry accepted approach when undertaking a rental assessment of a licensed hotel. In addition, CKC notes that consideration of rent on a dollar per square metre basis is not an industry accepted approach to hotel rental assessment because the size of a hotel premises is not a reliable indicator as every hotel varies substantially in terms of trade mix, configuration and space utilisation.

HTW's opinion, based on its experience of the market, is that the profits method reflects the primary method used by industry participants to assess market rentals for a hotel or club. HTW notes that:

(a) rental evidence on a dollar per square metre basis and dollar per patron capacity basis can give varying results;

(b) the Bayswater Hotel has special features and a permitted use that prevents it from being easily compared to other properties; and

(c) the profits method is not prohibited by the Lease and has regard to the provisions of the Lease.[8]

25 ALH's submissions to the valuer included a memorandum of advice provided by ALH's counsel. The executive summary stated counsel's opinion in these terms:

Question 1: Do the Leases require the Valuer to determine the Current Rent as a market rent or fair rent? Are the references to "market rent" in the Leases and the ALH Prospectus relevant to, or determinative of, this question?

The Leases require the Valuer to determine the Current Rent as fair rent, not market rent.

Question 2: If the Current Rent is to be a fair rent, how does case law define fair rent and how does fair rent differ from market rent?

Market rent requires an objective determination of the rent that premises would bring on the open market having regard to the rents paid for comparable premises in the same or a comparable area. Fair rent requires a largely subjective determination of the basis of the rent which it would be fair for the particular landlord and the particular tenant to have agreed under the lease in question having regard to all the circumstances relevant to any negotiations between them of a new rent from the review date.

...

Question 5: Is the proposed valuation methodology described in Section 4 of our Brief to Advise dated 3 April 2019 appropriate and consistent with the Leases?

Yes, the proposed valuation methodology is in our opinion appropriate and consistent with the Leases. In particular:

(a) In determining fair rent, the valuer must take into account any matter that the Lease - expressly or by implication - requires to be taken into account, and must ignore any matter that the Lease - expressly or by implication - requires to be ignored. The Valuer must not engage in fraud or collusion, or make a material error about the facts or ignore the submissions put by the parties within the time permitted by the Lease and otherwise in accordance with their rights to do so. Other than this, it is a matter for the Valuer to determine what matters to take into account in determining fair rent.

(b) In the case of the Leases:

(A) follow Part A of the Valuation Methodology;

(B) value the businesses conducted at the Premises on a going concern basis; and

(C) consider the actual EBITDA of the business conducted from the Premises, and not the EBITDA that might be achieved by a good average manager;

(ii) it would be appropriate and consistent with the Leases for the Valuer to take into account the identity and nature of the parties to the Lease and their relationship; and

(iii) it would be appropriate and consistent with the Leases for the Valuer to calculate the Current Rent by first considering the EBITDA of the business conducted from the Premises and then making adjustments to take into account:

(A) that the tenant is liable for most structural and capital works under the Leases;

(B) that the liquor and gaming industries are subject to a higher level of regulatory risk than most industries;

(C) that the tenant is not released if it assigns its interest under the Leases;

(D) that the tenant's works are treated as the landlord's property under the Leases; and

(E) that the tenant is required to pay land tax on a multiple holding basis (other than in Queensland).[9]

26 ALH's submissions concerning the Bayswater Hotel included a rental valuation report prepared by Cropley, which stated:

Recognition of the relationship between the Landlord and Tenant is key to fully appreciating the role required by the Determining Valuer in assessing the Current Rent under the lease, because the lease requires the Determining Valuer to determine a "fair rent" in accordance with Schedule 1 Part A. This is consistent with the Australian Property Institute's guidance in respect of Fair Rent - being, that Fair Rent is:

"the rent which it would be fair for the particular landlord and the particular tenant to have agreed under the lease in question having regard to all the circumstances relevant to any negotiations between them from the rent review date." [Item 4.1 - Technical Information Paper - Assessing Rent and Rent Determinations - API 9 February 2018]

As identified earlier, the relationship between the Landlord and Tenant is based on a lease which was structured to limit or eliminate the Landlord's property and business risks by requiring the Tenant to be responsible for:

• ✓ The payment of state land tax on a multiple holding basis...;
• ✓ The cost of all structural and capital works to the Premises, except where required as the result of an authority requirement or a structural defect (existing as at the commencement date of the initial term - in view of the lapse of 15 years since that time, this is very unlikely to be relevant going forward).
• ✓ In a situation where the premises are damaged or destroyed the Tenant receives no rental or outgoings relief for up to 15 months. After 15 months, rent abatement is only received if the Landlord is undertaking the reinstatement. Tenant's reinstatement insurance is required to cover the reinstatement cost.

These obligations are more onerous on the Tenant than market standard provisions.

In consideration for the Tenant taking on nearly all property and business risk in connection with the premises throughout the term of the lease and any further terms, the lease provides that the current annual rent on the Rent Review Date is to be assessed on a Fair Rent basis. Accordingly, the lease provides a "trade-off" whereby the rental amount would be less than market to compensate the Tenant for its allocation of risk under the lease.

...

The methodology used to assess the Current Rent (described as Fair Rent in lease Schedule 1 Part A) in this submission is summarised in the following commentary.

EBITDAR

The methodology applied herein for the assessment of a Fair Rent is based upon the industry standard "capacity to pay" or "profits method".

In taking this approach, we have utilised the EBITDA information provided by the Tenant's auditor, Deloitte, in accordance with clause 4.11 of the lease. This is appropriate and required given:

• Schedule 1 Part A, which requires the Determining Valuer to take into account the information provided to the Determining Valuer under clause 4.11, being the EBITDA figures for the previous 3 financial years; and
• the decision of Australian Leisure & Hospitality Group Ltd v The Trust Company (Australia) Limited [2011] VSCA 420 ...

We note that whilst clause 4.11 of the lease requires provision of EBITDA information, we refer to "EBITDAR" in this report because it is necessary to disregard the rent paid under the lease for the purposes of determining the rent to be paid under the lease.

In assessing a Fair Rent for the premises as at the Rent Review Date, we have, as required by the lease:

• had regard to the terms and conditions of the lease;

• either taken into account or disregarded (as applicable) the matters specified in Schedule 1 Part A, as directed by that valuation methodology;
• had regard to the EBITDA figures provided by the Tenant's auditor in accordance with clause 4.11 of the lease, rather than benchmarked or notional EBITDA figures;
• adjusted for the "group" nature of the Tenant's EBITDA figures in order to achieve "a fair rent for the Premises only" (emphasis added), as required by Schedule 1 Part A;
• had regard to the actual trading figures on the basis of the actual number of "attached" gaming machines operated from the premises, instead of the maximum number of gaming machines that could potentially be operated at the premises under the existing approvals for the premises.

Summary of valuation evidence concerning the Bayswater Hotel

27 CKC assessed the Current Rent using the profits method (EBITDAR) assuming a hypothetical tenant operating the hotel on a standalone basis with good average management and that the highest and best use of the property was as a gaming hotel. It assessed an EBITDAR exceeding $4.72 million annually, adopting an annual rental of $1,655,000. Because the assessed rental exceeded the 10% cap, CKC reduced its assessment to $1,326,186 (ex GST) per annum.

28 HTW also assessed the Current Rent using the profits method assuming good average management by a hypothetical tenant. HTW assessed an EBITDAR exceeding $4.7 million annually, leading to an adopted annual rental of $1,700,000. Applying the 10% cap, HTW also reduced its assessment to $1,326,186 (ex GST) per annum.

29 Cropley also adopted the profits method, using the EBITDA information provided by ALH's auditors. After deducting rent paid under the lease to calculate the EBITDAR for the hotel, Cropley made adjustments to achieve a fair rent in accordance with the valuation methodology. This led to an EBITDAR after amortisation of $2,430,557 per annum, and an assessed Fair Rent of $840,000. As the assessed rent was below the 10% cap, Cropley adopted a Current Rent of $1,085,061 (ex GST) per annum.

30 Although the results were varied, there was some commonality in the valuation evidence. The profits method was agreed as the most reliable method for determining Current Rent based on EBITDAR. The rental factor to be applied to EBITDAR ranged from 34% to 36% before amortisation, and from 37.5% to 39.2% after amortisation. Cropley had the benefit of the EBITDA information concerning the Bayswater Hotel provided by ALH's auditors. Neither CKC nor HTW had that information.

31 After setting out various preliminary matters in her determination for the Bayswater Hotel, the valuer referred to ALE's submissions and stated:

For the reasons outlined in Section 7.1 Current Rent, I do not consider market rent with the assumption of operation under good average management, to be the correct approach to this review.

I have formed the view that neither party has made a submission in respect to the EBITDA information disclosed under clause 4.11(a), and that information is not disputed as being the actual EBITDA of [ALH].

33 Quoting Hill and Redman's Law of Landlord and Tenant, she adopted the following description of the underlying mechanics of the profits method:

The concept which underlies the profits method of valuation is easy to describe. Essentially there are three steps in the process.

(a) An estimate is made of the income from the business. In the case of a hotel this will mean that an estimate is made of the likely income [emphasis added] from such sources as the letting of rooms, the restaurant and bars and ancillary functions such as holding conferences or running a health club. In the case of a casino an estimate will be made of the amount which members of the club will gamble and how much will be retained by the operators.

(b) An estimate is then made of the various expenses and outgoings involved [emphasis added] in the operation of the premises. To take again a hotel as an example there will be staff expenses, purchases of items such as food and drink, and outgoings such as fuel, rates, insurance and advertising.

(c) The difference between the income and the running costs is the net profit. This amount is available for the payment of rent. The first step is therefore to decide what proportion of the net profit should be taken as to that which the willing lessee would be willing to pay as rent.[10]

34 After referring to the previous court decisions concerning the leases and to a VCAT decision,[11] the valuer observed that the term 'Current Rent' was not defined under the International Valuation Standards 2017 or by the Australian Property Institute ('API'). She observed that sch 1 pt A of the leases provided that the rent was to be a fair rent for the premises only and that various matters were to be disregarded.

35 She adopted the API definition of Fair Market Rent, being:

The rent that would be fair for the particular landlord and particular tenant to have agreed under the lease in question having regard to all the circumstances relevant to any negotiations between them of a new rent from the review date. The test is largely subjective. 'Fair market rent' is considered to be different from 'current market rent' to take into account what is reasonable between the actual parties to the lease.

36 She also noted that the API adopted the following definition of 'Market Rent' from the International Valuation Standards 2017:

The estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lease terms in an arm's length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.

37 The valuer then observed that API guidance distinguished between Market Rent and Fair Rent in these terms:

In the former case, the rent is determined based on the rent the premises would bring on the open market having regard to the rents paid for comparable premises in the same or a comparable area. The test is objective. In the latter case, the rent is determined on the basis of the rent which it would be fair for the particular landlord and the particular tenant to have agreed under the lease in question having regard to all the circumstances relevant to any negotiations between them from the rent review date.

38 The valuer said that in her experience, and consistently with the observations made in the parties' submissions, rents were not consistently ascribed to hotels on a per square metre basis. To attempt to draw a comparison on that basis was neither informative nor conclusive. The industry norm was to adopt the profits method, which was permitted under the leases.

39 She then observed as to the use of the profits method:

Unless directed otherwise by the lease, the usual market approach to assessing rent for a Victorian gaming hotel is to adopt the Profits Method whereby the EBITDAR is estimated having regard to market conditions and outlook and the assumption that the hotel business is treated as a going concern operating under good average management by an hypothetical incoming tenant.

However, when using the Profits Method to assess Fair Rent, in the estimation of EBITDAR, the assumption of good average management is not necessarily applicable.

Whether assuming good average management or otherwise, 'below the line' adjustments are made to the rent where appropriate, to reflect circumstances peculiar to that lease that are not already accounted for in the assessment of EBITDAR or the rental rate adopted.

I have considered the submissions from the parties, which were assessed using the Profits Method, but from different perspectives.

The Tenant's submissions are made on the basis of Fair Rent, for the particular landlord and tenant, based upon the EBITDA of the business rather than what might be achieved by a good average manager.

