122 Pitt Street Pty Ltd v Universal 1919 Pty Ltd

1. [1]

   BATHURST CJ: I agree with Macfarlan JA.

2. [2]

   MACFARLAN JA: In 2006 the appellant (the “Lessor”) acquired the property at 122 Pitt Street, Sydney, subject to a registered lease dated 1 June 2004 granted to the respondent (the “Lessee”) in respect of four levels of the building, including the basement. The Lessee conducts the business of a licensed hotel on the premises. The lease was for an initial term of 10 years with an option to renew for a further 10 years. On 21 February 2014 the Lessee exercised that option, entitling it to a further lease.

3. [3]

   Prior to the exercise of the option, the Lessor gave to the Lessee a Rent Review Notice advising that the “Base Rent” payable under the lease would increase. The Base Rent for which the lease provided was effectively the current market rent for the demised premises calculated in accordance with certain specified criteria. As a result of a dispute between the parties concerning the increase, an independent valuer was appointed to determine the Base Rent for the premises as at the “Market Review Date” stated in the lease, namely 1 June 2014. The Lessor contends that the valuer’s determination did not comply with the terms of the lease and that therefore, in accordance with the reasoning of McHugh JA in Legal & General Life of Australia Ltd v A Hudson Pty Ltd [1985] 1 NSWLR 314 at 335-6, it is not binding on the parties.

4. [4]

   The alleged non-compliance is that the valuer, contrary to the valuation criteria stated in the lease, took into account the “value of the Tenant’s Fixtures or fitout” by having regard to the value of the fitout work that the Lessee was required to do after 1 June 2014 in order to fulfil its obligation to spend a minimum of $1 million on fitting out the premises. The Lessee contends that that future work did not fall within the relevant valuation criterion and, in any event, its value was not taken into account by the valuer.

5. [5]

   The Lessor brought proceedings in the Commercial List of the Equity Division of the Supreme Court challenging the determination. By judgment of 17 March 2015 Kunc J rejected the challenge and dismissed the proceedings.

6. [6]

   For the reasons that appear below, I consider that the Lessor’s appeal from his Honour’s decision should be dismissed. Likewise, the Lessee’s cross-appeal, which it said would only be pursued in the event that the Lessor’s appeal succeeded, should also be dismissed.

The lease

1. [7]

   The lease to which the Lessee is entitled following its exercise of the option to renew the 2004 lease was not in evidence but its terms can be discerned from the 2004 lease because that lease provided that upon renewal the terms of the lease would remain the same, save for the option to renew for a further term and a limited rent holiday granted at the beginning of the 2004 lease being omitted. No distinction is made in the discussion below between the 2004 and new leases as their terms are relevantly the same and they specify only a single Market Review Date of 1 June 2014.

2. [8]

   The relevant provisions of the lease are as follows:

3. [9]

   Item 9 of the lease’s Reference Schedule specified the Market Review Date as “[u]pon exercise of the option to renew (ie on 1 June 2014)”. Item 12 specified the “Permitted Use” as “Licenced Hotel (subject to the conditions of the Liquor Licence)”.

The expert determination

1. [10]

   By Rental Determination Report dated 1 June 2014 Mr Scott Robertson of Robertson & Robertson Consulting Valuers, determined that the Base Rent of the subject premises as at 1 June 2014 was $638,000.

2. [11]

   The following features of the Report are relevant.

3. [12]

   First, Mr Robertson set out the Base Rent criteria listed in Clause 5.9 of the lease, including the directions to “disregard the value of any goodwill attributable to the Tenant’s Business and the value of the Tenant’s Fixtures or fitout” and to have regard to the lease’s terms and conditions.

4. [13]

   Secondly, in describing the premises, Mr Robertson referred to the renovations under the initial lease being completed in October 2010 at a cost of $1,083,500.

5. [14]

   Thirdly, in describing the current uses of the premises’ various sections, Mr Robertson referred to one of the rooms on level one as having “modern partitioning and a staff food preparation area”.

6. [15]

   Fourthly, in listing relevant terms of the lease, Mr Robertson referred to the Lessee’s obligation to fit out the premises at a cost of at least $1 million. About this requirement, he commented:

7. [16]

   Fifthly, when considering the market rent applicable to the different sections of the premises, Mr Robertson noted that he had taken the fitout expenditure requirement into account in relation to each.

8. [17]

   Sixthly, under the heading “Basis of Assessment” Mr Robertson listed a large number of factors that he had taken into account. These included the “[c]haracteristics of the subject premises and common areas” and “[t]he current layout of the premises, potential alternate layout for the premises for use as retail and the impact that the listing as a heritage item has on same”.

9. [18]

   Seventhly, Mr Robertson referred to the rents applicable to a number of nearby premises and identified the similarities and differences between those premises and the subject premises, and between the terms of their leases and the subject lease. He did not refer in this context to the fitout of the subject or any other premises, or refer to any minimum spend obligation in the subject or any other lease.

