Plaintiffs v Defendant

Supreme Court of Victoria|2006-12-08|Before: HARGRAVE J

LANDLORD AND TENANT - rent review clause - rental determination by expert - whether rental determination in accordance with the lease and thus binding on the parties.

INTRODUCTION

1 The plaintiffs are the lessors of office space at levels 42-50, 101 Collins Street, Melbourne. The defendant is the lessee. The lease, which expires on 30 June 2014, provides for a review of rental at various dates.

2 The lease provides that rental is to be reviewed to the "current annual market rental" or, in the case of the July 2003 review, to the "current annual market rental " (emphasis added).

In each case the critical question must always be: Was the valuation made in accordance with the terms of a contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account or has failed to take into account matters which should have been 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.[4]

11 I accept this statement by McHugh JA as correct and I will apply it.

12 In Alcatel Australia Ltd v Scarcella[5] the Court of Appeal in New South Wales considered a rent review provision which required a valuer to determine the "annual market rental value" of the demised premises. Stein JA referred with approval to the comments of Mummery J in British Airways PLC v Heathrow Airport Ltd:[6]

Mummery J cautioned courts not to trespass into the territory of the valuer. He said:

It is not, however, the function of the court to answer questions or give general directions as to how the independent valuer should go about making his valuation, such as the factors to be taken into account or the weight to be attached by him to those factors.[7]

13 In considering whether a binding expert determination is in accordance with the lease pursuant to which it is made, the first question to be resolved is: What does the lease require the expert to do? Decided cases concerning similar, or even identical, language in other leases may be helpful in answering this question, but the relevant words of the lease in question must be interpreted in the context of the lease as a whole and any admissible evidence of surrounding circumstances. For example, in Bank of South Australia Ltd v South Australian Health Commission[8], Olsson J said:

In the course of debate I was referred by counsel to a series of dicta in cases reported in both England and Australia. They were sought to be called in aid of one contention or another. However, it must be said that all such materials must be viewed with considerable caution. Inevitably each decision has been very much the product of both the precise mode or expression of the relevant clause and also the context in which it appears. True it is that some reasonably persistent threads of reasoning can be divined apropos similarly expressed lease provisions, but none of the authorities adverted to is directly in point in relation to the mode of expression of the lease now under consideration.[9]

14 In Re McCafferty,[10] Williams J said:

Rent review clauses not infrequently refer to the criteria to be regarded by the valuer or establish a protocol according to which the rent is to be determined and such clauses have not infrequently been the subject of judicial decision as to their proper construction; thereby the valuer has been given additional guidance as to how he should approach his task. But because of the infinite variety in the wording of such clauses no one case is of real assistance when it comes to the construction of a particular clause in another.[11]

15 In Alcatel Australia Ltd v Scarcella, Stein JA said that "great care must be taken when utilising judicial dicta on a differently worded rent review clause."[12]

THE LEASE

16 The current lease was preceded by two earlier leases of office space in the building, entered into in 1991 and 1999 respectively. The lessor under each of these leases, and under the current lease, was the predecessor in title to the plaintiffs.

17 On 2 February 2004, the lessee entered into possession of level 42 on the understanding between it and the lessor that level 42 would be treated as part of the demised premises under the 1999 lease. Subsequently, on 29 June 2004, the current lease was executed.

18 The 1991 lease contained a rent review provision which is in different terms to the rent review provision under the 1999 lease and the current lease. The differences are set out below. The current provisions of the lease relating to rent review, which are contained in cl. A6 of the First Schedule, were introduced in the 1999 lease.

19 Clause A6 of the First Schedule to the lease provides:

A6.1 The Valuer appointed pursuant to Clause A3 or Clause A5 by the President or appointed pursuant to Clause A4 shall determine the Minimum Rent acting as an expert and not an arbitrator and his or her decision shall be final and binding on the parties.

A6.2 The Valuer shall call for and, if provided within fourteen (14) days of the Valuer's request, consider written submissions from the parties hereto.

