Data Base Corporate Pty Ltd v Strike Australia Pty Ltd

The plaintiff, Data Base Corporate Pty Ltd, is the sub-lessor of certain premises at King Street Wharf. The defendant, Strike Australia Pty Ltd, is an assignee of the sub-lessee. The defendant conducts a business at the premises in accordance with the Permitted Use under the sub-lease, which use is defined to mean “ten pin bowling, bar, ancillary facilities (including electronic and pinball machines [sic] games) in accordance with the development approval” and such other use as the plaintiff may in its absolute discretion approve.

The sub-lease was for a term of 10 years commencing on 24 August 2007 and terminating on 23 August 2017. It contains two options to renew, each for a further term of 5 years. In February 2017 the defendant exercised the first of the options to renew. Clause 11.2(a)(ii) of the sub-lease provides in effect that the rent may be reviewed at the commencement of the Further Term under paragraph 4 of the First Schedule to the sub-lease.

Paragraph 4 of the First Schedule sets out a procedure for the ascertainment of a Market Rent. In certain circumstances, the procedure requires the plaintiff, on behalf of both parties, to request the appointment of a valuer “to determine the Market Rent in accordance with paragraph 4.5”. In August 2017, Mr David Anderson, valuer, accepted such an appointment.

On about 5 October 2017 Mr Anderson issued a rental determination in which he determined the Market Rent as at 24 August 2017 to be $720,000 per annum (or $518.69m2 gross) excluding GST.

By a Summons filed on 2 July 2018, the plaintiff seeks declaratory relief to the effect that the rental determination was not carried out in accordance with the provisions of the sub-lease, in particular paragraph 4.5 of the First Schedule.

It is convenient to refer at the outset to the most pertinent provisions of the First Schedule to the sub-lease, namely, paragraphs 4.4 to 4.7. These provisions are in the following terms:

In brief summary, the plaintiff ultimately raised two principal complaints about Mr Anderson’s rental determination. These are:

The appointment was accepted by Mr Anderson on the basis, inter alia, that the rental was to be determined in accordance with the provisions of the sub-lease, and in particular paragraph 4.5 of the First Schedule. Mr Anderson thereby undertook to determine the rent in accordance with the instructions set out in paragraph 4.5.

Both parties provided written submissions to Mr Anderson. The plaintiff provided a report dated 21 August 2017 prepared by Urbis Valuations Pty Ltd. The defendant provided a report dated 24 August 2017 prepared by Intelligent Property Solutions Pty Ltd. The parties also provided written submissions in response. The plaintiff provided a report dated 29 August 2017 prepared by Gordon Property Advisory Services; and the defendant provided a report dated 30 August 2017 prepared by Intelligent Property Solutions Pty Ltd. I note that the instructions set out in paragraph 4.5 include an instruction to have regard to any written submissions made by or on behalf of either of the parties. It is apparent from Mr Anderson’s determination that he did so. It is not necessary to refer at this stage to any aspects of the written submissions.

It is necessary to refer in some detail to the rental determination itself. Mr Anderson’s report includes the following:

Mr Anderson’s assessment is primarily contained in Section 6 of his report. In Section 6.1 the terms of paragraph 4.5 of the First Schedule are set out in full. In Section 6.2 the definition of “Market Rent” contained in the sub-lease is referred to, and it is noted that paragraph 4.5(e) requires the appointed valuer to act as an expert and not as an arbitrator. In Section 6.3, reference is made to the submissions provided by the parties, including the following:

Section 6.4, headed “Rental approach”, is in the following terms:

Section 6.5 contains commentary about the rental evidence. It includes the following:

Section 6.6, headed “Market rental assessment” is in the following terms:

The Court was referred to the well-known decision of the Court of Appeal in Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314. In that case, a lessee challenged the binding nature of a rental valuation on the basis that the valuer had made an error concerning the area of the demised premises. The lessee was successful at first instance. However, on appeal, Mahoney JA and Priestley JA, in separate judgments, were not satisfied that any error had been established by the lessee. On the other hand, McHugh JA came to the conclusion (at 330-1) that the valuer had erred in principle in determining the rental value. His Honour thus turned to consider the question whether the mistake was one which “invalidated” the valuation. After an extensive review of the authorities, McHugh JA stated (at 335-6):

The issue was further considered by the Court of Appeal (in the context of a contract embodied in articles of association) in Holt v Cox (1997) 23 ACSR 590. Mason P (with whom Priestley JA agreed) stated (at 597):

In WMC Resources Ltd v Leighton Contractors Pty Ltd (1999) 20 WAR 489; [1999] WASCA 10 Ipp J (with whom Kennedy and White JJ agreed) referred at [23]-[26] to the discretionary nature of valuations. At [23] his Honour stated:

Ipp J continued at [35]-[37]:

In AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173 Nettle JA (with whom Maxwell P and Bongiorno AJA agreed) stated at [51]-[54]:

In Australian Vintage Ltd v Belvino Investments No 2 Pty Ltd (2015) 90 NSWLR 367; [2015] NSWCA 275 Bathurst CJ (with whom Beazley P and McColl JA agreed) stated at [74]-[78]:

It is stipulated in paragraph 4.7 of the First Schedule to the sub-lease that the determination of the Market Rent under paragraph 4 is final and binding on both parties. As McHugh JA stated, by so referring the decision to an expert, the parties agreed to accept the honest and impartial decision of the expert, and be bound by it. However, it is always critical to ask whether the decision was made in accordance with the terms of the contract.

If it is found that the decision was not made in accordance with the contract, properly construed, it is then open to review the decision on the ground that it is erroneous. The enquiry self-evidently involves questions of construction and interpretation of the contract. Where, as here, the contract is a written commercial contract, such questions are to be approached in accordance with the well-established principles that have been stated in cases such as Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[52]; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 at [16]).

The authorities referred to at [15]-[20] above indicate that it is relevant to consider the extent to which the contract contemplates that erroneous decisions of the expert are nonetheless immune from review; or, put another way, it is relevant to consider the extent to which matters are left to the expert in the sense that the expert is empowered to make even wrong decisions. In that context, it has been said that it is easier to suppose that parties to a contract contemplate that an error in the exercise of a judgment, opinion or discretion is beyond review, than is the case with an error which involves objective facts or a mere mechanical arithmetical exercise.

The first complaint made by the plaintiff about Mr Anderson’s determination focuses attention upon paragraph 4.5(c)(ii) of the First Schedule. It will be recalled that paragraph 4.5(c) identifies a number of things to which the appointed valuer is instructed to have regard. Paragraph 4.5(c)(ii) is in the following terms:

The provision identifies the nature of the market rents to which the valuer must have regard in determining the Market Rent. The provision is quite detailed in its prescription. Several elements are involved. The market rents must exclude certain rents that have been escalated. The GST component of any market rents must be disregarded (see also paragraph 4.5(d)(viii)). In addition, the market rents must be at the Market Review Date, for comparable premises in the vicinity of the Premises, let at their highest and best use.

The selection of market rents (if any) that fall within the scope of paragraph 4.5(c)(ii) plainly requires the valuer to exercise some discretion, judgment or opinion. For example, the designation of premises as “comparable premises”, and the assessment of its market rent, are matters of that character. They call for judgments of a type that valuers make when applying their specialised knowledge.

Other aspects of the process of selection seem to me to be of a different nature. The ascertainment of a Market Review Date, and whether particular premises are “in the vicinity of the Premises”, are examples. The Market Review Date is a date that is readily ascertainable from the terms of the sub-lease itself. The expression “in the vicinity of the Premises” employs ordinary words in relation to the defined term “Premises”. It was not suggested that the words have any technical or specialised meaning, or a particular meaning in the field of property valuation. The expression has a single meaning, determined objectively in accordance with the principles of contractual construction. A valuer appointed to determine the Market Rent in accordance with paragraph 4.5 of the First Schedule is required to apply that meaning as part of the process of selection of market rents that fall within paragraph 4.5(c)(ii). However, that application does not call for judgments of a type that valuers make when applying their specialised knowledge. That is so even if different valuers might reach different conclusions as to the geographic ambit of the expression.

