Barrister William Stark, concludes his three-part Valuations in Leasing in Victoria series and explores Valuation Pitfalls. William presented on this topic for Legalwise at the recent Retail and Commercial Leasing Conference. Read Part 1 on Options to Renew and Part 2 on Market Rent Reviews.
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1. This article follows on from the recent Legalwise Seminar on Retail and Commercial Leasing.
2. The 3rd and final part of this article deals with challenging rent reviews to market.
3. Challenging Rental Determinations has always been difficult.
4. See for example:
(a) Lucky Eights P/L v Bevendale P/L [2016] VCAT 1600, which confirmed that the Tribunal should not interfere with a valuer’s discretion.
(b) Keriani P/L v Long [2015] VCAT 1212, in which the Tribunal found that the parties were bound by the rental determination made by a specialist retail valuer.
(c) In Epping Hotels P/L v Serene Hotels P/L [2015] VSC 104, Justice Croft determined that the valuer had adopted an acceptable methodology in making the rental determination in that case. An appeal to the Court of Appeal (Weinberg and Tate JJA and Robson AJA) was dismissed (see Serene Hotels P/L v Epping Hotels P/L [2015] VSCA 228).
5. However, in the last couple of years there have been at least 3 successful VCAT challenges made to a valuer’s rental determination under section 37 of the Retail Leases Act 2003.
6. In Higgins Nine Group P/L v Ladro Greville St Pty Ltd [2015] VCAT 1687, VCAT concluded that the valuer did not provide “detailed reasons” that explained how he calculated the higher turnover figures that he projected for the premises for the new term.
7. The decision was upheld on appeal before Croft J in Higgins Nine Group P/L v Ladro Greville Street P/L[2016] VSC 244.
8. Both the judgment in the initial VCAT decision and the judgment on appeal discuss in depth the principles surrounding “detailed reasons”.
9. Some issues of note from Justice Croft’s decision are:
(a) A valuer’s determination of the market rent is not a contractual decision.
(b) VCAT’s finding as to the nature and effect of the Determination is a finding of fact, and not a finding of law and as a result, not subject to appeal to the Supreme Court under section 148 of the VCAT Act;
(c) S 37(6)(b) requires that there “are sufficient reasons that enable the parties to understand the basis on which the determination has been made”.
(d) It is clear that it is not sufficient for a valuer to “leap to a judgment”: the valuation must disclose the steps of reasoning. This position is reinforced by the provisions of s 37(6) of the Retail Leases Act 2003. Paragraph (b) requires “detailed reasons” for the valuer’s determination. Paragraph (c) adds the requirement that the valuer “specify the matters to which the valuer had regard”.
10. In Dalmatino Pty Ltd v Creative Laser Pty Ltd [2017] VCAT 875, VCAT was called upon to determine whether a rental determination about the rent on renewal complied with section 37 of the RTA.
11. In the event, Member Kincaid found that the valuation was flawed, as it did not comply with the requirements of section 37 of the Retail Leases Act 2003. The rental determination was still set aside for failure to comply with the requirements of section 37 of the Retail Leases Act 2003.
Relevant Valuation Principles
12. Member Kincaid analysed the relevant valuation principles. He concluded that the Tribunal should consider three questions-
1. What did the parties agree to remit to the expert?
2. Did the valuer make a mistake and what was the nature of the mistake?
3. Is the mistake of such a kind that demonstrates that the valuation was not made in accordance with the terms of the contract and accordingly does not bind the parties?
13. Having found that some of the premises referred to by the valuer were within the requirements of section 37, the Member then considered whether the reasons contained in the rental determination are such as to indicate the valuer had regard to “the rent that would reasonably be expected to be paid for premises having the same, or substantially similar, use to which the premises may be put under the lease”. Member Kincaid concluded that he could not be satisfied that this was so, and as a result he found that the valuation did not comply with section 37.
14. In Josephine Ung Pty Ltd v Jagjit Associates Pty Ltd [2017] VCAT 2111, Member Edquist concluded that the rental determination undertaken by the valuer was vitiated by error, and was of no effect.
Conclusion
15. In order for a rental determination to comply with section 37 of the Retail Leases Act 2003, the valuer undertaking the task must be thorough, and provide detailed reasons for his or her determination.
16. The recent spate of decisions has confirmed that, whilst not onerous, the task requires the valuer to be diligent in meeting the requirements set out in section 37.
William Stark has been a member of the Victorian Bar since 1998. He practises in a broad range of commercial disputes in the areas of property (especially mortgage-related property), contracts, corporations law and insolvency. William writes a blog about property law related matters. William has appeared as counsel successfully opposing a number of applications for interlocutory injunctions to restrain mortgagee sales, and successfully seeking and opposing numerous orders for the removal of caveats. William has appeared regularly at VCAT in retail tenancy and real property proceedings. William is also a nationally accredited mediator, having been involved in hundreds of mediations representing parties. In his 10 years as a solicitor, he worked with Hall & Wilcox and Mallesons Stephen Jaques. For over four years prior to coming to the Bar, William was an accredited commercial litigation specialist with the Law Institute of Victoria (being in the first intake of those specialists in late 2003). For 6 years prior to commencing articles, while studying law part- time William worked full-time for the Australian Taxation Office. Contact William at williamstark@vicbar.com.au or connect via LinkedIn