A6.3 The Valuer shall determine the Minimum Rent by establishing what the current annual market rental, or, in the case of the July 2003 Review, the current annual market rental value, of the Demised Premises will be, is or was at the Relevant Market Review Date having regard to all matters which in the opinion of the Valuer are relevant and having regard to the following specific criteria:

(i)

the current annual rental value of other commercial office premises in the central business district of the City of Melbourne being premises of a quality, nature, size and location similar to the Demised Premises;

(ii)

taking no account of any goodwill attributable to the Demised Premises by reason of the trade business or activity carried on therein by the Lessee;

(iii)

taking no account of the relevance of the fact that relocation costs would be payable by the Lessee moving from the Demised Premises and / or by any Lessee moving from any premises;

(iv)

disregarding the value of fixtures, fittings and internal partitions installed by the Lessee;

(v)

taking no account of the fact that certain items of fixtures, fittings, furnishings, plant, machinery and equipment supplied by the Lessor may have been supplied only, rather than supplied and installed by the Lessor, and taking no account of the value of any items installed by the Lessee in substitution for such items supplied by the Lessor;

(vi)

the terms conditions provisions and agreements contained in this Lease (except to the extent that they are inconsistent with the specific criteria in Clauses A6.3(i) to (v) inclusive); and

the Valuer shall endeavour to deliver his or her determination supported by his or her reasons therefor and at the same time shall determine the contribution each party should make to payment of the cost of the valuation, and the parties shall then pay their respective contributions.

20 The lease provides for reviews of rental to "current annual market rental" or, in the case of the July 2003 review, to "current annual market rental value". The use of these two different expressions is at the heart of the submissions made on behalf of the lessor.

21 The two expressions are not defined. However, the lease directs that the valuer who is to determine the rent must do so having regard to all matters which in his or her opinion are relevant, and also having regard to the criteria specified in cll. A6.3(i) - (vi). These criteria apply to a determination of both market rental and market rental value. The valuer is not directed by cl. A6 as to how he or she is to have regard to relevant matters or to the specific criteria mentioned. The specified criterion in cl. A6.3(i) , which directs the valuer to have regard to the rental value of comparable premises, is central to the case. I will refer to this criterion as "the rental value direction."

22 As I have said, the 1991 lease contained a rent review provision which was in materially different terms. Clause A6.3 of the 1991 lease also included, as cl. A6.3(i), a direction in identical terms to the rental value direction in cl. A6.3(i) of the current lease. Further, the valuer was directed to have regard to two additional criteria which are not found in cl. A6.3 of the current lease, as follows:

(iii) taking no account of the fact of any premium or other inducement paid or payable to the Lessee to take this Lease;

(iv) taking no account of any premium or other inducement that may be paid or payable to a Lessee in relation to that Lessee taking a Lease of any premises referred to in clause A6.3(i) or of any other premises.

23 I was not directed to any evidence that a premium or inducement was paid or payable to the lessee in connection with the 1991 lease or the 1999 lease. In any event, this would appear to be of no consequence to the determination of the issues in this proceeding. However, it is relevant to note that it was common ground that no premium or inducement was paid or payable to the lessee to take the current lease.

THE RENTAL DETERMINATION

24 The rental determination comprises 25 pages. It is evident and obvious that the valuer was of the opinion that there were many matters which he regarded as relevant to the determination of the current annual market rental of level 42. These are set out in the rental determination and it is not necessary to refer to all of them.

25 The valuer set out cl. A6.3 of the lease and summarised the issue between the parties:

There is disagreement as to the interpretation and application of Clause A6.3, in particular as to the difference, if any, in meaning of the terms "current annual market rental" and "current annual market rental value".

