ROPART PTY LID v KERN CORPORATION LTD AND

Hope AJA May 1989 the plaintiff as sub-lessee and the defendants Kern Corporation Limited and Superannuation Fund Investment Trust as sub-lessors entered into a registered sub-lease for the whole of level 43 Grosvenor Place, Sydney. The initial term of the lease was eight years from 6 June 1988. The plaintiff had options to renew for two further terms each of five years.

The sub-lease provided for a review of the minimum rent which it fixed, and in the event of there being no agreement between the parties as to the current annual rental value to be used in the review, a valuer was to be appointed to determine that value. The valuer was to act as an expert and to comply with CL3.6(b)(iv), and subject to CL3.6(c)(ii) was to consider representations in writing submitted in accordance with CL3.6(b)(iv) by the lessor and the lessee as to the current annual rental value of the demised premises at the relevant review date.

There is no issue that all things have happened which duly brought about the appointment of the valuer to carry out a rent review.

The dispute between the parties is essentially as to the matters to which the valuer was to have regard or was not to have regard in determining the current annual rental value.

The clause of the lease which gives rise to the dispute is in these terms:

"CL3.6(c)(i) - The valuer appointed pursuant to CL36(b)(i) hereof shall establish what the current annual rental value of the Demised Premises will be is or was at the Relevant Review Date having regard to all matters which in the opinion of the valuer are relevant and having regard to the following specific criteria:

(aa) the Demised Premises as first class commercial office premises; and

(bb) the current annual rental value of other commercial officer premises in the Central Business District of the City of Sydney being premises of a quality nature size and location similar to the Demised Premises; and

(cc) 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; and

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

(ee) taking no account of the fact of any premium and/or other inducement then being paid or payable to a lessee in relation to that lessee's taking

a lease of any premises referred to in CL3.6(c)(i)(bb) hereof or of any

(ff) taking no account of the relevance of the fact that any relocation cost would be payable by the Lessee moving from the Demised Premises and/or by any lessee moving from any premises referred to in

CL3.6(c)(i)(bb) hereof or from any other premises; and

(gg) taking into account that the Base Amount of Lessor's Outgoings will be

updated as at the Relevant Review Date and the date by reference to

(hh) taking no account of the fact that Partitioning is included in the Demised

(ii) the terms conditions provisions and agreements contained in this Lease.

(iii) The valuer shall not take into account any fact matter or thing including any written representation referred to in CL3.6(b)(iv) hereof which is not consistent with the criteria referred to in CL36(c)(i) hereof."

The two disputes which have been argued before us and were argued before Rolfe J in the Equity Division are directed first to the general effect of the provisions that I have set out and secondly to the effect and application of subCL(ee).

In relation to the general question it has been submitted for the appellant that the primary obligation of the valuer was to determine the current annual rental value of the premises having regard to all matters which, in his opinion, were relevant. When the clause went on to say that he should also have regard to the criteria listed in subCL(aa)(ii) it was in effect and indeed in substance merely reminding the valuer of the matters which it was necessary for him to have regard to or to take into account when he was deciding what that rental value was.

In aid of this argument counsel for the appellant relied very strongly on the fact that the expression describing what it was the valuer had to deal with was the current annual rental value and not the current annual rent. It is submitted that these two descriptions referred to different subject matters and that the word "value" is of signal importance in determining the subject matter of the clause.

The clause deals with matters which are described as specific criteria, and directs that as regards some matters the valuer shall take no account of them and as to other matters the valuer shall take them into account.

It is submitted for the appellant that these different and apparently contradictory directions mean the same thing, and in effect mean "take into account" or "have regard to".

The view contended for by the respondent is that although the obligation of the valuer was to establish the current annual rental value, he was not to achieve that result solely by applying principles generally applicable in determining such a value. Far from merely setting out some of the principles applicable when a valuer is required to make such a determination, the parties qualified the nature of those principles and established what might be called their own protocol for arriving at the rental value for the purposes of the lease.

It is submitted for the appellant that this produces an artificial result. I must say that ordinary principles of valuation in many cases tend to produce a result that can be regarded as artificial, and if the result in the present case can be called

UROPART PTY LTD v KERN CORPORATION LTD AND SUPERANNUATION FUND INVESTMENT TRUST (Hope AJA)

artificial it is only relatively so. The fact that you do not take into account, if that is the proper construction of subCL(ee), premiums and other inducements paid or payable to a lessee might be regarded as artificial but I think that it is possible that a contrary view could be taken, depending on the circumstances.