Conversely, the Landlord's submissions are made on the basis of a "Current Rent that is substantially similar to a market rent" based upon an EBITDA that would be achieved by a good average manager optimising trading outcomes by operating the full complement of approved gaming machines, amongst other things.

The concept of a good average manager raises the prospect of the hypothetical tenant and landlord - a notion that arises in the definition of Market Rent, and sometimes in a lease contract, but is not necessarily captured in the concept Fair Rent.

When considering a hypothetical tenant and landlord, good average management of the hypothetical tenant becomes a consideration, whereby the special effects of the incumbent tenant's goodwill are discounted by assuming that a "hypothetical tenant" is leasing the premises.

When I look to the Lease, there is no direction to assume a hypothetical landlord or tenant, nor a direction that might open up an assumption of hypothetical landlord and tenant - such as to contemplate that the premises are vacant and available for lease, nor is there reference to a market rent for the purpose of this review.

There is no other direction under the lease, which would otherwise require the valuer to assess rent based upon earnings estimated to be achieved under good average management.

It is significant that the valuer is to be provided Tenant's actual EBITDA information at cl 4.11, and directed at cl 37 to "treat EBITDA from any business operated from the Land or any improvements on the Land as EBITDA of the Tenant, irrespective of which person operates that business or owns the improvements, and to include it in the assessment.' (Emphasis added)

I have formed the view that the concept of Fair Rent applicable to the assessment of Current Rent for the Premises only, for the purpose of this determination is satisfactorily captured in the API definition and Guidance Note.

Accordingly, I conclude that I must take into account, or disregard, as directed, the matters outlined under the Schedule 1 Valuation Methodology Part A, and in contemplating the concept of Fair Rent as being "fair for the particular landlord and the particular tenant to have agreed under the lease in question having regard to all the circumstances relevant to any negotiations between them from the rent review date" in respect to the Premises only, without further assumption as to a hypothetical good average manager tenant.[12]

40 The valuer considered in some detail what was fair for ALE and ALH in the circumstances relevant to negotiations between them. She then said:

Accordingly, in applying the Profits Method, I have considered the actual EBITDA of the business conducted from the Premises and estimated the likely income and costs under incumbent ALH management of the entire Premises, having regard to the circumstances and outlook at the Review Date, and not the EBITDAR that might otherwise be achieved assuming standalone operation by a good average manager.

I have based my estimate of EBITDAR for Current Rent assessment purposes on the number of gaming machines attached to the premises at the rent review date, also having regard to the Expert Opinion (appended), whereby Hr Hay quotes Australian Leisure and Hospitality Group Limited v Trust Company Fiduciary Services Limited [2009] VSC 574 and Australian Leisure and Hospitality Group Limited v Trust Company Fiduciary Services Limited [2011] VSCA 420 in advising that Part A of the subject Lease Agreement requires that the valuer "shall disregard ... any value attributable to licences, goodwill, Tenant's items...".

Further, that "shall disregard" in Part A means "shall ignore" or "put to one side and make no allowance for". The valuer has to "ignore or forget about the value attributable to the licences" and have "have regard to the business as a going concern" but is to make "no addition, subtraction or discount ... by reference to the value attributable to licences."

To my mind, I am to make no allowance for the 'licenses' or 'gaming rights' (which includes both venue approvals and gaming machine entitlements) beyond their contribution to the business as a going concern. [Were] I to make adjustment to revenue for additional gaming entitlements than are actually operated from the premises, this would be contrary to the direction to ignore or forget about them.

In assessing EBITDAR and other adjustments for application in the Profits Method, I have also considered two ongoing and material financial considerations peculiar to the ALE-ALH Lease Agreements.

The first is that the Tenant is obliged to pay Land Tax on a multiple holding basis. This is highly unusual, with conventional market arrangements being for the landlord to pay Land Tax, or where it is recoverable, it is recovered only on a single holding basis. However, as with analysis of the comparable evidence, the EBITDAR adopted for rent assessment, reflects the impost of property outgoings to the extent that they are recoverable from a tenant. Accordingly, the EBITDAR estimate for the subject takes into account the particular outgoings recovery provision of the subject Lease Agreement, including Land Tax on a multiple holding basis.

The second is that the subject ALE-ALH Leases provides for the Tenant to be liable for capital repairs and maintenance that are ongoing in nature.

Such a provision is unusual in the Victorian hotel sector outside the ALE-ALH portfolio, as the Retail Lease Act 2003 ... usually applies and invalidates such provisions. Even where the Act does not apply, such responsibilities usually reside with the landlord.

41 Following a review of relevant matters including the property, zoning, environmental considerations, the land and its locality, improvements, structural maintenance, and liquor and gaming licences, the valuer estimated the future EBITDAR for the hotel. To do so, she considered the actual EBITDA of the business and estimated the likely income and costs under the incumbent ALH management, having regard to the circumstances and outlook at the review date, and not the EBITDAR that would be achieved assuming a standalone operation by a good average manager.

42 As to the submissions made by the parties, the valuer observed:

The Tenant's submission provides insights into trading practices and outcomes achieved under incumbent management, together with detail around trading considerations peculiar to the subject Premises which have influenced, or may influence, trading outcomes.

The Landlord does not have a line of sight to non-gaming trading outcomes at the Premises. It has commissioned independent advice with respect to potential trading outcomes under good average management, which have informed (to an extent) the valuation submissions made on its behalf. For the reasons outlined in Section 7.4 Current Rent, I do not consider market rent with the assumption of operation under good average management, to be the correct approach to this review.

...

Aside from the particular advantages and disadvantages of forming part of a portfolio, to a great extent, the age, condition, location and configuration of the Premises are reflected in its trading outcomes, influencing revenue, and operating mix and efficiencies influencing operating expenses.

As the Tenant's actual EBITDA information is not available to the Landlord and has been provided to me on a strictly confidential basis, I am obliged to maintain Tenant confidentiality.

43 After considering each aspect of the hotel business, the valuer determined an EBITDAR of $3,527,000.

44 In part 16 of the determination, the valuer set out comparable rental evidence derived from 17 different hotels. None of those properties involved leases between both ALE and ALH. The valuer then set out details of a further nine hotels or clubs. For three of the 26 properties, one (but not both) of ALE and ALH was a party to the relevant lease.

45 The valuer compared the comparable rental evidence with the lease before her, and observed as follows:

The overwhelming majority of comparable evidence falls under the protections of the Retail Leases Act 2003, which prevents recovery of land tax and capital repairs & maintenance from the tenant. It also prevents ratchet or collar provisions on rent review, albeit fixed growth indices are permitted.

The rent review structures typically provide for annual reviews indexed to CPI or fixed percentage growth of 2.5% to 4%, with periodic market reviews.

Typically, a landlord will recover property rates and taxes, excluding Land Tax, sometimes building replacement insurances (but not always), and the tenant responsible for general repairs and maintenance. Where land tax is recovery, it is typically on a single holding basis. The outgoings costs, to the extent that they are recoverable, are reflected in the EBITDAR and resultant rental rate.

Total tenure from commencement is typically 25 to 40 years, with a few exceptions of less than 20 years.

The Lease Agreement is structured to be as passive as possible for the Landlord. It provides income certainty via ratchetted CPI indexed reviews each year, a 10% capped and collared review of Current Rent in 2018, an unfettered review of Current Rent in 2028, and at each option. Current Rent is not a conventional market rent, but a form of fair rent. Further, the Lease Agreement provides for Tenant capital repairs and maintenance and full outgoings recovery.

The subject Lease Agreement provides considerably longer tenure, at 65 years in total, and reflects the typical agreement which extends across the ALE-ALH national portfolio.

The Tenant has considerable flexibility with respect to development and redevelopment of the Premises, with the longer tenure more favourable to such an endeavour, whereby the Tenant is afforded greater incentive for maximising business outcomes and a longer period to capture any additional return or reward arising from such development and redevelopment, albeit that the benefit of such works are captured in the reviews of Current Rent for the benefit of the Landlord.

The Tenant is also afforded a concession, in light of the cap on gaming machine numbers that have affected it since 2012. The ALE-ALH Lease Agreements now contemplate a reduction in [Electronic Gaming Machine] numbers of up to 50% at any venue except the Boundary Hotel (limited to a reduction from 90 to no fewer than 70), provided that it is no less than 95% in aggregate across the ALE-ALH portfolio, dropping to 90% subject to performance thresholds. Within those parameters, the Tenant is entitled to deploy or withdraw machines to its best commercial advantage across its portfolio, albeit with an increase at one venue potentially necessitating a reduction at another. Accordingly, the Tenant may operate at a reduced, and potentially suboptimal, number of machines at an individual ALE premises.

The terms and conditions of the subject Lease Agreement do not align directly to the comparable evidence, with particular terms and conditions that reflect the relationship between two highly sophisticated and informed corporate entities, as landlord and tenant, across a substantial portfolio of gaming hotels.

With any such relationship, binding two parties, there is an element of accepting the 'good with the bad', to the extent that this can be managed by the contract between them. Each of the parties to the Lease Agreement are afforded benefits and have made concessions peculiar to the relationship not readily available in the market.

The Lease Agreement provisions peculiar to the parties inform the method of assessment of EBITDAR for the purpose of Current Rent Review, with the exception of the estimated structural maintenance requirement allowance, and the Cap and Collar provisions, which are 'below the line' adjustments.

Between the 2018 Rent Review Date and the next opportunity for review in 2018, being an unfettered review, the rental growth structure, although ratchetted is comparatively modest at CPI, being the lower index based upon the low inflationary outlook in comparison to the evidence.

The other general terms are not so materially different to broader market-sector conventions that would warrant a departure from the comparable evidence range of rental rate applicable to adopted EBITDAR.

47 In conclusion, the valuer adopted a rental rate of 35% to be applied to an EBITDAR of $3,527,500. She determined that the rounded Current Rent was $1,205,000 per annum (ex GST). This was similar to the Current Rent prior to the rent review date of $1,205,623.26, and within the 10% cap and collar.

48 In Legal & General Life of Australia Ltd v A Hudson Pty Ltd,[13] McHugh JA held that the key issue in considering whether a valuation is binding upon the parties to a contract is whether it was made in accordance with the terms of the contract. He expressed the relevant principles as follows:

In my opinion the question whether a valuation is binding upon the parties depends in the first instance upon the terms of the contract, express or implied.

...

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 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 have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract.[14]

49 In Bevendale Pty Ltd v Lucky Eights Pty Ltd,[15] the Victorian Court of Appeal set out the principles governing the setting aside of a valuation by reference to Legal & General. The Court in Bevendale also cited Commonwealth v Wawbe Pty Ltd, where Gillard J summarised the principles in simple terms:

[T]he 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 demonstrates that the valuation was not made in accordance with the terms of the contract and accordingly does not bind the parties?[16]

50 The decision of the Court of Appeal in Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd is to the same effect.[17] In that decision, the Court expressed the test to set aside an expert determination in these terms:

The question, first and last, is one of contract. What did the parties bargain for? 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. If, on the other hand, the determination complies with the contract, the parties are bound by it.

...

The most comprehensive analysis of the applicable principles is to be found in the judgment of the Full Court of the Supreme Court of Western Australia in WMC Resources Ltd v Leighton Contractors Pty Ltd. Ipp J (with whom Kennedy and White JJ agreed) enunciated the principles as follows:

1. By the contract, the parties agree to be bound by a determination made in accordance with the terms of the contract. If the valuation complies, the parties are bound.

2. A court (or an arbitrator) will not set aside a determination merely on the ground that it is incorrect or that it reveals errors. The determination will only be interfered with if it is not made in terms of the contract.

3. There will ordinarily be implied terms of the contract that the process of making the determination will be conducted honestly, bona fide and reasonably.

4. Given that the parties have bound themselves to accept a determination which complies with the contract, a statement in the contract that the determination is 'final and binding' adds little.

5. No different approach is required where, in accordance with the contract, the determination is made by one of the parties to the contract or its representative.[18]

51 It is well established that where the parties to a contract agree to be bound by a determination that complies with their contract, a provision in the contract that the determination is final and binding adds little if anything to the analysis.[19]

52 While both ALE and ALH accepted these statements of the law, they disagreed as to what the leases required, and therefore as to what the valuer was required to do.