26 The valuer then referred to the submissions of the parties on this issue and continued:

From a practitioners perspective I cannot see any reason not to consider incentives and adjust face rentals when analysing comparable evidence to arrive at the "current annual market rental" to be paid for Level 42, 101 Collins Street Melbourne. To arrive at the market rental the valuer must consider and if appropriate take into account incentives being offered in the market as it existed at the relevant date. It is the (market) rental value of the comparable premises which must be ascertained and then compared to the subject premises to arrive at the current market rental to be paid for the ensuing period, subject to any contrary instruction.

I note that the Lease instructs me to establish

"the current annual market rental ... having regard to all matters which in the opinion of the Valuer are relevant and having regard to the following specific criteria

(i) the current annual rental value of other commercial premises in the central business district of the City of Melbourne ..."

...

I also note that the identical instructions are to be followed in the instance of assessing the current annual market rental value at 1 July 2003 and further, a specific instruction 'not to take into account' incentives is not present in Clause A6.3 of the Lease.

In conclusion I believe that the terms "market rental value" and "market rental" are treated as synonymous in practice by the valuation profession, in the absence of instructions within a lease which clearly demonstrate that the parties wish the valuer to apply a specific definition or approach.

27 Next, the valuer referred to and considered the specific criteria in cll. A6.3(i) to (vi) of the lease. As to the rental value direction in cl. A6.3(i), the valuer placed principal reliance upon his view as to the rental values of comparable office premises within the building at 101 Collins Street. In reaching his view as to the rental values of comparable premises, the valuer took many matters into account, including the terms of the leases, the level of outgoings and any incentives paid or payable by a lessor to a lessee to take the lease. With respect to incentives, the valuer noted that they were present in virtually all of the comparable leases to which he had regard, irrespective of whether they were new tenancies, renewals or relocations. He also noted that there was no consistent pattern to the incentives which were paid.

28 Having regard to all of the matters considered by him, including but not limited to incentives, the valuer made adjustments to the rentals paid for comparable premises to arrive at a range of rental values for comparable office premises within the building at 101 Collins Street. That range was between $412 and $456 per square metre. The valuer then identified a single lease which he regarded as the "most indicative" of rental value for level 42 and stated that, after adjustment for height and review frequency differences, a rental value of $423 per square metre was indicated for level 42.

29 The valuer concluded:

Therefore, whilst having considered the pattern of evidence established following adjustment for height, rent review frequency and basis and outgoings recovery (and then considering each transaction in light of its particular issues) it is my view that an appropriate rental for Level 42 of the subject tenancy is $420 per sq.m. per annum, exclusive of GST and in accordance with the terms and conditions of the lease.

30 It was submitted on behalf of the lessors that the valuer did not perform the task assigned to him under the lease because he treated market rental and market rental value as synonymous. The lessors contend that, as a result, the valuer determined the market rental for level 42 by simply adopting the adjusted rental value of the most comparable premises identified by him.

31 It was submitted on behalf of the lessee that the valuer recognised that there was a distinction drawn in the lease between market rental and market rental value and that his reference to the two expressions being synonymous was qualified by the words "in practice." It was submitted that this was a reference to the fact that the outcome of the application of the two expressions would likely, in the professional opinion of the valuer, yield the same result.

32 It was submitted on behalf of the lessees in the alternative that the valuer did not, in any event, adopt the rental value of the most comparable property identified by him as the market rental of level 42. It was submitted that the valuer considered a range of rental values arising from a review of a number of comparable premises, identified the most comparable premises and, in this context, made a series of adjustments to allow for differences between level 42 and the comparable premises. It was submitted that these adjustments included an adjustment to take account of the incentives and other special concessions paid or allowed to the lessees of comparable premises. It was submitted that this process was, in accordance with the principles stated in the authorities, a matter for the valuer's expertise and was not subject to review by a court.

33 The language used by the valuer is ambiguous and capable of supporting each of the rival contentions. However, the view which I take of the proper interpretation of the lease makes it is unnecessary for me to decide precisely what the valuer did. For the reasons stated below, it is my opinion that the valuer was entitled to determine the market rental of level 42 on the basis that it was equivalent to the rental value of level 42. If this is not what he did, then his process of adjusting rental values of comparable premises to arrive at a market rental was a matter to be resolved by him in the exercise of his professional expertise, and is not reviewable by a court.