The selection of market rents for the purposes of paragraph 4.5(c)(ii) is thus an exercise that is only partly comprised of discretion, judgment or opinion (see AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd (supra) at [54]).

The question whether particular premises are “in the vicinity of the Premises” within the meaning of paragraph 4.5(c)(ii) is a mixed question of fact and law. As stated by Bathurst CJ in Australian Vintage Ltd v Belvino Investments No 2 Pty Ltd (supra) at [76]-[78], there is no reason why parties to a contract cannot leave such a question to be determined by a contractually appointed expert, such that even an erroneous answer is immune from review by the Court. Of course, whether that is so in any particular case ultimately depends upon the presumed intention of the parties.

In my opinion, the parties to the sub-lease should not be presumed to have intended that questions as to whether particular premises are “in the vicinity of the Premises” are to be left to the appointed valuer, in the sense that the valuer is empowered to determine those questions, even erroneously (see Mercury Communications Ltd v Director-General of Telecommunications [1994] CLC 1125 at 1140, cited in Australian Vintage Ltd v Belvino Investments No 2 Pty Ltd (supra) at [78]).

Again, the determination of such questions does not require the making of judgments of a type that valuers make when applying their specialised knowledge. Moreover, the expression “in the vicinity of the Premises” evidently introduces an important limitation upon the range of comparable premises for the purposes of paragraph 4.5(c)(ii). Market rents for comparable premises that are not in the vicinity of the Premises simply cannot be included within the market rents selected for the purposes of paragraph 4.5(c)(ii). To my mind, reasonable business persons in the positions of the parties to the sub-lease are unlikely to have intended that if an appointed valuer decided to include, for the purposes of paragraph 4.5(c)(ii), market rents for premises that are not in the vicinity of the Premises, they would nonetheless be bound by that decision of the valuer. In my opinion, an error of that character is not immune from review by the Court.

Mr Anderson specifically addressed the meaning of paragraph 4.5(c)(ii) in Section 6.4 of his report. He did so in the context of his consideration of “the type of premises deemed comparable in determining the market rent”. It is evident that Mr Anderson treated the expression “in the vicinity of the Premises” as secondary to the expression “comparable premises”. It is also clear that Mr Anderson regarded “vicinity”, not qualified by the adjective “immediate”, as quite broad; and further, that in circumstances where the availability of premises in the King Street Wharf, Barangaroo, Cockle Bay and Darling Harbour precincts that are comparable in terms of physical characteristics “would remain limited”, one means of “arriving at what might be deemed the appropriate vicinity” would be “the potential zone of influence for the current use”, which “would extend some distance from the immediate vicinity”.

Mr Anderson had stated earlier in Section 6.4 of his report that in his opinion the most appropriate method of assessment was the direct comparison approach on a rate per square metre of lettable area basis. In Section 6.5 of his report, Mr Anderson stated that he had regard to the rental examples put forward in the parties’ submissions and a range of leasing transactions including “the following summarised examples”. It is apparent from those examples and the submissions received that Mr Anderson had regard not only to rents for premises located in and near the King Street Wharf area but also to rents for premises located outside the King Street Wharf or Darling Harbour areas, and indeed outside the Sydney Central Business District. Mr Anderson specifically referred in his report to certain premises in Bondi Beach, Chippendale, Macquarie Park and Hornsby.

Mr Anderson stated in Section 6.6 of his report that in forming his opinion of value he had regard, amongst other things, to “the examples detailed above”. The Bondi Beach and Macquarie Park premises were cited as two of the four examples which provided “the best guide to market rent” for the Premises.