Valuation methodology ground: did the valuer err in interpreting the leases as directing her to disregard the usual market approach to assessing rent?

53 ALE put its case on the valuation methodology ground in two ways. First, it submitted that the valuer erred when she interpreted the leases as directing her to disregard the usual market approach in the determination of Current Rent. Alternatively, it submitted that the valuer failed to take market rent into account in circumstances where it was a mandatory consideration.

54 In support of these submissions, ALE contended that:

(a) there was no express direction in the leases or in the valuation methodology that the usual market approach was to be disregarded;

(b) a direction that the rent be a fair rent for the premises only did not compel the conclusion that the valuer was instructed to disregard the usual market approach. Fair rent and market rent were not mutually exclusive concepts. The usual market approach was a relevant circumstance in any negotiation between ALE and ALH;

(c) fair rent and market rent were not binary concepts. Fair rent was broader and wider but did not reject market rent. Market rent was an essential ingredient in fair rent. Current Rent as defined in the leases did not equal market rent;

(d) the words 'fair rent' were not used by the parties in the leases as a legal term of art. The words may have different meanings depending on the context in which they are used;[20]

(e) there was nothing in the leases that supported the adoption by the valuer of the API definitions of 'market rent' and 'fair market rent';

(f) schedule 3 defined 'Market Rent' to mean the current market rent for the premises determined having regard to the valuation methodology in sch 1 pt A. Clause 2.7(a)(ii) of sch 3 sets out a procedure by which the rent is adjusted to reflect changes in the value of the premises occasioned by a future development of the land undertaken by ALH in accordance with its development rights under the leases. The valuer's construction of the leases produces the result that rent is assessed on a 'Market Rent' basis for the purpose of cl 2.7(a)(ii)(A) of sch 3, but on a different basis under cl 4;

(g) clause 4.12 of the leases refers to the valuer's determination of Current Rent under cl 4.3 and also to any other valuation process which requires a determination of market rent;

(h) there were various textual and contextual matters in the leases which compelled the conclusion that the valuer was not directed to disregard the usual market approach in assessing Current Rent for the premises, including that the valuer was to take into account any use for which the premises can be used, as well as rents for comparable premises;

(i) the prospectuses issued at the time when the leases were first entered referred to a 'market rent review' and a 'market review'; and

(j) there was nothing in the text or context of the leases to suggest that the parties intended to constrain the valuer's discretion as to the selection of an appropriation valuation methodology.

55 ALE acknowledged that market rent had to be adjusted in accordance with the terms of the leases, and contended that the words 'fair rent' should be given their natural and ordinary meaning which is not unduly favourable or adverse to either landlord or tenant.

56 ALE described the provisions of the leases as giving rise to a 'hybrid' determination of the Current Rent. It was a hybrid because it included objectively ascertainable market rent adjusted for other matters which the valuer had been instructed to take into account. However, ALE submitted that the valuer had not adopted the hybrid process, as she had excluded the usual market approach of assessing rent for the premises in the hands of a hypothetical good average manager.

57 ALH submitted that the difference between fair rent and market rent was explained by Malcolm CJ in Ricciardello v Caltex Oil (Australia) Pty Ltd in the following terms:

In the context of rental valuation or assessment there is a well-established distinction between "market rent" on the one hand and a "fair rent" on the other. In the former case the rent is determined on the basis of the rent the premises would bring on the open market having regard to the rents paid for comparable premises in the same or a comparable area. The test is objective. In the latter case the rent is determined on the basis of the rent which it would be fair for the particular landlord and the particular tenant to have agreed under the lease in question having regard to all the circumstances relevant to any negotiations between them of a new rent from the review date. The test is largely subjective.[21]

(a) the distinction between market rent and fair rent was well established by the time that Ricciardello was decided in 1991;

(b) the leases dated from 2003, and were entered into by sophisticated, well advised parties;

(c) the term 'fair rent' in the leases should be taken to have its usual meaning;

(d) the rent that would be achieved in the open market may or may not be one that is fair between the particular parties to a lease. Fair rent is determined in a fundamentally different way;

(e) if the valuer had determined a Current Rent based on a hypothetical good average manager tenant, she would have failed to perform the valuation in accordance with the leases; and

(f) the valuer correctly understood and performed the task given to her by the leases.

59 ALH alternatively submitted that it was open to the valuer in the exercise of her professional judgement to determine Current Rent as fair rent in the manner that she did. There was no direction to the valuer to assess a pure or traditional market rent.

60 ALH submitted that the sch 3 provisions and the expression 'Market Rent' in sch 3 apply in the event of a future development of the property, and not on an anniversary rent review.

(a) the API definitions and guidance satisfactorily captured the test in the valuation methodology. It was not correct to say that the valuer eschewed any consideration of market evidence or market rental. She took into account rent for comparable premises in similar locations and discounted as not particularly useful the comparative approach on a square metre basis. She found that a more appropriate use of market evidence was as a benchmark comparator for rent as a proportion of net profit;

(b) the term 'fair rent' has an established legal meaning, including when the leases were executed. The use of this term and the similar term 'reasonable rent' gave rise to a strong but rebuttable presumption that it was used in that established sense;[22] and

(c) under the valuation methodology it was open to the valuer to determine the Current Rent in the manner that she did. She was required to form an opinion as to what factors were relevant and to exercise professional judgement in the determination of the Current Rent. The way in which the objective and subjective elements were to be accommodated was very much a matter for expert knowledge and was essentially a matter of opinion.[23]

62 A plurality of the High Court in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd summarised the principles of construction of commercial contracts in these terms:

The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.

In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.

Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.

However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". It may be necessary in determining the proper construction where there is a constructional choice.

...

Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations.

Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption "that the parties ... intended to produce a commercial result". Put another way, a commercial contract should be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".[24]

63 These principles have been consistently applied in Victoria.[25]

64 Likewise, in Toll (FGCT) Pty Limited v Alphapharm Pty Ltd, the High Court said:

References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction. [26]

65 To the same effect, in Maggbury Pty Limited v Hafele Australia Pty Limited, Gleeson CJ and Gummow and Hayne JJ said that a court construing a contract will ascertain:

the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.[27]

66 Clause 4.1 of the leases directs that the Rent must be reviewed on each Rent Review Date in accordance with the relevant Rent Review Method and the terms of cl 4. For the fifteenth anniversary of the Commencement Date of each lease, the Rent Review Method is a Current Rent review with a cap and collar of 10%.

67 The procedural steps to be adopted for a Current Rent review are set out in cl 4.3. Clause 4.3 item (i) directs that the valuer must determine the Current Rent in accordance with cls 4.6 and 4.10.

68 Clause 4.6 directs that the Current Rent must be determined as at the relevant Rent Review Date in accordance with the matters set out in pt A of the valuation methodology. The expression 'in accordance with' simply means that the determination of Current Rent is to be done in the way that the valuation methodology says it should be done.[28]

69 Clause 4.5(a) provides that the valuer must give a written valuation providing complete details of the reasons for the determination. Clause 4.5(b) provides that the valuer acts as an expert and not as an arbitrator. The valuer must be a current full valuer member of the API of not less than five years' standing, and must have been actively engaged in the commercial property market for the year preceding the relevant Rent Review Date. The valuer must have at least five years' experience in valuing the kind of premises the subject of the lease.

70 Clause 4.5(c) and the valuation methodology require the valuer to consider the submissions of the parties. However, under cl 4.11(b), neither party was permitted to make submissions to the valuer in respect of the EBITDA figures for ALH's business conducted from the premises for the previous three financial years provided by ALH's auditor to the valuer. The valuer is required to assess the Current Rent taking into account the parties' submissions, other than in relation to information provided to the valuer under cl 4.11.

71 Clause 4.11 provides for a special procedure in relation to EBITDA figures. Within ten business days of the appointment of the valuer, ALH is required to arrange for its auditor to provide the valuer with copies of the EBITDA figures for its business conducted from the premises for the previous three financial years, while at the same time providing ALE with a copy of the covering letter to the valuer. Clause 4.11(a) provides that the information is provided to the valuer on a confidential basis and on the basis that the valuer must not disclose the information to ALE. The practical effect is that the valuer and ALH are aware of the EBITDA figures provided pursuant to cl 4.11, but ALE is not. Clause 37 also relates to the provision of EBITDA figures, but it is not relevant to the issues in dispute in this proceeding.

72 The valuation methodology provides that the instructions to a valuer appointed under cl 4.3 of the lease must require the valuer to assess the Current Rent taking into account certain specified matters. Briefly stated, some of those matters are:

(a) the terms and conditions of the lease, which include ALH's obligation under cl 3.2(b) to pay outgoings including certain taxes and rates;

(b) the total term of lease is assumed to be the sum of the initial term plus all further terms of the lease;

(c) the actual use and any permitted use of the premises;

(d) the rent shall be a fair rent for the premises only;

(e) rents for comparable premises in similar locations ascribed on a per square metre basis;

(g) submissions by ALE and ALH (except in relation to the EBITDA information); and

(h) a cap and collar (where applicable to the particular Current Rent assessment).

73 However, the valuation methodology also provides that certain specified matters are to be disregarded by the valuer, including the value attributable to licences, goodwill, tenant's items, development rights and structural works undertaken by the tenant, and any rent-free periods, financial contributions, allowances or inducements given to the tenant.

74 It was common ground that the leases are not subject to the Retail Leases Act 2003 (Vic) ('RLA'). The assessment of Current Rent under the leases may be contrasted with a current market rent review under s 37 of the RLA, which provides for:

(a) the assessment of current market rent as the rent obtainable at the time of the review in a free and open market between a willing landlord and willing tenant in an arm's length transaction; and

(b) the assessment of rent on the basis that the premises are unoccupied and offered for lease for the same, or a substantially similar, use to which the premises may be put under the lease.

75 Under the RLA, a provision of a retail premises lease is void to the extent that it makes the tenant liable to pay the landlord's land tax,[29] or purports to limit the extent to which rent may be reduced in a review (subject to certain specified exceptions).[30]

76 The valuation methodology provides for an assessment of Current Rent on the basis of instructions and directions specific to the premises, which do not reflect the rules which otherwise prevail in Victoria in the assessment of current market rent for retail premises under the RLA.

77 The valuation methodology directs that the Current Rent 'shall be a fair rent for the Premises only'. The direction is expressed in mandatory terms. The use of the word 'only' confirms that the fair rent assessment relates to the premises alone.