The judgment at first instance

1. [19]

   The primary judge identified the relevant issues and made findings as follows:

2. [20]

   His Honour summarised his reasoning as follows:

3. [21]

   The primary judge later gave an alternative reason why he considered that Mr Robertson did not contravene the instruction in the Base Rent criteria to disregard the value of “The Tenant’s Fixtures or fit out”. His Honour said that because the minimum spend requirement related to expenditure, being a different concept to value, Mr Robertson did not contravene the relevant instruction by taking it into account as “value” is the only relevant concern of the Base Rent criteria (Judgment [65]).

4. [22]

   His Honour further held that even if the words “fitout” in the Base Rent criteria and the concept of “Fitout Work” in Clause 28 of the lease overlapped, Mr Robertson in fact disregarded the value of that “Fitout Work” (Judgment [67]). His Honour regarded that as evident from a number of matters, principally the absence of a statement by Mr Robertson that he took that value into account and the likelihood of him saying that if he had done so (ibid).

5. [23]

   The primary judge then stated that had he concluded that Mr Robertson’s determination was invalid, he would have directed that the parties restart the process under Clause 5.5 for resolution of the dispute concerning the current market rent. His Honour also would have directed that a copy of the Court’s judgment be provided to the President of the NSW Division of the Australian Property Institute at the time that the parties sought his or her nomination of a valuer and that another copy be provided to the valuer once appointed (Judgment [83]).

6. [24]

   Mr Robertson in a letter dated 18 August 2014, expressed what the Lessor submitted to the primary judge was “a steadiness of mind and firmness of position” in refusing to amend his valuation of the current market rent. Despite this, his Honour did not consider that there were sufficient reasons to direct that Mr Robertson should not undertake any new valuation. Indeed, his Honour said that had it been necessary he would have gone further and directed that the Lessor not raise the concerns it expressed in relation to Mr Robertson’s position with the President (Judgment [87]).

ISSUES ON APPEAL

1. [25]

   The Lessor’s Amended Notice of Appeal asserted that the primary judge erred in finding that “to take into account an obligation about ‘Fitout Work’ [Clause 28] did not involve taking anything into account about ‘fitout’ [Clause 5.9]” and in finding that, in conformity with Clause 5.9(a), Mr Robertson in fact disregarded the value of the “fitout”.

2. [26]

   The Lessee’s Notice of Contention sought to support the primary judge’s decision on a basis additional to that upon which his Honour had relied. Further, by its Amended Notice of Cross-Appeal, the Lessee challenged the orders that the primary judge would have made had he found in the Lessor’s favour (see [23] above). The appropriate vehicle for this challenge was however a Notice of Contention rather than a cross-appeal because the proposed orders were not in fact made and accordingly could not be challenged.

3. [27]

   The Lessee’s Amended Notice of Cross-Appeal made it clear that the Court would only need to determine the cross-appeal if the appeal succeeded.

DETERMINATION OF THE APPEAL

1. [28]

   Oral argument on the appeal considerably simplified and clarified the parties’ positions.

2. [29]

   The Lessor confined its complaint to the contention that Mr Robertson did not obey the injunction in Clause 5.9(a) of the Lease to disregard “the Tenant’s Fixtures or fitout”. It did not assert that Mr Robertson was not entitled to have regard, as he did, to the minimum spend requirement in Clause 28. It said however that his doing so suggested, in the absence of a statement by him to the contrary, that to this extent he took into account “the Tenant’s Fixtures or fitout” in contravention of Clause 5.9(a).

3. [30]

   The Lessee sought to support the primary judge’s decision on the following alternative bases:

4. [31]

   For the following reasons, I consider that both of these arguments are correct and that the Lessor’s contention that Mr Robertson contravened the injunction in Clause 5.9(a) should be rejected and that the appeal be dismissed.

5. [32]

   As to the first argument, there is nothing in the terms of Clause 5.9(a), or elsewhere, to suggest that the reference to “the Tenant’s Fixtures or fitout” includes a reference not only to the condition of the premises at the relevant date (1 June 2014) but also to work that was likely to be carried out in the future pursuant to Clause 28. Clause 5.9 expressly refers to the premises’ market rent at a particular point in time and the language of the phrase “the Tenant’s Fixtures or fitout” plainly refers to the property’s physical condition at that time. There is nothing to indicate the contrary. Moreover, the different language used in Clause 28 concerning work to be performed in the future (“Fitout Work”) supports the view that it is not within the different term “fitout” used in Clause 5.9(a).

6. [33]

   In light of this clear language, it is unnecessary to speculate as to why the parties provided in the lease as they did. Nevertheless, the presence of Clause 5.9(a), as I have construed it, is consistent with the following description of the purpose of provisions of this type given by Muir J in Vesco Nominees Pty Ltd v Stefan Hair Fashions Pty Ltd [2001] QSC 169; Q Conv R 54-555 (cited with approval in Serene Hotels Pty Ltd v Epping Hotels Pty Ltd [2015] VSCA 228 at [9]-[11]):

7. [34]

   In this case, the lease provided for only one review of market rent, to be calculated on the first day of the new lease (1 June 2014). The initial lease provided, in respect of the period between 2004 and 2014, for the Lessee to spend a minimum of $1 million on fitout and Mr Robertson’s Report referred to the requirement in the initial lease having been fulfilled (see [13] above). Accordingly, when the terms of the initial lease (and therefore also the terms of the renewed lease to be applicable if that option was exercised) were formulated, the parties would have expected the Lessee to have spent at least $1 million on fitout by the Market Review Date. As a result, there was the potential for “perceived unfairness”, for the reason given by Muir J, unless the lease included a direction to disregard the value of any fitout when assessing market rent. The direction thus had a sensible operation in relation to the value of the “Tenant’s Fixtures or fitout” as it existed as at the Market Review Date. The existence of that objectively ascertainable and sensible purpose is fatal to any attempt to have the Court depart from the clear words of Clause 5.9.