It is clear in my opinion (and I did not understand counsel for the defendant to submit to the contrary), that premises in Macquarie Park or Bondi Beach are not “in the vicinity of the Premises” within the meaning of paragraph 4.5(c)(ii). Even without the adjective “immediate”, the ordinary meaning of “in the vicinity of the Premises” suggests a surrounding area that is near to or close to the Premises. The context in which the expression appears does not indicate that a different meaning was intended. Accordingly, it appears that in forming his opinion of Market Rent, Mr Anderson has had regard to rents for premises that are not in the vicinity of the Premises as well as to rents for premises that are in the vicinity of the Premises.

It is my opinion that, in so doing, Mr Anderson has not carried out his determination of the Market Rent in accordance with paragraph 4.5 of the First Schedule to the sub-lease.

As I have sought to explain, questions whether particular premises are “in the vicinity of the Premises” within the meaning of paragraph 4.5(c)(ii) are not ones the parties have left to the appointed valuer; the valuer is not empowered to determine those questions, even erroneously. Errors in that regard are not beyond review by the Court. It seems that Mr Anderson, whether due to his hierarchical approach to the words “comparable premises in the vicinity of the Premises”, or for reasons including his view that the number of comparable premises close by was “limited”, was prepared to include market rents for premises that are not in the vicinity of the Premises.

Further, as noted earlier, paragraph 4.5(c)(ii) contains a detailed prescription of the nature of the rents to which the valuer must have regard in determining the Market Rent. The provision, which is an instruction to the appointed valuer, should be read as one which identifies the permissible boundaries of the types of rents to which the valuer is to have regard. If it were interpreted otherwise, the evident intention to place limits upon the types of rents to which the valuer must have regard would be undermined. That is to say, paragraph 4.5(c)(ii) requires regard to be had to a particular class of rents, namely, certain market rents at the Market Review Date for comparable premises in the vicinity of the Premises. If the valuer makes a mistake about the meaning of the expression “in the vicinity of the Premises”, and thereby has regard to a different, wider class of rents, it is open to the Court to intervene. In those circumstances, the valuer has not had regard to rents as stipulated by paragraph 4.5(c)(ii), but has instead had regard to rents of a different nature. It is not sufficient that the rents taken into account include some rents that fall within paragraph 4.5(c)(ii). This is because the class of rents considered is not that which the contract requires.

Neither is it an answer that the Macquarie Park premises was referred to in a submission made to Mr Anderson by the defendant. The Bondi Beach, Chippendale and Hornsby premises were not the subject of any submission made to Mr Anderson. In any case, I do not think that the fact that a submission refers to premises that are not in the vicinity of the Premises within the meaning of paragraph 4.5(c)(ii) allows the valuer to have regard to rents for those premises. Whilst paragraph 4.5(c)(viii) requires the valuer to have regard to submissions made by the parties, the content of a submission cannot itself alter what is required by other parts of paragraph 4.5, including paragraph 4.5(c)(ii).

The approach taken by Mr Anderson was not in accordance with the requirements of paragraph 4.5 of the First Schedule. He did not have regard to market rents in the manner prescribed by paragraph 4.5(c)(ii). This occurred as a result of his erroneous inclusion of rents for premises that are not “in the vicinity of the Premises” within the meaning of paragraph 4.5(c)(ii).

The second complaint made by the plaintiffs about Mr Anderson’s determination is that, contrary to the requirements of paragraph 4.5(d)(ii) of the First Schedule, he failed to disregard the Tenant’s Property. The plaintiff submitted that this occurred because Mr Anderson took into account a so-called “zoned” approach to rental, which is itself based upon the manner in which the tenant has actually configured the premises, and otherwise had regard to the physical characteristics of the premises.