78 In Ricciardello, Malcolm CJ described the distinction between market rent and fair rent as well-established, referring to both British and Australian cases. His Honour said that fair rent was 'the rent which it would be fair for the particular landlord and the particular tenant to have agreed under the lease in question having regard to all the circumstances relevant to any negotiations between them of a new rent from the review date', adding that the test was largely subjective.[31] The evidence relevant to the determination of a market rent was much narrower in scope. Rowland J referred to the distinction between fair rental value and market value, which had led to a broader enquiry by the valuer.[32]

79 The concept of reasonable or fair rent as opposed to market rent can be found as far back as John Kay Ld v Kay, where Lord Evershed MR said that a reasonable rent requires the application of a subjective test of what the judge thinks right and fair, as contrasted with an objective test for market value based on what the evidence shows.[33]

80 In his book entitled Commercial Rent Reviews: Law and Valuation Practice published in 1986,[34] the late R.T.M. Whipple refers to the unreported English decision of Store Properties and General Investments Ltd v Darrington (Rustington) Ltd, where it was said that 'a rent could not be fair unless it were reasonable and could not be reasonable unless it was fair'.[35]

81 In the well-known decision of Ponsford v HMS Aerosols Ltd, the majority of the House of Lords preferred the objective approach against strong dissent.[36] In that case, the rent review clause provided for the rent to be the higher of a nominated amount and 'a reasonable rent for the demised premises'. Viscount Dilhorne held that an independent surveyor should assess the rent that the demised premises would command if let on the terms of the lease and for the period the assessed rent was to cover. This involved assessing the reasonable rent that others, and not just the sitting tenant, would be prepared to pay for the use and occupation of the premises.[37] Lord Fraser agreed with Viscount Dilhorne, adding that the words 'a reasonable rent' pointed unambiguously to an assessment on an objective basis without reference to the particular landlord or the particular tenant, or to the history of how the premises came to be built or paid for.[38] Lord Keith noted that if the approach were to be purely objective, it would be difficult to perceive any difference in meaning between a reasonable rent and a market rent.[39]

82 Lord Wilberforce, in dissent, held that it was not reasonable in fixing the rent to take into account physical improvements erected following a fire at the premises but to ignore the fact that they had been erected at the cost of the tenant. A market rent, or a rack rent, was one thing; a reasonable rent another.[40]

83 Lord Salmon, also dissenting, said that a reasonable rent meant something quite different from an open market rent. A reasonable rent was often the open market rent, but this was not always the case. It was not the case where the demised premises had been extended and improved by the tenant at the tenant's expense.[41]

84 In Beer v Bowden, premises were let initially for a nominated amount, and after a specified date for an amount to be agreed. The Court held that a term should be implied that the rent would be a fair rent for the premises excluding the tenant's improvements.[42]

85 In Thomas Bates & Son Ltd v Wyndham's (Lingerie) Ltd,[43] the rent review clause referred to such rent 'as shall have been agreed' between the parties or fixed by an arbitrator in default of agreement. The English Court of Appeal held that the clause meant that the rent should be such as would have been reasonable for the landlords and the tenants to have agreed under the lease. The rent to be ascertained in default of agreement must be a fair rent as between the landlords and the tenants.[44]

86 In Lear v Blizzard,[45] the rent review clause provided for rent to be agreed or determined by an arbitrator. Tudor Evans J held that the clause was to be construed in a subjective sense, taking into account all considerations that would affect the mind of either party.[46]

87 In Email Ltd v Robert Bray (Langwarrin) Pty Ltd,[47] the Full Court of the Supreme Court of Victoria construed a rent review clause which provided for the rental to be mutually agreed, and in the absence of agreement, to be determined as a reasonable rental by a single valuer appointed by the parties. The Court held that the expression 'reasonable rental' was not a term of art and had no fixed or precise meaning. It meant a rental that was reasonable in light of all the relevant circumstances. It did not mean market rental. A valuer might consider that the market rental represented a reasonable rental, but the valuer may also wish to take other facts into consideration.[48]

88 The Full Court said that it did not consider that the Ponsford decision laid down any general principle, as the point was one of construction. It considered that the minority judgments were more convincing than the majority opinions. There was weight in the argument that if reasonable rental meant market rental, there was no need for there to be complicated provisions in the lease relating to the rent review.[49]

89 In 99 Bishopsgate Ltd v Prudential Assurance Co Ltd, the English Court of Appeal considered a rent review clause which called for an arbitrator to determine a fair yearly rent for the demised premises having regard to rental values for property let without a premium and with vacant possession. The Court held that the words used in the lease showed that the parties intended a market rent review.[50]

90 The decision of the WA Supreme Court in Ricciardello has been discussed and applied in subsequent cases. In Colin Marg Pty Ltd v Mackay Medical Investment Ltd,[51] the lease provided that the rent for a further lease was to be mutually agreed, or, if not agreed, determined by a registered valuer nominated for that purpose. Wilson J held that the valuer was to perform a task that the parties had been unable to do themselves. This was a strong indicator that the valuer was required to take into account all of the considerations which would have been in the parties' minds when negotiating. The valuer was to undertake the assessment on a subjective basis.[52]

91 Her Honour observed that the requirement that the valuer have regard to the rents of comparable premises did not limit the scope of the valuer's task. On the contrary, it was a prescription of one matter to be taken into account in the broader inquiry into what would be a reasonable rent for the parties to have agreed in all the circumstances.[53]

92 Likewise, in Majestic Logistics Pty Ltd v Dowling Holdings Pty Ltd,[54] the lease provided for the rent for a gaming hotel to be adjusted at the end of each ten year term by an amount agreed as a 'fair variation in the annual rent', or in default of agreement, to be fixed by a valuer.

93 Grant CJ held that the clear purpose of the rent review mechanism was to permit mutual agreement, but to require the variation to be determined by a third party valuer acting as an expert in the absence of agreement.[55]

There is a well-established distinction between "market rent" on the one hand and a "fair rent" on the other. Market rent is determined on the basis of the rent the premises would bring on the open market having regard to the rent paid for comparable premises in the same or a comparable area. The test is objective. On the other hand, fair rent is determined on the basis of the rent which it would be fair for the particular lessor and the particular lessee to have agreed under the lease in question having regard to all the circumstances relevant to any negotiations between them of a new rent from the review date. That test is subjective and broader in evidentiary and factorial scope than an enquiry into market rent. Where the test is subjective it may also be necessary to take into account, as a matter of fairness, such things as whether the lessee has constructed improvements on the land at its own expense which have become the property of the lessor.[56]

95 His Honour noted that the fact that the valuer was appointed in default of agreement suggested, at least prima facie, that the assessment was to be subjective in nature, although it was ultimately governed by the instruction to fix 'fair market rent'.[57]

96 Ricciardello was quoted with approval by the WA Full Court in Green v Magenta Nominees Pty Ltd,[58] and subsequently by Hasluck J in Green v Wilden Pty Ltd.[59]

97 More recently, Ricciardello was followed by the WA Court of Appeal in Sino Iron Pty Ltd v Mineralogy Pty Ltd,[60] where the Court referred to the differences between 'market rent' and a 'reasonable rent in all the circumstances' or a 'fair and reasonable rent', quoting Malcolm CJ in Ricciardello.

98 In Modick RC Ltd v Mahoney, the New Zealand Court of Appeal described the expressions 'objective' and 'subjective' as not truly helpful in contrasting two kinds of rent review clauses. The wider approach, whereby the arbitrator had the task of determining what reasonable parties would have agreed, itself imposed an objective test of reasonableness.[61]

99 In MMAL Rentals Pty Ltd v Bruning, a contract provided for the price payable on the exercise of an option for certain shares to be 'fair market value'. Spigelman CJ observed:

It is convenient at the outset to determine the proper construction of the words "fair market value". All the words in the contractual formula ... must be taken into account in its construction. The term employed is neither "fair value" nor "market value" but "fair market value".[62]

There are a number of contractual, statutory and accounting standards contexts in which the administration of justice must determine the "fair value" of property. The meaning of that formulation will vary with the context. In some contexts the formulation refers to what is just or equitable in all the circumstances. In such a case the scope of the relevant considerations which may be taken into account by the requisite decision-maker, whether an arbitrator or a judge, is wide ... Where the relevant test is "fair value", a market value is often not decisive.[63]

101 This statement of the position was accepted by Brereton J in TX Australia Pty Limited v Broadcast Australia Pty Limited when reviewing an expert determination as to access fees for broadcast transmission towers.[64]

102 In EMS Holdings Pty Ltd v Industrial Lands Development Authority, the issue was to construe the phrase 'fair market rental'. Owen J held that the phrase meant a rent that the lots would bring on the open market having regard to rent paid for comparable premises in the same or a comparable area adjusted to take into account matters made pertinent by the particular relationship of the lessor and the lessee concerning the land the subject of the lease. There were a myriad of factors that might merit consideration in the latter category.[65]

103 The fundamental question is whether the assessment to be undertaken by the valuer under the valuation methodology is to be determined:

(a) objectively on the basis of the rent that the premises would bring in the hands of a hypothetical tenant in the open market; or

(b) subjectively on the basis of what would be fair for the landlord and tenant to have agreed having regard to all the circumstances relevant to any negotiations between them of a new rent from the relevant review date.

104 I have come to the conclusion that when properly construed, the leases and the valuation methodology adopt the subjective 'fair rent' test, rather than the objective 'market rent' test, for the assessment of Current Rent. This is the test described in Ricciardello and subsequent cases, and requires the valuer to determine the rent which it would be fair for the particular landlord and tenant to have agreed under the leases having regard to all of the circumstances relevant to any negotiations between them for a new rent from the relevant review date. The test entails fairness to both parties.

105 In coming to this conclusion I have had the benefit of extensive written and oral submissions. It is convenient to set out my reasons under the headings of text, factual context, and commercial purpose, bearing in mind the principles for the construction of commercial contracts which I have set out above.

106 The first and obvious reason for adopting a fair rent rather than a market rent approach to the determination is that the valuation methodology provides that the rent shall be a fair rent for the premises only. The expression 'market rent' is nowhere to be found in the valuation methodology. The reference to fair rent and the absence of any reference to market rent point to a subjective assessment of rent where considerations wider than those relevant to market rent can be taken into account.

107 When the leases were drafted, expressions like 'fair rent' and 'reasonable rent' were in general currency, as Ricciardello and subsequent cases make clear. The parties are sophisticated and had the benefit of the best legal advice at the time. They chose to provide for fair rent, and not market rent, in the valuation methodology. There is every reason to accept what the valuation methodology expressly says. As the Full Court said in Email, the parties did not provide for a market rental as they could so easily have done.[66]

108 I do not, however, accept as submitted by ALH that the expression 'fair rent' is a term of art in its own right so as to attract a rebuttable presumption as to its construction.[67] Spigelman CJ said in MMAL that the meaning of the comparable expression 'fair value' will vary with the context.[68] His Honour said that it may refer to what is just and equitable in all the circumstances with the result that there is a wide scope as to the relevant considerations that may be taken into account by the decision-maker.[69] Likewise, in Email, the Full Court considered that the expression 'a reasonable rental' is not free from ambiguity.[70]

109 While I am not satisfied that expressions such as 'fair rent' or 'reasonable rent' should be considered as having a specialised or technical meaning in law, I am satisfied as the decided cases show that the use of expressions such as fair rent and reasonable rent in the rent review clauses of leases is well known and points towards a subjective test. These expressions invoke considerations much wider than those relevant to the determination of market rental. This is reflected in the API guidance notes relied on by the valuer in the determination.

110 A second important indicator leading to the same conclusion is found in the rent review provisions of the leases. Clause 4.3 item (d) provides for the parties to try to agree on the Current Rent following service of a rent dispute notice. Under cl 4.3 item (e), a valuer must be appointed if the parties do not agree on the Current Rent. Clause 4.4 takes the matter a step further and provides that despite cl 4, the parties may at any time agree on the Current Rent. The appointment of the valuer takes place only if the parties cannot agree, and takes the place of continuing negotiations between the parties. This factor suggests that the parties agreed on the subjective test in determining rental consequential on the negotiation process.[71]

111 A third indicator that a subjective test was intended by the parties arises from a review of the relevant matters that the valuer is required to take into account under the valuation methodology. The valuer is to assume a total term of lease commensurate with the initial term plus all further terms of the lease, and to determine rental on the basis of any use for which the premises may be used in accordance with the leases and relevant laws. The valuer is to disregard the existence of rent-free periods, financial contributions, allowances and inducements. A special process is adopted for the provision of the EBITDA information to the valuer. The information to be provided directs attention to ALH's actual performance as the operator of the subject premises, rather than that of a hypothetical incoming tenant with good average management. In addition, the parties may make written submissions to the valuer as to the matters which they consider the valuer should take into account. A cap and collar operates in relation to the determination of Current Rent upon the fifteenth anniversary of the Commencement Date.

112 Each of these provisions is inconsistent with, or points away from the adoption of a market rent. As ALE appropriately recognised in its submissions, the valuation methodology was certainly not directed at an assessment based on market rent in any pure or strict sense. On any view, the directions in the valuation methodology take the assessment a long distance away from any ordinary definition of market rental. In its submissions, ALE described the result as a hybrid rental. In reality, the departures from a traditional or conventional notion of market rent are so numerous and so extensive as to suggest that what the parties had in mind when they agreed on the valuation methodology was the wider inquiry provided by the adoption of the subjective test stated in Ricciardello.

113 The adoption of the subjective test stated in Ricciardello and subsequent cases does not mean that comparable rental information is disregarded by the valuer or is irrelevant. Rather, comparable rental information is part of the overall body of information available to assist the valuer to assess Current Rent. It is part of the wider inquiry contemplated by the subjective test.