8. [35]

   This acceptance of the Lessee’s first argument is sufficient to warrant dismissal of the appeal. I nevertheless turn now to consider its alternative argument.

9. [36]

   On appeal, the Lessor accepted that Mr Robertson was required to have regard to the terms and conditions of the lease as expressly provided for by Clause 5.9(g). As Clause 28 contained terms and conditions of the lease, the Lessor had to accept, on appeal, that Mr Robertson was entitled to take Clause 28 into account. The Lessor however submitted that, in the absence of an express statement to the contrary, the Court should infer that Mr Robertson took into account not only the minimum fitout spend obligation but also, contrary to the terms of Clause 5.9(a), the value of the work that the fulfilment of that obligation would produce. The Lessor thus submitted that it should be inferred that Mr Robertson referred to the minimum spend obligation for the purpose of identifying the value of future fitout work to be taken into account in determining the current market rent.

10. [37]

    As it is the Lessor that is asserting that Mr Robertson’s determination did not conform with the lease, the onus is on it to establish that fact by demonstrating that Mr Robertson failed to disregard “the value of the Tenant’s Fixtures or fitout”. In these circumstances, the inference that the Lessor advances should not be drawn if there is an at least equally open inference available as to Mr Robertson’s purpose in referring to the minimum spend obligation. Senior counsel for the Lessee submitted that it could be inferred that Mr Robertson had such a purpose, namely, to take account of the real possibility that a hypothetical prospective tenant might consider that a minimum spend requirement of $1 million could adversely restrict its commercial discretion as to how much to spend on fitting out the premises and, consequently, how much rent it was prepared to pay for the premises in light of that requirement in the lease.

11. [38]

    Both common sense and Mr Robertson’s reference to Clause 28.5.3 being “a critical condition that I have considered in this rent determination, as most leases are not definitive i.e. minimum fitout costs” (see [15] above) support this submission. Mr Robertson’s comment seems to suggest that he saw the relevance of the requirement as that identified by the Lessee’s senior counsel. The comment does not sit comfortably with the Lessor’s contention that Mr Robertson referred to the requirement for the purpose of identifying the value of the future fitout work which he intended to take into account in assessing the market rent of the premises as at 1 June 2014.

12. [39]

    For these reasons, even if, contrary to my view, the Lessee’s first argument is not correct, its second argument is and for that reason the appeal should be dismissed.

13. [40]

    In these circumstances, it is unnecessary to deal in any detail with the orders that would have been made if the appeal had succeeded, particularly because both parties agreed that in that event the process under Clause 5.5 for appointing an expert to determine the current annual market rent would have to be restarted. The parties disagreed as to whether the Court should, or indeed could, in these circumstances give directions as to whether Mr Robertson could be reappointed as the valuer and what material should or could be provided to the Institute President and the valuer.

14. [41]

    There is little doubt that the lease contains an implied term that any valuer appointed under it will be an impartial person who is able to conduct the market rent valuation with an open mind. Whether Mr Robertson meets this criterion is a matter for the relevant President to consider when deciding who to appoint, and possibly a matter for a court to consider thereafter in the event that the President reappoints Mr Robertson and his reappointment is challenged.

15. [42]

    Furthermore, I do not see it as this Court’s function to decide in the present proceedings what material should or should not be submitted to the President and, after appointment, to the valuer. Those are matters to be determined by the terms of the lease. So far as the President is concerned, the lease does not in terms impose any limit on what can be submitted but there may be an implied term that could restrict the extent of the parties’ communications with him or her. On the other hand, the lease gives greater guidance in relation to the valuer. In the valuer’s case, the material that the parties may submit is arguably limited to the written submissions referred to in Clause 5.9(j).

ORDERS

1. [43]

   For the reasons I have given, the appeal should be dismissed with costs. The Amended Notice of Cross-Appeal was in reality, or at least should have been, a Notice of Contention rather than an Amended Notice of Cross-Appeal. Neither this Notice nor the Notice of Contention that was in fact filed was the subject of significant attention in these proceedings and neither provides a basis for depriving the Lessee of any of its costs of the proceedings. Accordingly, I propose that the Court make the following orders:

   1. (1)

      Appeal dismissed.

   2. (2)

      Cross-appeal dismissed.

   3. (3)

      Order that the appellant pay the respondent’s costs of the appeal and cross-appeal.

2. [44]

   MEAGHER JA: I agree with Macfarlan JA.