Overturned Commercial Rental Determinations

The Retail Leases Act 20023 outlines that in circumstances where the landlord and tenant are unable to agree on the current market rent for a premises, a valuer is required to be appointed to determine the rental.

Under a non-retail lease, the parties apply to the President of the REIV to appoint a valuer under the REIV lease. Under the Law Institute Lease, a valuer is to be appointed by the Australian Property Institute. On some occasions the parties may select a nominated valuer by agreement.

For a retail lease, the application for a specialist retail valuer to undertake a rental determination is made to the office of the Small Business Commissioner of Victoria when the parties are not able to agree.

The criteria to consider when conducting a market rent review are generally but not always listed in the lease. In the case of a lease subject to the Act, section 37(2) applies and is summarized as:

…a free and open market between a willing landlord and a willing tenant…

• the provisions of the lease;

• The rent that would reasonably be expected to be paid for the premises if they were unoccupied and offered for lease for the same, or a substantially similar, use to which the premises may be put under the lease;

• The landlord’s outgoings to the extent to which the tenant is liable to contribute to those outgoings;

• Rent concessions and other benefits offered to prospective tenants of unoccupied retail premises- …but not to take into account the value of goodwill created by the tenant’s occupation or the value of the tenants fixtures and fittings…

Section 37(6) then goes further and holds the valuation to a standard as follows:

The valuation must-

• be in writing; and

• contain detailed reasons for the specialist retail valuer’s determination; and

• specify the matters to which the valuer had

• regard and taken into account in making the determination.

Herein lies the basis upon which VCAT and the Supreme Court of Victoria have overturned valuations that they deemed were lacking in sufficient detail.

A valuer cannot rely upon statements such as “based on my knowledge and experience” as a substitute for providing detailed reasoning in arriving at their conclusions.

This does not mean the valuation is not correct but rather that it does not meet the requirements set out in the legislation.

There are also cases where there was an error in fact and the valuation was overturned such as:

• AJ Moussi Pty Ltd v Luxor Corporation Pty Ltd (Building and Property) [2022] VCAT 434 (April 20, 2022)

  In this case the maximum number of patrons at the leased premises was incorrectly assessed.

Historically, the valuer’s opinion of the market rent was 100 per cent binding on the parties. The rent was assessed for better or worse and the parties continued as they had done prior to the review.

In recent years there has been a shift away from the previous broad acceptance of the rental determination as a binding agreement.

The Building and Property list at VCAT and the Victorian Supreme Court hear cases where the parties are seeking to overturn the determination. Not all are successful. Some of the many examples are below:

Where the landlord’s application was successful:

• Epping Hotels Pty Ltd v Serene Hotels Pty Ltd [2015] VSC 104 (April 28, 2015)

  This is a case where the use of the “profits” method or earnings ratio to assess the market rent was upheld and the parties were bound by the valuation.

• Stricta Pty Ltd v CW Leasing Services Pty Ltd (Building and Property) [2023] VCAT 1092 (September 20, 2023)

  This case involved the landlord seeking to set aside the valuation on amongst other issues that the valuer had not considered all of the evidence.

Where the tenant’s application was successful:

• Leonello Service Centre Pty Ltd v Rany Pty Ltd (Building and Property) [2019] VCAT 1752 (November 8, 2019)

  In this case the valuation was overturned as detailed reasons were not provided in addition issues with outgoings and maintenance obligations under the lease.

• Storage Depot Pty Ltd v Brooklyn Logistics Park Pty Ltd (Building and Property) [2022] VCAT 210 (February 25, 2022)

  In this case the valuation was overturned as detailed reasons were not provided.

The motivation to overturn a rental valuation can simply be that one of the parties is of the opinion that they did not achieve the result that they wanted and seek to overturn the result. It can be a bargaining chip to extract a concession from the opposing party which, if successful, would avoid having to go through the entire determination process again. It can also be a delaying tactic, particularly if the valuation goes back several years, to put off paying an increased back rent.

A valuation that is set aside also creates uncertainty and considerable expense. For the tenant, they are not able to budget what their catchup rent and future rent obligation will be. For the landlord, they often face issues where the level of rent and the failure to have the lease documentation signed by both parties leads to issues with their bank or the inability to market and sell the property.

When faced with the prospect of having a rental determination, consider when making a submission to the determining valuer that any evidence presented pays strict attention to section 37(6) of the Act. The evidence submitted should be complete and the rationale detailed and logical. Consider also, the terms of appointment of the determining valuer. In some terms of engagement, should the valuation be overturned, the valuer is entitled to undertake a new valuation at additional cost. If this is not an appropriate outcome for the parties, then this should be rejected from the outset.

A review of the Retail Leases Act 2003 is also due at some time in the near future. It may therefore be appropriate for the state government to consider adding an additional sub clause to section 37(6) to the effect that if one or both of the parties is of the opinion that all or any sub sections (a), (b) or (c) have not been complied with, then upon the provision of written notice to the determining valuer and the opposing party, the said valuer has a period of 30 days from receipt of notice to provide additional or amended information to support or amend the valuation.

This brief amendment may have the effect of creating certainty and relieving the judicial system and the parties of additional burden and expense.

CAUTION FOR THE PARTIES:

Overturning determinations is a time-consuming and costly exercise and the parties should be aware that it doesn’t mean the parties may receive a different outcome of the quantum amount of rent and outgoings from the initial determination.