114 Schedule 3 defines 'Market Rent' to be the current market rent for the premises determined having regard to the matters in the valuation methodology. Schedule 3 contains a complex set of provisions regarding proposals for future development of existing premises - an entirely different factual context to that presently under consideration. Schedule 3 has no application to the assessment of Current Rent on the fifteenth anniversary of the leases, or at the commencement of any future term of the leases. It has no bearing on the determination of Current Rent.

115 The definition of Market Rent in sch 3 does not seek to depart from or modify the valuation methodology. It simply adopts the valuation methodology and defines the expression 'Market Rent' by reference to it. While that definition also employs the expression 'current market rent', it does not seek to modify the valuation methodology. As I have said, ALE's position was that the valuation methodology resulted in a hybrid rent and not on any view the assessment of a pure or strict market rent.

116 Clauses 2.7(a)(ii)(A) and 2.7(b)(ii)(A) of sch 3 set out a procedure by which the rent is to be adjusted to reflect changes in the value of the premises occasioned by a future development of the premises undertaken by ALH. The valuer was not concerned with this scenario, or with the construction and operation of these complex provisions. Her task was to consider the application of the valuation methodology to the assessment of Current Rent for the relevant anniversary rent review.

117 ALE also drew attention to cl 4.12 of the lease which speaks of the determination of the Current Rent under cl 4.3 'or any other valuation process under this Lease which requires a determination of market rent'. The valuer was not concerned with the construction or operation of this provision. Her concern was with the application of the valuation methodology to the determination of Current Rent under cl 4.3, and not with any of the other valuation processes in the leases.

118 A final point made by ALE drew attention to the use of the expression 'market rent review' or 'market review' on a number of occasions in the ALE and ALH prospectuses in 2003. However, as Judd J said in Australian Leisure and Hospitality Group Limited v Trust Company Fiduciary Services Limited:

The prospectuses are, by their nature, regulated marketing documents. They are designed for a purpose other than recording the agreement between the parties which is fully reflected in the Lease and the Relationship Deed. Insofar as a prospectus purports to explain the operation of a lease or the Relationship Deed it is no more than the author's attempt to interpret the effect of the documents.[72]

119 The Court of Appeal described the factual context of the leases in these terms:

The Lease was the product of the divestment by Foster's Group Limited, in about August 2003, of its Leisure and Hospitality Division into two publicly listed entities, namely the ALE Property Group (with TC as trustee of a hotel-owning sub-trust, the ALE Direct Property Trust), which was to own the freehold title to 105 hotels or pubs, and ALH, which was to own and conduct the hotel businesses and attached bottle shops pursuant to a number of leases in the same or similar terms.

There were two public floats. Under the prospectus issued for the ALE float, it was stated that ALE had acquired the 105 hotels and that the plant furniture and equipment, gaming and liquor licences, goodwill and the right to profit from future development opportunities associated with each hotel in the portfolio was to be owned by ALH and not the ALE Property Group.[73]

120 Redlich JA described the leasing arrangement for the development of the leased premises as 'most unusual'.[74]

121 The leasing arrangements between the parties are far from the typical market situation where a single hotel in a given locality is to be leased to a hypothetical incoming tenant with good average management. Taken together, the leasing arrangements involve the leasing of an entire gaming hotel and pub portfolio where ALH owns the plant, furniture and equipment, gaming and liquor licences and goodwill associated with each hotel and pub, and is responsible for virtually all the outgoings, insurance, maintenance and repairs. ALH retains operational flexibility and the ability to benefit from redevelopment opportunities. As the valuer noted, ALH is afforded a greater incentive for maximising business outcomes. As the valuer also noted, following the imposition of a cap on gaming machine numbers in 2012, ALH has the agreed capacity to deploy or withdraw machines to its best commercial advantage across its portfolio, with an increase at one venue potentially necessitating a reduction at another.

122 ALE and ALH are not the typical landlord and tenant. They are large corporate entities with ongoing relationships across a portfolio of properties and businesses. The adoption of a market rent review assuming a hypothetical incoming tenant with good average management for individual hotels or pubs would be artificial and unreal given the parties' history, businesses, background, and assumed past and future relationship of 65 years. ALE and ALH should be able to make submissions to the valuer arising from these matters. They are not unimportant or irrelevant to the determination of Current Rent, as might be the case if a market rental valuation were adopted.

123 The purpose of the valuation methodology is to provide instructions to a determining valuer where the parties cannot agree on a future Current Rent. Having regard to the genesis of the leases, the nature of the respective businesses, the commercial and factual background, and the actual and assumed longevity of the relationship between ALE and ALH, a reasonable businessperson would take the view that the valuer in determining a future Current Rent should be able to undertake the wider inquiry consequent upon the adoption of the subjective test, rather than being confined to the much narrower range of considerations permissible in determining a market rent. A fair rent between the parties is better achieved by the adoption of the subjective approach.

Conclusion - construction of the valuation methodology

124 For these reasons, I conclude that the valuer was correct when she adopted the API definition of 'fair rent' and the subjective approach described in Ricciardello. She did not misunderstand the valuation methodology or determine Current Rent using the wrong methodology or test. Her approach was correct and she did not err in failing to adopt the market rent as the sole assessment methodology.

In her assessment of the fair rent, did the valuer err by disregarding the usual market approach in the determination of Current Rent?

125 The valuer's task was to determine Current Rent in accordance with the valuation methodology and the provisions of the leases, which involved the assessment of fair rent through a wider field of inquiry than would have been the case for the assessment of market rent. However, that conclusion does not necessarily mean that the usual market approach or market rent was irrelevant or should have been excluded from consideration.

126 ALE submitted that the valuer misdirected herself as to the requirements of the valuation methodology and incorrectly determined to disregard the usual market approach to the determination of Current Rent. Alternatively, ALE submitted that the valuer had failed to take market rent into account in circumstances where it was a mandatory consideration in the determination of Current Rent.

127 ALE noted that the valuer accepted that the usual market approach to assessing rent for a Victorian gaming hotel is to adopt the profits method, whereby the EBITDAR is estimated having regard to market conditions and outlook and the assumption that the hotel business is treated as a going concern operating under good management by a hypothetical incoming tenant.

128 ALE then drew attention to the valuer's observations that there was no direction in the leases to assume a hypothetical landlord or tenant, or to open up such an assumption. There was no reference to the premises being vacant or available for lease, or to a market rent for the purpose of the relevant review. Nor was there any other direction under the leases to require the valuer to assess rent based upon earnings estimated to be achieved under good average management. These considerations led the valuer to conclude that she must take into account, or disregard, as directed, the matters outlined in the valuation methodology and contemplate the concept of fair rent, in respect of the premises only, without further assumption as to a hypothetical good average manager tenant.

129 ALE drew attention to cl 37(a) of the leases which provides for EBITDA from any business operated or improvements on the premises to be treated as EBITDA of ALH regardless of who operates the business or owns the improvements. ALE observed that the valuer had considered the actual EBITDA of the business conducted on the premises and estimated the likely income and costs under incumbent ALH management of the entire premises, having regard to the circumstances and outlook at the review date. She had not estimated the EBITDAR that might otherwise have been achieved assuming standalone operation by a good average manager.

130 ALE submitted that these considerations established that the valuer had incorrectly disregarded the usual market approach and had failed to take market rent into account in circumstances where it was a mandatory consideration.

131 The valuer's analysis included a consideration of the circumstances relevant to negotiations between ALE and ALH, which may not typically be a consideration in the assessment of market rent. Those circumstances included the ownership and commercial background of the ALE and ALH groups, the number and type of hotels, employment details, and leasing arrangements. The valuer noted the restrictions on assignment, and the fact that the 'homogenised' lease arrangements provided both parties with greater revenue, expense certainty and management efficiency. They also provided significant flexibility to ALH in optimising its operations, within reasonable parameters, and to the extent that was legally permissible and commercially viable.

132 The valuer assessed the relative advantages and disadvantages of hotels under portfolio management as against standalone venues under good average management by an owner operator. While revenue performance may be constrained at a venue level, portfolio hotels could achieve economies of scale and market penetration which could positively impact profitability compared with a standalone operator. ALH achieved higher rebates proportionate to expenditure than would be achieved by a good average manager, reflective of its significant group purchasing level. As between the two parties, there was an element of accepting the 'good with the bad'. Each party was afforded benefits, and had made concessions, peculiar to their relationship not readily available in the market.

133 The valuer undertook a detailed analysis of rental evidence relating to 17 comparable hotels. Her analysis included whether the rent imposed was a market rent, the rent review arrangements, the nature and type of venue, the number of Electronic Gaming Machines ('EGMs'), rent as a percentage of net profit and of gross revenue, and rent per operating EGM.

134 She also undertook an analysis of nine other venues as to venue type, the number of EGMs, rent as a percentage of net profit and gross revenue, and rent per operating EGM. She also calculated rental rates on a departmental revenue basis for different businesses and services.

135 These analyses led the valuer to conclude that while there was some consistency, hotels and gaming venues cannot be directly compared with other properties. A comparison rent paid for similar premises on a square metre by square metre basis usually led to far more varied results.

136 These and other considerations led the valuer in assessing fair rent to conclude that an approach based on rents for comparable premises in similar locations ascribed on a per square metre basis was neither appropriate nor useful. The valuer said she had assessed Current Rent via the profits method, having regard to comparable evidence of Victorian gaming hotels.

137 In making Current Rent calculations, the valuer relied on comparable evidence to conclude that the appropriate rental rate for application in the profits method was 35%. She undertook an estimate of Current Rent applying a rental rate derived from comparable evidence on the revenue expected to be derived by each hotel department, describing this alternative method as providing a broader estimate of Current Rent. The valuer noted that this approach was a less preferred method due to the potential for results to be skewed as they were not indicative of trading profitability or rental affordability.

138 It is plain that the valuer gave extensive consideration to the best method for determining Current Rent. She adopted the profits method, as did the valuers retained by the parties, using the EBITDA information to predict likely future net profitability. She relied on comparable market information to determine the rental rate to be applied to the EBITDAR calculations. She undertook a detailed analysis of comparable hotel trading, profitability and rental information.

139 The valuer was required to perform the valuation in accordance with the valuation methodology. She was not required to perform a two-step analysis by first determining market rent for the premises and then determining fair rent. Such an approach would have been cumbersome, artificial and unreal. When she spoke of the concept of fair rent as being 'fair for the particular landlord and tenant to have agreed under the lease in question having regard to all the circumstances relevant to any negotiations between them from the rent review date' and 'without further assumption as to a hypothetical good average management tenant', she was speaking of the valuation methodology that she was required to adopt. She was not suggesting that she was required to, or would, disregard market rent as a concept, or that comparable market information was irrelevant or should be excluded from consideration.

140 To the contrary, the valuer gave detailed consideration to market rent information and engaged in an extensive analysis of the information she had. She undertook additional analyses of departmental profitability to achieve an alternative assessment, albeit one that she considered less reliable.

141 The valuer's observations as to the usual market approach in the context of a fair rent assessment were pertinent and appropriate. The usual market approach was only part of the inquiry and might give way to other considerations. The valuer was at liberty, after considering all relevant considerations, to return a Current Rent assessment that was the same as, or different from, that which would have been achieved by the hypothetical good average manager. She was correct when she observed that there was no direction in the valuation methodology to assume a hypothetical landlord or tenant, or that the premises were to be assessed on the basis that they were vacant and available for lease. There was no requirement in the valuation methodology to assess rental on the basis of a good average tenant, although it was open to the valuer to do so if she decided that this was appropriate.

142 The valuer was required to be a current full valuer member of the API of not less than five years' standing with at least five years' experience in valuing gaming hotel premises. If the parties could not agree on the appointment of a valuer, the appointment was to be made, upon request by either party, by the President of the API. It was unsurprising that the valuer chose to use API guidance notes and materials. The guidance notes and materials were consistent with authority.

143 I conclude that the valuer undertook the determination in accordance with the valuation methodology and, subject to the EBITDA information ground, in accordance with the terms of the leases.

144 The valuer chose to rely on the profits method in applying the subjective test to determine the fair rent. The process by which she did so required the exercise of her skill and judgment as an experienced valuer. I will briefly refer to a number of authorities which confirm that it is appropriate that experts are given a considerable degree of latitude when they carry out a valuation in accordance with the terms of an agreement.