However, as it seems to me, Rolfe J was correct in his approach to this question. His Honour described his conclusion as being that the words "taking no account of" required the valuer to ignore or disregard the matters which the clause directed that he was not to take into account. Equally, the valuer was required to take account of any matter, as for example in sub-clause (gg), to which he was directed to have regard.

It should be appreciated that in respect of many, if not all, of the matters in respect of which the specific criteria directed no account should be taken, there could be considerable difficulty both in ascertaining the facts and in deciding what effect should be given to the facts if and when they were elicited. In respect of many of the comparable premises to the rental of which regard was required to be had by the valuer it might be quite impossible for him to determine the circumstances in which the rental provided by a lease was arrived at, and whether or not some premium or inducement was given or made by the lessor to the lessee which had an effect on the quantity of the rent.

It is understandable that the parties should wish to avoid difficult and complex debates and disputes as to the existence and significance of these items, and when they directed that no account should be taken of them, their direction was simply to say, in my opinion, that the valuer should ignore them. In other words, as was said in the course of argument, the valuer should forget about them.

I do not consider that giving effect to the provisions of the clause as a whole as Rolfe J decided in relation to the first question creates any difficulty or artificial situation. In my opinion he was correct. I would dismiss the appeal in so far as it relates to the answer to the first question.

The second question gives rise to considerable difficulty. I have already set out sub-clause (ee). The particular disputes that arise, having regard to the construction which I propose should be given to the whole of the clause, are concerned with the meaning of the words "then being paid or payable to a lessee".

The principal argument below was whether the clause only directed that no account should be taken of payments in cash. On this view inducements which are not made in cash did not fall within sub-clause (ee) and would be taken into account by the valuer in arriving at the rental value of the premises by the application of the general principles of valuation.

Something can be said in general terms about the words, but as I shall indicate, I do not think it is possible to make specific declarations about their effect.

One submission for the appellant was that the words "then being paid or payable" did not refer to payments which were complete before the relevant time. Thus if by the relevant date a payment had already been completed, it would not be within the sub-clause. If it was made on that date, or, it would seem, between that date and the time when the valuer made his determination, it would be within the sub-clause.

It is submitted that this is the literal meaning of the words, and if a literal meaning is to be given to the whole of the clause, and it is submitted that the construction which I propose should be given generally to the clause is a literal construction, sub-clause (ee) should likewise be given a literal construction and should be given the meaning which I have described.

In my opinion the words "then paid or payable" should not be given the very limited construction contended for by the appellant. The sub-clause obviously related to something which would or might be material in arriving at the current annual rental value. it was not directed to something that would in any event not be taken into account in assessing that value. it directed that no account should be taken of the premium or inducement even though - I will interpolate - it would or might be relevant were it not for this sub-clause.

It follows in my opinion that the words "then being paid or payable', are not limited to payments made on or after the relevant date. They can refer to payments made at earlier points in time, provided they were payments relevant to the making of the valuation as having some relation to the rental payment of the lease which is said to be comparable for the purpose of making the valuation.

Apart from the time of payment, these words "paid or payable", are said by the appellants to be limited to payments in cash.

Other inducements which are not cash payments are outside the clause. Thus a rent free period, no matter what form it takes, is outside the clause, and can and should be taken into account by the valuer in arriving at the current annual rental value of the premises.

Rolfe J thought that this was too narrow a construction of the words, and I would respectfully agree with him. I do not think that it is necessary to go to the various cases to which his Honour referred and which have been referred to in argument, but having regard to the context of the clause it is obvious that the words were used to refer to inducements given by lessors to lessees to enter into a lease. Whether a particular inducement can be said to come within the terms of the sub-clause would depend very much upon its nature. The matter is not at large. There are restrictions imposed on the nature of the inducements referred to in sub-clause (ee), and the important restrictions are to be found in the words "then being paid or payable to a lessee". But once one escapes from a restriction which requires the payment to be in cash paid directly by the lessor to the lessee, the restrictions are more limited and have more relevance to the type of inducement to which the sub-clause is essentially directed.