WAS THE RENTAL DETERMINATION MADE IN ACCORDANCE WITH THE LEASE?

34 In considering whether the rental determination was in accordance with the lease, it is necessary to construe the relevant provisions of the lease in accordance with general principles of contractual interpretation. This requires the Court to consider what reasonable persons in the position of the parties would have understood the words to mean, by reference to the text of the lease, the surrounding circumstances known to the parties and the purpose or object of the transaction.[13] Further, in interpreting the words, the Court should proceed in a common sense and non-technical way and give the agreement a commercially sensible construction.[14]

35 In this case, the following surrounding circumstances were known to the parties. First, the parties knew that cl. A6.3 of the 1991 lease directed the valuer, in determining the "current annual market rental", to have regard to two additional specific criteria. The effect of these two criteria was that the valuer was to ignore incentives and other special concessions paid or payable to the lessee or paid or payable to a lessee of comparable premises to which the valuer was directed to have regard under sub-cl. A6.3(i). Second, the parties knew that neither the 1999 lease nor the current lease directed the valuer to ignore incentives and other special concessions. In this regard, I note that I was not directed to any evidence as to why the direction to ignore incentives was excluded from the 1999 lease and the current lease. Third, the parties knew that no incentives were paid or payable, and no other special concessions were provided, to the lessee to take the lease.

36 It was submitted on behalf of the lessors that the lease draws a clear distinction between the basis of the July 2003 rent review and the basis of all other rent reviews. It is only the July 2003 rent review which is concerned with "market rental value". All other rent reviews, including that in issue, are on the basis of "market rental."

37 It was submitted on behalf of the lessors that there have been a number of cases dealing with the distinction between "rental" and "rental value". It was submitted that the authorities indicate that "rental" is simply the money paid as rent for a defined period under a lease, whereas "rental value" is the sum arrived at after making proper allowance for such things as incentives and special concessions. Reliance was placed upon the decision of Eames J (as he then was) in Australian and Overseas Telecommunications Corporation Ltd v Colonial Mutual Life Assurance Society Ltd.[15] In that case, Eames J referred with approval to the following passage from the judgment of Ambrose J in Re McCafferty:

In my view no competent experienced valuer would have any difficulty in distinguishing between "a rental" and "a rental value" if neither of those terms were defined in the lease. "A rental" is simply the money paid as rent for a defined period under a lease. "A rental value" on the other hand in my view is the sum arrived at after making proper allowance for all collateral advantages and disadvantages ascertained upon a proper examination of all the arrangements made between the lessor and lessee including the various rights and obligations under the terms of the lease which reflects the net consideration passing to the lessor from the lessee under the lease and associated collateral arrangements. [16]

38 It was submitted that these cases establish, subject to particular definitions and context, a clear distinction between the expressions "market rental value" and "market rental" and that the effect of this distinction is that: (1) in considering "market rental value" a valuer must make proper allowance for incentives and special concessions; and (2) in considering "market rental" a valuer must disregard incentives and special concessions.

39 It was submitted on behalf of the lessors that the rental value direction in cl. A6.3(i) has no effect upon the clear distinction which was drawn between the two expressions used in cl. A6.3. On the basis of this clear distinction, it was submitted that the valuer was obliged to give a different meaning to each of the two expressions. The lessors submitted that the valuer did not do so because he treated the two expressions as synonymous. Accordingly, it was submitted that the rental determination was not made in accordance with the lease.

40 The lessors' submission accepted that, at first blush, it appears illogical to instruct the valuer to determine market rental (which the lessors submit requires incentives to be ignored) by reference to the rental value of comparable premises (which the lessors accept requires adjustments to be made for incentives). However, it was submitted that any tension between the valuer's primary task to determine market rental and his obligation to have regard to rental values of comparable premises was more apparent than real.