145 In The Gull Lexington Group Pty Ltd v Laguna Bay (Banongill) Agricultural Pty Ltd, the Court of Appeal explained the three rationales behind the reluctance of a court to set aside such a valuation, referring to:

(a) the absence of scientific exactitude in the valuation of land and buildings;

(b) the liability in damages of an expert who negligently determines a valuation; and

(c) the discrepancy between the level of expertise of a court and that of an expert in the particular area which is the subject of the valuation.[75]

146 In Legal & General, McHugh JA observed that it was difficult and usually impossible to imply a term that a valuation can be set aside on the ground of a valuer's mistake or because the valuation is unreasonable. By referring the decision to a valuer, the parties agree to accept the valuer's honest and impartial decision as to the appropriate valuation. They rely on the valuer's skill and judgement and agree to be bound by the decision.[76]

147 In AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd, Nettle JA (with Maxwell P and Bongiorno AJA agreeing) said:

[T]he 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...[T]he 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.[77]

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.[78]

149 A recent example of the application of these principles was in Bevendale. In that decision, a rent review of a gaming hotel was undertaken under s 37 of the RLA. The Court discussed the principles relevant to a market rent review under that provision,[79] and noted that the task involved a blend of actual circumstances and hypothetical features or assumptions.[80]

150 In Bevendale, the valuer applied the profits method to determine the market rent for the premises on the basis that it was the most appropriate means of assessing the current market rental. The valuer reviewed trading information for the hotel and other gaming premises, undertaking analyses generally similar to those undertaken by the valuer in the present case. The valuer in Bevendale formed the view that the subject hotel was managed in a manner which was consistent with average competent management and he considered that a hypothetical tenant would operate the premises to a similar standard, such that he could have regard to the hotel's trading results in determining the EBITDAR that a hypothetical tenant could achieve.[81]

151 On that basis, he determined the EBITDAR which could reasonably be anticipated to be achieved by a hypothetical tenant applying average management acumen. He applied a rental ratio of 38% after considering comparable rental evidence.[82]

152 The Court of Appeal by a majority set aside and dismissed the VCAT decision under appeal on grounds that do not arise in the current proceeding. In effect, this restored the valuer's determination. The majority affirmed the principles governing the setting aside of a valuation stated by McHugh JA in Legal & General, which were described as 'not in dispute before VCAT or this Court'.[83]

Conclusion: the valuer correctly interpreted and applied the valuation methodology

153 For the reasons stated above, the valuation methodology ground fails. The valuer correctly interpreted the valuation methodology and the terms of the leases. The valuer did not err in applying the valuation methodology, nor did she err by failing to determine or take into consideration market or hybrid rent as contended by ALE. She acted as an expert, applying her professional skill and judgment in the assessment of Current Rent as required by her instructions and by the valuation methodology and the leases.

EBITDA information ground: whether ALH made submissions in relation to the EBITDA information which the valuer impermissibly took into account?

154 Clause 4.11(b) of the leases prohibits submissions 'in respect of' the information disclosed to the valuer under cl 4.11(a), while the valuation methodology requires the valuer not to take into account submissions 'in relation to' information provided to the valuer by ALH under cl 4.11 of the leases.

(a) ALH through Cropley made submissions to the valuer concerning the EBITDA information contrary to cl 4.11(b) of the lease; and

(b) the valuer took ALH's submissions concerning the EBITDA information into account contrary to the valuation methodology.

156 The parties advanced competing submissions as to the construction of cl 4.11(b) and the relevant words in the valuation methodology.

157 ALE submitted that a broad interpretation of the prohibition in cl 4.11(b) should be adopted because:

(a) the expressions 'in relation to' and 'in respect of' are of wide import;

(b) the purpose of the prohibition on the making of submissions by ALH in relation to the EBITDA figures was to avoid the commercial unfairness that would otherwise arise if ALH were able to make submissions to the valuer in respect of information to which ALE did not have access;

(c) this conclusion produces a commercially sensible result and is consistent with the objective intention of the parties; and

(d) the prohibition extended to the information disclosed to the valuer under cl 4.11(a).

158 ALH submitted that a narrow construction of the prohibition in cl 4.11(b) should be adopted because:

(a) the term 'EBITDA figures' in cl 4.11(a) meant only the single earnings figure for each of the preceding years;

(b) the expression 'EBITDA figures' was not defined in the lease although the term 'EBITDA' was defined in cl 1.1;

(c) the purpose of cl 4.11(b) was to provide the valuer with an audited statement of the financial position of the business, the accuracy of which could not be challenged or called into question;

(d) the prohibition did not extend to EBITDAR figures or to individual EBITDA line items that were to be adjusted; and

(e) there was a necessary asymmetry of information as ALH operated the business and inevitably knew more about it than ALE.

Construction of the expressions 'in respect of' and 'in relation to'

159 There are many cases that have considered the construction of the expressions 'in respect of' and 'in relation to'.

160 In Mann v Paterson Constructions Pty Ltd, Nettle, Gordon and Edelman JJ said:

The prohibition applies in terms to recovery of any money 'in respect of' a variation. That is an expression of wide connotation, which, in the context in which it appears, should be taken to mean what it says. It prohibits the recovery of any money, and that means the recovery of any money whether under contract or in restitution.[84]

161 Likewise, in Workers' Compensation Board of Queensland v Technical Products Proprietary Limited, Deane, Dawson and Toohey JJ said:

Undoubtedly the words "in respect of" have a wide meaning, although it is going somewhat too far to say, as did Mann C.J. in Trustees Executors & Agency Co. Ltd. v. Reilly, that "they have the widest possible meaning of any expression intended to convey some connection or relation between the two subject-matters to which the words refer". The phrase gathers meaning from the context in which it appears and it is that context which will determine the matters to which it extends.[85]

162 In Project Blue Sky Inc v Australian Broadcasting Authority, McHugh, Gummow, Kirby and Hayne JJ said:

The words "relate to" are "extremely wide". They require the existence of a connection or association between the content of the Standard and the Australian content of programs. What constitutes a sufficient connection or association to form the required relationship is a matter for judgment depending on the facts of the case. No doubt the association or connection must be a relevant one in the sense that it cannot be accidental or so remote that the Standard has no real effect or bearing on the Australian content of programs. But, without attempting to provide an exhaustive definition, once the Standard appears to prohibit, regulate, promote or protect the Australian content of television broadcasts the required relationship will exist. Furthermore, the fact that the Standard also deals with matters other than the Australian content of programs will not necessarily negate the existence of a relevant relationship. A standard can relate to the Australian content of programs although it also regulates other matters.[86]

163 In PMT Partners Pty Limited (In Liquidation) v Australian National Parks and Wildlife Service, Toohey and Gummow JJ observed:

As it has been put, the issue on the appeal is whether acts or proceedings under pars (a) and (b) of cl 45 are "acts or proceedings in or in relation to an arbitration". It is perhaps revealing to ask the question in reverse. Can it be said with any conviction that these matters are not, at least, "in relation to" an arbitration? The section is a logical universe of only two possibilities - it either is or is not in relation to an arbitration.

It is apparent that the words "in or in relation to" are particularly wide. We have already referred to the idea that, as a facultative provision, there is no apparent call to read down the words used, or to give them any constricted operation. Cases concerning the interpretation of this phrase in other statutory contexts are of limited assistance. However, the cases do show that the words are prima facie broad and designed to catch things which have sufficient nexus to the subject. The question of sufficiency of nexus is, of course, dependent on the statutory context. Some examples will bear this out.[87]

164 In O'Grady v Northern Queensland Company Limited, Toohey and Gaudron JJ said:

In accordance with the same reasoning, jurisdiction is not conferred on a Wardens Court by the opening words of s. 80(1) unless there is a matter which in truth has arisen in relation to mining or a mining tenement and which does not present some merely remote or hypothetical question for the Court to determine. Although "in relation to" is an expression of broad import, in context with "arising" it presupposes a direct connexion between a presently existing action, suit or proceeding and mining or a mining tenement, not merely an incidental connexion.[88]

[t]he prepositional phrase "in relation to" is indefinite. But, subject to any contrary indication derived from its context or drafting history, it requires no more than a relationship, whether direct or indirect, between two subject matters.[89]

What connexion or association will be sufficient to bring proceedings within s. 80(1) must be a matter of judgment on the facts of each case. But, as long as the connexion between the proceedings and the subject matter of mining or a mining tenement is not so remote as to be insignificant, then, subject to s. 80A, the Wardens Court has exclusive jurisdiction over those proceedings.[90]

167 In Travelex Ltd v Federal Commissioner of Taxation, Crennan and Bell JJ said:

Before turning to consider what is covered by the expression "a supply that is made in relation to rights" under item 4(a), it needs to be noted that the expression "made in relation to" is a wide one denoting a connection between "a supply" and the "rights". The precise relationship between the two will be governed by the context in which the expression is used.[91]

168 In Smith v Federal Commissioner of Taxation, Toohey J said:

The words 'in respect of' are, in my opinion, words of the widest possible scope. They import such meanings as 'in relation to', 'with reference to' or 'in connection with'. The phrase 'in respect of' is probably the widest of an expression intended to convey some connection between two related subject-matters.[92]

169 Foster J summarised the position when construing a deed in Melbourne City Investments Pty Ltd (now called ACN 161 046 304 Pty Ltd) v Treasury Wine Estates Limited (No 4):

The expression "in relation to" is an expression of wide import designed to catch things which have a sufficient nexus to the subject matter under consideration. The sufficiency of the nexus is dependent upon the context. In the end, it is a question of degree. There must be some association which is both relevant and appropriate. Although the interpretation of the phrase "in relation to" which I have summarised in the last sentence is derived from cases dealing with the use of the phrase in a statutory context ... the observations of the High Court to which I have referred are nonetheless apt in assisting me to determine the meaning of the expression in the present case.[93]

170 In my view, the expression 'in respect of' in cl 4.11(b), and the expression 'in relation to' in the second last dot point of the valuation methodology, assume a wide meaning as accepted and applied in the cases above. There is no text or context in the leases that suggests otherwise. What is required for the prohibition to arise is a direct connection between the EBITDA information and a submission made by a party. There must be a direct connection which is more than remote, insignificant or inconsequential.

171 Clause 4.11(b) applies to 'the information disclosed to the valuer under paragraph (a)'. The meaning of this expression is clear and unambiguous. It simply means the information provided by the auditor to the valuer in response to the requirement in cl 4.11(a). Clause 4.11(b) provides that neither party is entitled to make submissions in respect of this information. Clause 4.11(a) requires the auditor to provide ALE with a copy of the covering letter enclosing the information 'which identifies the information' provided to the valuer. This is plainly intended to ensure that both ALE and ALH are appraised of the nature of the information actually provided by the auditor to the valuer.

172 The expression 'EBITDA' is defined in cl 1.1 to mean operational earnings before interest, tax, depreciation and amortisation, calculated in accordance with the Accounting Standards (within the meaning of the Corporations Act) as issued by the Australian Accounting Standards Board from time to time and, to the extent that, any matter is not covered by the Accounting Standards, means generally accepted accounting principles consistently applied by ALH over the previous three years.

173 It is obvious that the mere provision by the auditor of the bottom line EBITDA figures for the three preceding years would give little or no assistance to the valuer. Plainly, the auditor is expected to provide the revenue and expenditure item totals necessary to determine the EBITDA, as this information must be carefully analysed by the valuer in the course of her valuation in order to estimate likely future income and expenditure for the premises. This is a basic step in the application of the profits method.

174 Clause 4.11(a) must plainly contemplate the inclusion by the auditor of the bottom line EBITDA figure and the constituent revenue and expenditure item totals over the preceding financial years necessary for its calculation. A reasonable businessperson if asked would readily conclude that the auditor should provide this information (as was done) in order to give business efficacy to the provision and to facilitate the purpose for which the information is provided to the valuer.

175 The special procedure agreed by the parties for the provision of confidential information to the valuer without disclosure of that information to ALE creates an asymmetry of information in favour of ALH. The EBITDA information is fundamental to the profits method and, when adjusted, forms the basis of the determination. An important purpose of cl 4.11(b) is to limit the unfairness that may result from the provision of significant and highly relevant information to the valuer unseen by ALE. Clause 4.11(b) does mean in practical effect that the factual accuracy of the information provided by ALH's auditor cannot be challenged in submissions made to the valuer, but this is not its only function. It also operates, and should be construed to operate, to preclude ALH from taking unfair advantage of the EBITDA information which it has and which ALE does not have.