However, here again I think that it is difficult to make a declaration describing what does or does not come within the scope of the sub-clause. We are not concerned in this proceeding with particular inducements the precise nature of which has been established. We are concerned with a hypothetical question, and not with an inducement of a specific kind.

The question whether an inducement is "paid or payable" in a general sense to a lessee is a matter about which there can be a variety of views depending upon the circumstances. obviously, a direct payment from a lessor to a lessee falls within the words, but there are other circumstances where although the lessee was not the recipient of the cash, a cash payment could nonetheless be said to fall within the sub-clause. Thus it is arguable that a payment made at the direction of a lessee by the lessor as an inducement for entering into the lease, or a payment made to an associate of the lessee could, depending upon the circumstances, fall within the sub-clause. Here again I find considerable difficulty in making any declaration which would be purposeful for the valuer or indeed for the parties.

The difficulty that I have in making a declaration is illustrated by what has happened in this case. It is agreed that the paragraph in the amended summons which sought a declaration in relation to the meaning of these words did not specify the appropriate declaration. The declaration which his Honour made is in these terms:

UWROPART PTY LTD v KERN CORPORATION LTD AND SUPERANNUATION FUNB INVESTMENT TRUST (Clarke JA)

"The word inducement in CL3.6(c)(i) and CL3.6(c)(i)(ee) includes inducements provided by the lessor to the lessee otherwise than by way of payment of money in cash or the equivalent of cash."

With respect to his Honour, this declaration does not solve the problems which the parties have and which the valuer had. Whether any particular inducement fell within the class of inducements described in the sub-clause would depend on its nature and the circumstances, and a declaration in general terms would be a source of disputes rather than lead to their resolution.

Over the years since there has been general jurisdiction in this Court to make declarations, declarations have been made at times in relation to hypothetical circumstances. There has been a tendency in courts not to be eager to make them, and for obvious reasons. I think that if one learns anything in trying to decide cases, it is that circumstances can be infinitely various and it is difficult to lay down a principle which can apply to all circumstances, rather than the particular circumstances which are before the Court.

Although declarations can be made in relation to hypothetical circumstances, it is not appropriate for the Court to do so unless it can feel confident that it can encompass within its declaration the variety of circumstances that can arise. I have no such confidence in the present case and in my opinion it is not an appropriate case for the making of a declaration.

I would accordingly allow the appeal in relation to the declaration in para 1(b) of the order of the Court, and order that the Court make no declaration in respect of that matter. The appellant should pay the respondent's costs of the appeal.

GLEESON CJ: I agree that the appeal should be allowed in part, that is to say, in relation to declaration 1B, but otherwise dismissed. I also agree with the reasons of Mr Justice Hope. The clause with which we are concerned establishes a protocol according to which a valuer is to find the current actual rental value of demised premises for the purpose of a rent review.

The valuer is directed to have regard to all relevant matters. He is also instructed to have regard to what are called certain specific criteria. One of those specific matters is the current annual rental value of other comparable commercial office premises. He is further instructed to take no account of the fact of any premium and/or other inducement then being paid or payable to a lessee in relation to that lessee's taking a lease of any such premises.

The primary issue in this appeal is whether the last mentioned instruction requires him to ignore the fact of the premium or inducement referred to or whether, as the appellant contends, it requires him to note it and make allowance for it.

The former view, which was accepted by Mr Justice Rolfe, is the better view.

It accords with the natural and ordinary meaning of the words of the contract. I do not regard the consequences it produces as anamolous or irrational. As Mr Justice Hope has observed there are good commercial reasons why that result might have been intended; in particular, the investigation and consideration of the true facts that may be relevant to such premium by inducement is often a matter of difficulty and uncertainty. To say that no account should be taken of a fact does not ordinarily mean that that fact should be noted and allowed for. Indeed the appellant seems to argue that, in the present context, a direction not to take a fact into account is the equivalent of a direction to take it into account. That is a paradox that strikes me as unacceptable.

Clarke JA I agree with the orders proposed for the reasons which have been given.

Appeal allowed in part and the declaration in order IB made by Mr Justice Rolfe is set aside. Otherwise the appeal is dismissed and the appellant is to pay 5 the respondent's costs of the appeal.

10 Counsel for Respondant: M Tobias QC / D P Robinson

Solicitors for Respondant: Freehlll Hollingdale and Page