41 It was submitted on behalf of the lessors that the lease, when properly construed, required the valuer to proceed in the following manner:

In setting a current annual market rental the valuer should have regard to comparable current market rental values. The logic is as follows:

(a) obviously, the valuer must look at rent paid in respect of comparable premises in making his determination; this would seem to accord with commonsense as well as with clause A6.3(i);

(b) looking purely at face rents paid in respect of comparable premises may not be a helpful exercise because there may be considerable distortions created by different incentive levels obtaining in relation to different leasing arrangements;

(c) the only reliable way to look at comparable premises is to look at effective rental paid in respect of them; and then to come up with an appropriate figure, based on effective rentals, that would represent an effective rental in respect of the subject premises;

(d) if, however (as in the present case), the valuer is required to fix a face rental - a current annual market rental - for the subject premises, he will not stop short at the effective rent figure; he will gross it up to take account of incentives actually affecting comparable premises and thus arrive at a market rental; the manner in which he does so is a matter involving the application of his expertise as a valuer.

42 Based upon this submission as to the content of the valuers' task under the lease, it was submitted:

In the present case, the valuer took the step referred to in (c) above but failed to take the step referred to in (d) because he had concluded that the meanings of the expressions "current annual market rental" and "current annual market rental value" as used in clause A6.3 were synonymous. In failing to take the step referred to in (d), or in otherwise failing to come up with a market rental rather than a market rental value, the valuer did not give effect to clause A6.3. By adopting an approach which simply involved the setting of current annual market rental of the subject premises by reference to the current annual market rental value of comparable premises, the valuer ignored his overriding mandate which was to determine the minimum rent by establishing the current annual market rental at the relevant date. His determination does not conform with clause A6.3 of the rent review provisions of the lease and thus does not bind the parties.

43 I do not accept the submissions made on behalf of the lessors, for the following reasons.

44 It is common ground that the rental value direction in cl. A6.3(i) requires the valuer to have regard to, amongst other things, incentives in adjusting rentals for comparable premises. In the absence of a specific direction to take no account of incentives, such as that contained in the 1991 lease, there is no basis for the lessors' contention that the valuer was obliged to take the fourth step referred to in the lessors' written submissions and "gross up" the rental value of the most comparable premises identified by him. In my opinion, the valuer was simply required to determine the market rental in the context of his findings concerning the rental values of comparable premises and other relevant matters.

45 In my opinion, when the lease is construed in the light of the surrounding circumstances to which I have referred, commercial common sense dictates that the valuer was entitled to treat the two expressions as synonymous. I do not accept the lessors' submission, which would have the effect that the parties intended that the lessee, who received no incentive to enter into the lease, would pay rental equal to the amount actually paid by other lessees of comparable premises in the market, where those lessees received incentives to enter their leases. No such intention should be attributed to parties to a commercial lease in the absence of clear and unambiguous language requiring that result. In my view, when considered in the light of the surrounding circumstances, the language of cl. A6.3 does not require that result. I am of this view for the following reasons.

46 First, in my opinion any distinction which the parties may have intended to draw between market rental and market rental value has been negated by the inclusion of the rental value direction contained in cl. A6.3(i) and the exclusion of any direction to the valuer to ignore incentives. As I have said, such a direction was given in the 1991 lease and the parties to the lease were aware of this.

47 Second, if the parties had intended such an uncommercial result, an unambiguous direction to this effect could have been included in the lease. For example, the lease could have provided that the rent was to be determined by reference to the rentals paid for comparable properties, taking no account of any incentives paid or payable to the lessees of such comparable properties. This is what was done in the 1991 lease. The exclusion of such clear words from the current lease is a strong indication that the parties did not intend that the valuer should calculate market rental in the manner contended for by the lessors.