176 I conclude that the prohibitions in cl 4.11(b) and the relevant part of the valuation methodology extend to the EBITDA information, including the earnings figures and the constituent revenue and expenditure item totals for the past three financial years provided by the auditor to the valuer.

Did ALH act in breach of cl 4.11(b) of the leases?

177 The EBITDA information is confidential, but was provided to the Court and the parties' external solicitors and counsel. It includes constituent revenue and expenditure item totals, information as to the cost of goods and rebates, EBITDA, EBITDAR and EBIT figures for each of the three preceding financial years. The EBITDA, EBITDAR and EBIT figures differ only as to whether rental, depreciation and amortisation were added or subtracted. The Cropley report adopted the same revenue and expenditure item descriptions as were used in the EBITDA information. Submissions as to adjustments from the item totals in the EBITDA information were made in the same terms.

178 In a letter dated 14 June 2019 to the valuer, ALH explained its position in these terms:

ALH has not made submissions in respect of the Deloitte EBITDA.

Instead, ALH has made submissions in relation to how a fair rent for each premises should be assessed, and this necessarily has regard to the Deloitte EBITDA. Adjustments have been made to the Deloitte EBITDA for the purpose of calculating an adopted EBITDA that is consistent with a fair rent. Those adjustments do not change or purport to change the Deloitte EBITDA or to otherwise represent or explain ALH's actual EBITDA.

179 As to the EBITDA information, the Cropley report stated that:

(a) in adopting the profits method, it had utilised the EBITDA information provided by ALH's auditor in accordance with cl 4.11 of the lease;

(b) this was appropriate and required given that the valuer was required to take the EBITDA information into account under cl 4.11, and because of the decision in Australian Leisure and Hospitality Group Ltd v The Trust Company (Australia) Ltd;[94]

(c) it had had regard to the EBITDA figures provided by the auditor, rather than benchmarked or notional EBITDA figures;

(d) it had adjusted for the 'group' nature of the EBITDA figures in order to achieve a fair rent for the premises only; and

(e) it considered it necessary to make an adjustment to the EBITDA numbers to derive 'a fair rent for the premises only'.

180 Cropley submitted that the valuer should make adjustments to the EBITDA information (or the consequential EBITDAR) for the preceding years. First, Cropley sought what were termed 'Adjustments to EBITDAR for Stand Alone Analysis', consisting of:

181 In turn, the group contract discounts were said to include venue cleaning, Sky Channel, insurance, telephone, security and utilities (electricity and gas).

182 Cropley sought adjustments of earnings estimates by the valuer based on the EBITDA information. For example, the Cropley report stated:

Based upon the trading information provided for the past three financial years we have estimated the annual rebate amount as at the date of this rental valuation to be $476,330. The 40% adjustment for stand alone operation equals to $190,352. This is the rebate adopted in our assessed EBITDAR.

The trading information provided by Deloitte describes three central costs as "Overhead Allocations" within three classifications: Pub Operations, BWS Operations and Dan Murphy's Operations. The expense categories incurred in each of these operational groupings are ...

In respect of the expense item Overhead Allocation - Hotels (shown in the auditor's statement as $101,963) an adjustment is required to avoid a duplication in respect of gaming support expenses.[95]

183 Despite their confidentiality under cl 4.11(a), Cropley adopted or disclosed the actual figures in the EBIDTA information in at least three instances. The reference to Overhead Allocation - Hotels quoted above discloses the actual expense figure for this item as found in the EBITDA information and seeks that it be adjusted. Section 10.4.4 of the Cropley report, dealing with Group Contract Discounts, states that 'the insurance expense contained in the FY 2018 accounts was $6,103', again adopting the insurance expense shown in the EBITDA information for that year. The FY 2018 'Overhead Allocation - BWS Non DBS' figure of $63,890 in the EBITDA information reappears in the adopted trading table leading to Cropley's recommended EBITDAR.

184 When dealing with Gaming Commissions in Section 11.6, Cropley states that '[t]he cost of gaming listed in the FY 2018 financial statements for this venue is $17,545'. On this occasion, Cropley appears to have misread the line items in the EBITDA information, adopting the figure of $17,545 from the immediately preceding line item.

185 Cropley also sought an '[a]djustment to EBITDAR for Specific Lease Provisions' because the tenant was responsible under the lease for all costs relating to structural or capital works. Inclusion of an additional expense of $38,594 per annum was sought, reflecting a cost of $12 per square metre per annum over the gross building area of the venue.

186 Other features of the Cropley report were the provision of:

(a) adopted trading figures having regard to past trading history and adjustments with respect to Stand Alone Trading and Specific Lease Provisions;

(b) adjusted figures where there were significant variations between reported expenses and those adopted in the Cropley report; and

(c) a table setting out adopted trading figures showing revenues, cost of goods, gross profit, operating expenses, and adjustments, and giving rise to an EBITDAR exceeding $2.81 million.

187 ALH's submissions to the valuer were in part submissions 'in respect of' the EBITDA information. They were based on an assumed knowledge by the valuer of the EBITDA information, and were directly connected to the EBITDA information, going well beyond remote, insignificant or inconsequential references. They could only be understood by reference to the EBITDA information provided by the auditors. The items discussed in the Cropley report were identical or similar to those in the EBITDA information. The adjustments recommended by Cropley were propounded on the basis of the underlying information in the EBITDA information. In a number of instances, line items in the EBITDA information were adopted or disclosed in the Cropley report. While Cropley commonly refers to the EBITDAR for the premises, this differs from EBITDA only by the arithmetical deduction of rent, which was common information. EBITDAR for each of the preceding years had already been calculated by the auditors and set out in the EBITDA information.

188 While the EBITDA information concerned the preceding financial years, and the EBITDAR to be calculated by the valuer was in the future, the past EBITDA information provided the best guide to the future. Cropley's submissions were heavily dependent on its knowledge of the EBITDA information.

189 I therefore conclude that ALH's submissions to the valuer, to the extent that they were made in respect of the EBITDA information, were made in breach of cl 4.11(b).

Did the valuer impermissibly take into account ALH's submissions in relation to the EBITDA information?

190 The valuation methodology provides that the instructions to the valuer must require the valuer to take into account various matters and to disregard other matters. Submissions made by ALE and ALH are to be taken into account, except if made in relation to the EBITDA information.

I have considered the submissions by the parties...

My consideration of such submissions, in concluding a Current Rent, has assisted my conclusions, and is not limited to the direct references throughout this report.

192 In relation to the dispute between the parties as to compliance with cl 4.11(b), the valuer observed:

The Tenant's auditor has provided Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) figures for the Tenant's business as provided for under clause 4.11 (a) of the Lease. Clause 4.11 (b) provides that neither party is entitled to make submissions to the Valuer in respect of the EBITDA information disclosed to the Valuer under clause 4.11 (a).

In the ALE 4.11(b) Letter, the Landlord submits that parts of the Cropley submission should be disregarded, as it has formed the view that the valuer makes submissions in relation to the Tenant's actual EBITDA figures by recommending adjustments in order to assess the notional stand-alone EBITDA for the premise, to achieve a "fair rent for the premises only" as required under the Lease.

The Tenant, in its response in the ALH 4.11(b) Letter, submits that the parties are not entitled to challenge or dispute the auditors' EBITDA figures, having "been provided by a professional auditor and the determining valuer should be entitled to accept the [Tenant's auditor's] EBITDA on its face as ALH's actual EBITDA". Further, that ALH has not made submissions in respect of the auditors' EBITDA, but in relation to how a fair rent should be assessed, and this necessarily has regard to the auditor's EBITDA. Such "adjustments do not change or purport to change the auditor's EBITDA or to otherwise represent or explain ALH's actual EBITDA".

I have considered the submissions of the parties and reviewed the Cropley submission in respect to this contention. I have formed the view that neither party has made a submission in respect to the EBITDA information disclosed under clause 4.11(a), and that information is not disputed as being the actual EBITDA of the Tenant.[96]

193 The valuer's determination contains extensive commentary on and numerous responses to the parties' submissions. The valuer addresses the Cropley report in detail. As she stated in the determination, all of ALH's submissions, including those contained in the Cropley report, were taken into account. This included submissions made 'in respect of' or 'in relation to' the EBITDA information.

194 Under cl 4.11(b) and the valuation methodology, the valuer was instructed not to take into account submissions made by the parties 'in respect of' or 'in relation to' the EBITDA information. In fact, the valuer did take such submissions into account.

195 As I have set out above, ALH, through the Cropley report, made submissions 'in respect of' and 'in relation to' the EBITDA information. While subject to their context, these expressions are ordinarily of wide import. In coming to the contrary conclusion, the valuer took a narrow view of the scope of these expressions. She did not have the benefit of High Court authority as to what these expressions mean, and how they should be construed.

What is the consequence of a departure from instructions?

196 ALE submitted that once it was established that an expert has departed from instructions, the determination is of no effect and is not binding on the parties.[97]

197 ALE relied on Veba Oil Supply & Trading GmbH v Petrotrade Inc,[98] and the earlier decision in Shell UK Ltd v Enterprise Oil plc,[99] to the effect that a material departure from instructions vitiates the determination whether or not it affects the result. The Court was not to be concerned with the effect of the departure on the result. Any departure from instructions was to be considered material unless it could truly be characterised as trivial or de minimis. ALE submitted that the departure from instructions was not trivial or de minimis.

198 ALH relied on the decision of the Queensland Court of Appeal in Mango Boulevard Pty Ltd v Mio Art Pty Ltd,[100] where Fraser JA assumed, without deciding, that Veba stated the law applicable in Australia. In Mango Boulevard, under the terms of a share sale agreement, an alternative valuation would have no determinative effect unless within 10% of a previous valuation, in which case an average of the two valuations would be adopted. If outside the 10% range, a mediation, and if required, an arbitration, would be conducted. The Court concluded that the effect of the asserted errors in the alternative valuation was insignificant.[101]

199 It is well established in Australian law that a valuation conducted under a contract is binding on the parties if made in accordance with the terms of the contract. If, on the other hand, the valuation is not made in accordance with the terms of the contract, it is of no effect, and, at the option of the parties, must be done again.[102] In the present case, the instructions given to the valuer are terms of the contract.

200 In Veba, the English Court of Appeal reviewed previous authorities and held that once a material departure from instructions was established, a determination was not binding on the parties because they had not agreed to be bound by the decision. A departure from instructions was material unless it could truly be characterised as trivial or de minimis in the sense of it being obvious that it could make no possible difference to either party.[103]

201 The Court held that a departure from instructions was quite different from the situation where an expert had gone wrong in the course of carrying out instructions, which required the court to consider whether the mistake had materially affected the ultimate result. Once a material departure from instructions was established, the court was not concerned with its effect on the result.[104]

202 Veba adheres to the accepted principle that the parties to a contract are not bound by an expert determination made under the terms of the contract unless the determination is made in compliance with the contract. Being a decision of a majority of the English Court of Appeal after reviewing previous authority in some detail, there is no apparent reason why Veba would not be followed in Australia. Although decisions of the English Court of Appeal are not binding in Australia, they may be persuasive for Australian courts.[105] Veba has been cited or briefly discussed in a number of cases in Australia.[106]

203 In Mango Boulevard, the Queensland Court of Appeal, while assuming that Veba stated the law applicable in Australia, distinguished Veba because the alternative valuation in question only had a determinative effect if it was within 10% of the previous valuation, and even then it was to be averaged with the previous valuation.[107] Under the terms of the contract, a difference greater than 10% between the two valuations led to a mediation, and if that failed, to an arbitration.

204 The present circumstances are dissimilar to those in Mango Boulevard, where the impugned valuation did not have any determinative effect unless within 10% of a previous valuation. Here, the determination is operative for all purposes to fix the Current Rent for the premises from the review date for a ten year period subject to CPI adjustments under the leases. Under the Veba principle, a departure from instructions is taken as material unless it can truly be said that the departure is trivial or de minimis.