48 Third, the lessors' own submissions accept that the expressions "market rental" and "market rental value" do not always have the meanings contended for by the lessors. The cases relied upon by the lessors to establish the meanings of the two expressions make it clear that it is for the Court to discern the intention of the parties to the lease in question by reference to ordinary principles of contractual interpretation. This principle applies with particular force to rent review clauses, where it is common for parties to use language that may produce an artificial result.

49 In my view, the distinction between market rental and market rental value articulated in Re McCafferty does not apply to the lease in this case. The report of that case does not disclose whether the lessee was paid an incentive to enter into the lease. Further, the lease in Re McCafferty expressly and unambiguously directed the valuer to disregard any incentives payable by a lessor to a lessee in fixing the "market rent". In my view, the statements in Re McCafferty as to the difference between "rental" and "rental value" do not express general definitions of those terms to be applied in every case. If, contrary to my view, the statements by Ambrose J in that case as to the difference between "rental" and "rental value" were intended to be of general application, I would respectfully decline to follow those statements. It is common for rent review clauses to prescribe a highly artificial method of determining rent. Accordingly, the same words may have different meanings in different leases. Even identical rent review clauses may be interpreted differently in the context of two different leases, depending upon matters including the surrounding circumstances, commercial common sense and the other terms of the leases.

50 In my view, I should treat the consideration of the distinction between rental and rental value by Eames J in the Australian and Overseas Telecommunications case in the same way. Indeed, Eames J noted that the assistance which can be gained from the construction of rent review clauses in other cases "must be necessarily limited."[17]

51 The case of Ropart Pty Ltd v Kern Corporation Ltd[18] illustrates the way in which the ordinary meanings of words can be altered by specific directions given in a rent review clause. In that case, the valuer was appointed to establish "annual rental value." The lease provided that the valuer was required to have regard to the "annual rental value" of comparable premises. However, the valuer was instructed to take no account of the fact of any premium paid or payable to the lessee to take the lease, or which was paid or payable to the lessee of any comparable premises. Having regard to the protocol established by the specific directions to the valuer, the Court of Appeal in New South Wales concluded that the valuer was required to ignore incentives in considering rental value of the premises in question, and in considering rental values of comparable premises.[19] The specific directions to the valuer to ignore incentives in Ropart were in virtually identical terms to the directions which were contained in the 1991 lease, but which have been excluded from the current lease in this case.

Conclusion

52 For the above reasons, I find that the rental determination was in accordance with the lease. The proceeding will be dismissed.

[1] For example, AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173.

[2] (1985) 1 NSWLR 314.

[3] Ibid 331.

[4] Ibid 336.

[5] [2001] NSWCA 401.

[6] [1992] 1 EGLR 141, 144.

[7] [2001] NSWCA 401, [43].

[8] (1996) 65 SASR 409.

[9] Ibid 416.

[10] [1994] 2 Qd R 538.

[11] Ibid 541.

[12] [2001] NSWCA 401, [40].

[13] Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451, [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165, [40].

[14] Hillas & Co Ltd v Arcos Ltd [1932] UKHL 2; [1932] All ER 494, 499, 503-4; Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429, 437; Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99, 109-10; Vroon BV v Fosters Brewing Group Ltd [1994] VicRp 53; [1994] 2 VR 32, 67; MLW Technology Pty Ltd v May [2005] VSCA 29, [76]-[81]; Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL 19; [1997] AC 749, 770-1.

[15] (1992) V ConvR 54-450.

[16] [1994] 2 Qd R 538, 545; quoted in Australian and Overseas Telecommunications Corporation Ltd v Colonial Mutual Life Assurance Society Ltd (1992) V ConvR 54-450, 65-245

[17] (1992) V ConvR 54-450, 65,247.

[18] (1991) NSW ConvR 55-598.

[19] Ibid 59,373-6 per Hope AJA; 59,376 per Gleeson CJ.

At a glance

Court

Decision date

Before

Source

Judgment (35 paragraphs)

Parties

Cases Cited (6)