205 As described above, there was a departure from cl 4.11(b) and the valuation methodology, resulting in submissions in respect of the EBITDA information being received and taken into account by the valuer in her determination of Current Rent.

206 There is no doubt that the EBITDA information was of great assistance to the valuer and was the underlying foundation of the valuation. It was accepted as the best guide to future earnings. The submissions made in the Cropley report in respect of the EBITDA information were substantial and persuasive and were prepared by an experienced valuer.

207 The valuer listed Cropley's submission as one of the documents which she had received for consideration in making her determination. She stated that she had considered the submissions made by the parties, and that her consideration of such submissions, in concluding a Current Rent, had assisted her conclusions and was not limited to the direct references made throughout her determination. She said that ALH's submission provided insight into trading practices and outcomes achieved under incumbent management, together with detail around trading considerations peculiar to the premises which have influenced, or may influence, trading outcomes.

208 As to cl 4.11(a) of the leases, the valuer observed that:

As the Tenant's actual EBITDA information is not available to the Landlord and has been provided to me on a strictly confidential basis, I am obliged to maintain Tenant confidentiality.

Consequently, my observations are made in a general fashion, with a focus on relativity, so as not to divulge confidential trading outcomes of the Tenant.

209 Given the limited references to the EBITDA information in the determination (for the reasons given by the valuer), it is not possible to discern the ultimate extent to which ALH's submissions and the Cropley report, as they concerned the EBITDA information, were persuasive or influential with the valuer.

210 As senior counsel for ALH said in address at the trial:

I don't pretend that I can demonstrate to Your Honour by referencing you to the determination and the Cropley reports but none of these submissions were factored at all to the final result. The evidence is not clear to be candid with Your Honour one way or the other. It seems the best we've been able to ascertain and we've done the work in writing, it seems that these impugned submissions had little or no impact on the determination but I cannot put it higher than that.

211 What is important under the Veba principle is whether the departure from instructions was material and not trivial or de minimis, not whether the departure from instructions had a material effect on the valuation. Here, the departure from instructions was not trivial or de minimis in the sense that it was obvious that it could make no possible difference to the result. To the contrary, the departure from instructions by the valuer in failing to exclude the Cropley report insofar as it was made in respect of, or in relation to, the EBITDA information may well have affected the determination.

212 I find that the departure from the instructions by the valuer was significant and material. It gave ALH an advantage to which it was not entitled under the terms of the leases. It was not trivial or de minimis.

213 As a result, ALE succeeds on the EBITDA information ground and the parties are not bound by the determination.

214 ALE fails on the valuation methodology ground, and is successful on the EBITDA information ground. ALE is entitled to a declaration that the Current Rent determinations were not made in accordance with the leases and are not binding on the parties. The determinations must be done again.

215 I will hear from the parties as to any consequential orders that are sought, and as to costs.

[1] Australian Leisure and Hospitality Group Ltd v Trust Company Fiduciary Services Ltd [2009] VSC 574 (Judd J); Australian Leisure & Hospitality Group Ltd v The Trust Company (Australia) Limited (formerly known as Trust Company Fiduciary Services Ltd) [2011] VSCA 420 (Redlich and Mandie JJA, Robson AJA).

[2] Earnings before interest, tax, depreciation and amortisation.

[3] Earnings before interest, tax, depreciation, amortisation and rent.

[4] In one of the leases, this clause referred to the Rent Review Date occurring on 4 June 2018.

[5] Excepting the leases for the Burvale Hotel, Meadow Inn Hotel and Prince Mark Hotel.

[6] This paragraph was not included in the lease for the Berwick Inn Hotel.

[7] Or, in the case of the Berwick Inn Hotel lease, the Rent Review occurring on 4 June 2018.

[10] Quoting LexisNexis, Hill and Redman's Law of Landlord and Tenant (online) [2383]. Emphasis added by the valuer 'to highlight the use of 'estimate' and 'likely', which does not require the assessment of net profit, for the purpose of assessing rent, to rely exclusively on the actual income and costs, but upon an estimate of likely income.'

[11] See footnote 1; Lucky Eights Pty Ltd v Bevendale Pty Ltd (Building and Property) [2016] VCAT 1600.

[13] (1985) 1 NSWLR 314 ('Legal & General').

[14] Ibid 335-6 (emphasis in original).

[15] [2020] VSCA 312, [256] (Kyrou and McLeish JJA) ('Bevendale').

[16] [1998] VSC 82, [45].

[17] [2013] VSCA 179; (2013) 41 VR 636 ('Dura').

[18] Ibid 643-644 [15]-[18] (Maxwell P, Ashley and Redlich JJA) (citations omitted).

[19] Ibid 644 [18]; AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173; (2006) Aust Contract Reports 90-241, [76] (Nettle JA); Australian Vintage Ltd v Belvino Investments No 2 Pty Ltd [2015] NSWCA 275; (2015) 90 NSWLR 367, 387 [85].

[20] Referring to Ricciardello v Caltex Oil (Australia) Pty Ltd [1991] ANZ ConvR 445, 449-450; Moore v Tatura Milk Industries [2019] VSC 259, [11]; 99 Bishopsgate Ltd v Prudential Assurance Co Ltd [1985] 1 EGLR 72, 75.

[21] [1991] ANZ ConvR 445, 449-450 ('Ricciardello').

[22] Relying on Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64, [167], [174]-[175] (Spigelman CJ, Campbell JA and Handley AJA).

[23] Referring to EMS Holdings Pty Ltd v Industrial Lands Development Authority [1994] ANZ ConvR 479, 482 (Owen J); Email Ltd v Robert Bray (Langwarrin) Pty Ltd [1984] VicRp 2; [1984] VR 16, 21.

[24] [2015] HCA 37; (2015) 256 CLR 104, 116-7 [46]-[51] (French CJ, Nettle and Gordon JJ) (citations omitted).

[25] See Perpetual Limited v Myer Pty Ltd [2019] VSCA 98, [75] (Whelan, Niall and Hargrave JJA); PCCEF Pty Ltd v Geelong Football Club Ltd [2019] VSCA 144, [27] (Whelan, McLeish and Emerton JJA); Knights Quest Pty Ltd v Daiwa Can Company (2018) 366 ALR 557, 578-9 [88] (Beach, Kyrou and Hargrave JJA).

[26] [2004] HCA 52; (2004) 219 CLR 165, 179 (citation omitted).

[27] [2001] HCA 70; (2001) 210 CLR 181, 188, quoting Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896, 912 (Hoffmann LJ).

[28] See Redgum Developments Pty Ltd v G8 Education Limited [2020] VSC 142, [21] (Nichols J).

[32] Ibid 449 (Malcolm CJ and Walsh J agreeing).

[33] [1952] 2 QB 258, 267.

[34] R T M Whipple (ed), Commercial Rent Reviews: Law and Valuation Practice (Law Book, 1986) 52 [230].

[36] [1979] AC 63 ('Ponsford').

[42] [1981] 1 WLR 522, 527 (Goff LJ), 527 (Geoffrey Lane LJ), 528 (Buckley LJ).

[43] [1980] EWCA Civ 3; [1981] 1 All ER 1077.

[44] Ibid 1088 (Buckley LJ, Everleigh and Brightman LJJ agreeing).

[45] [1983] 3 All ER 662.

[47] [1984] VicRp 2; [1984] VR 16 ('Email').

[48] Ibid 20-21 (Crockett, Kaye and Gray JJ).

[50] [1985] 1 EGLR 72, 74-75 (Oliver LJ), 75 (Neill LJ and Sir David Cairns).

[51] [2006] QSC 181; [2007] 1 Qd R 303.

[54] [2019] NTSC 50.

[58] (Full Court of the Supreme Court of Western Australia, Kennedy, Owen and Steytler JJ, 15 June 1995).

[59] [2005] WASC 83 [1089]-[1090].

[60] (2019) 55 WAR 89, 145-146 [244].

[61] [1992] 1 NZLR 150, 154 (Cooke P, Hardie Boys and Gault JJ agreeing).

[62] [2004] NSWCA 451; (2004) 63 NSWLR 167, 176 [47] ('MMAL').

[63] Ibid 176 [52] (citations omitted).

[64] [2012] NSWSC 4, [33]-[34].

[65] [1994] ANZ ConvR 479, 482.

[67] Relying on Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64, [167], [174]-[175].

[69] Ibid; TX Australia Pty Ltd v Broadcast Australia Pty Ltd [2012] NSWSC 4, [33]-[37] (Brereton J).

[71] Colin Marg Pty Ltd v Mackay Medical Investment Ltd [2006] QSC 181; [2007] 1 Qd R 303, 305 [9] (Wilson J); Majestic Logistics Pty Ltd v Dowling Holdings Pty Ltd [2019] NTSC 50, [53] (Grant CJ).

[72] [2009] VSC 574, [29].

[73] Australian Leisure & Hospitality Group Ltd v The Trust Company (Australia) Limited [2011] VSCA 420, [6]-[7].

[75] [2018] VSCA 85; (2018) 55 VR 273, 290-291 (Santamaria JA and McDonald AJA).

[76] Legal & General (n 13), 335 (McHugh JA).

[77] [2006] VSCA 173; (2006) Aust Contract Reports 90-241, [51] (emphasis added) (citations omitted).

[78] Ibid [53] (emphasis added) (citations omitted).

[79] Bevendale (n 15), [123]-[142].

[84] [2019] HCA 32; (2019) 267 CLR 560, 623 (emphasis in original) (citations omitted).

[85] [1988] HCA 49; (1988) 165 CLR 642, 653-654. This decision was cited by Dawson J in Technical Products Pty Limited v State Government Insurance Office (Queensland) [1989] HCA 24; (1989) 167 CLR 45, 51.

[86] (1998) 194 CLR 355, 387 (citations omitted).

[87] [1995] HCA 36; (1995) 184 CLR 301, 330.

[88] [1990] HCA 16; (1990) 169 CLR 356, 374.

[91] [2010] HCA 33; (2010) 241 CLR 510, 533.

[92] (1987) 164 CLR 513, 533, quoting Nowegijick v The Queen (1983) 144 D.L.R. (3d) 193, 200 (Dickson J).

[93] [2019] FCA 804, [87] (emphasis in original) (citations omitted).

[94] [2011] VSCA 420.

[97] Relying on Australian Vintage Ltd v Belvino Investments No 2 Pty Ltd [2015] NSWCA 275; (2015) 90 NSWLR 367, 385 [74]-[75]; Dura (n 17), [15].

[98] [2001] EWCA Civ 1832; [2002] 1 All ER 703 ('Veba').

[99] [1999] 2 All ER (Comm) 87.

[100] [2013] QCA 271 ('Mango Boulevard').

[101] Ibid [50], [61] (Fraser JA, Gotterson JA and Peter Lyons J relevantly agreeing).

[104] Ibid 711-712 (Simon Brown LJ), 714 (Tuckey LJ); but see ibid 715-716 (Dyson LJ dissenting on this point).

[105] Hearne v Street [2008] HCA 36; (2008) 235 CLR 125, 166 (Hayne, Heydon and Crennan JJ); Sydney Local Health District v Macquarie International Health Clinic Pty Ltd [2020] NSWCA 274, [131]. See also Sharah v Healey [1982] 2 NSWLR 223, 227; Cook v Cook [1986] HCA 73; (1986) 162 CLR 376, 390; P & V Industries Pty Ltd v Porto [2006] VSC 131; (2006) 14 VR 1, 9; Ying v Song [2009] NSWSC 1344, [28]; Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361, 412.

[106] Harman International Holdings Pty Ltd v Pashon Electrical Pty Ltd [2021] NSWSC 230; WLD Practice Holdings Pty Ltd v Sara Stockham [2020] NSWSC 1488; Westgem Investments Pty Ltd v Commonwealth Bank of Australia Ltd (No 6) [2020] WASC 302; Middlemount South Pty Ltd v Anglo American Mettalurgical Coal Assets Pty Ltd [2019] QSC 911; 711 Hogben Pty Ltd v Tadros [2016] NSWSC 1683; Arida v Arida [2013] NSWSC 1051.

[107] Mango Boulevard (n 100), [50].