Tenant’s Property is defined in the sub-lease to mean:

The provenance of the “zoned” approach to rental is the submission dated 21 August 2017 made by Intelligent Property Solutions Pty Ltd on behalf of the defendant. The submission itself took the form of a rental valuation of the current market rent of the premises. The premises, including the improvements, are described in detail at pages 12 to 20. Figure 6 on page 20 depicts the “Subject Configuration and Layout”, and shows four areas, namely, Licensed Area, Main Retail Front Area, Bar Area, and Entertainment, Bowling & BOH [Back-of-House]. On page 22 it is stated:

In the Comparable Evidence section of the report it was stated:

The Valuation Rationale section of the report included the following:

Mr Anderson included a description of the premises in Section 4.2 of his report (quoted at [10] above). He also included Figure 6 from the defendant’s submission. In Section 6.3 of his report (largely set out at [11] above), Mr Anderson considered the submissions that were made by the parties. After referring to the “zoned” approach taken by Intelligent Property Solutions, Mr Anderson stated:

In the final paragraph of Section 6.3 Mr Anderson stated:

Mr Anderson then proceeded to set out his Rental approach in Section 6.4 (quoted at [12] above) and deal with Rental evidence in Section 6.5 (referred to at [13] above). He stated there that in the course of his investigations he had regard to the rental examples put forward in the parties’ submissions. In the penultimate paragraph of that section Mr Anderson specifically referred to an approach that “allows rent to be ascribed on the basis that the property is vacant…”.

Mr Anderson’s Market rental assessment is contained in Section 6.6 of his report (quoted at [14] above). Mr Anderson stated there that in forming his opinion of value he had regard to rental evidence, including the examples detailed in Section 6.5. There is no reference to the “zoned” approach in Section 6.6.

Reading Mr Anderson’s determination as a whole, I am unable to accept the plaintiff’s submission that he effectively adopted the “zoned” approach such that he failed to disregard the Tenant’s Property, contrary to paragraph 4.5(d)(ii). I do not think that Mr Anderson did any more than express a view that the approach taken by Intelligent Property Solutions was in the circumstances a suitable one for them to take. This view was expressed in the context of Mr Anderson’s consideration of the submissions made to him. Mr Anderson was required by paragraph 4.5(c)(viii) to have regard to the submissions. In the final paragraph of Section 6.3, Mr Anderson stated that he had regard to the submissions but placed more weight on the rental evidence “in relation to the permitted use and physical characteristics of the premises rather than the location”. I do not think that the reference to physical characteristics should be read, in that context, as a reference to the Tenant’s Property. Moreover, Sections 6.4 to 6.6 of Mr Anderson’s report, which essentially explain his approach to the assessment of Market Rent, cannot be fairly read as an adoption of the “zoned” approach for the purpose of that assessment. For these reasons, the plaintiff has not shown that Mr Anderson acted in a manner contrary to paragraph 4.5(d)(ii) of the First Schedule.

Finally, I should record that the plaintiff adduced expert evidence in support of its case from a practising valuer, Mr Peter Messenger. Objection was taken to the tender of Mr Messenger’s report dated 30 August 2018. I rejected the portion of his report that concerned the steps that a reasonably competent and prudent valuer would take to determine Market Rent in accordance with paragraph 4.5, but admitted the balance of the report which was directed to aspects of what Mr Anderson actually did in carrying out his task. Mr Messenger was cross-examined at some length.

I have considered the evidence given by Mr Messenger, but I ultimately found it to be of no real assistance in dealing with the two complaints made by the plaintiff about Mr Anderson’s determination. That is not a criticism of Mr Messenger, who I accept expressed his opinions honestly, and without acting as an advocate in the plaintiff’s cause (as was submitted by the defendant). Much of Mr Messenger’s evidence concerned matters that did not touch upon the two complaints made by the plaintiff. There was evidence, for example, concerning matters that in my view had been left to the appointed valuer, such as whether certain premises were “comparable”. To the extent that Mr Messenger’s evidence was directed to the two complaints, his views about what was meant by “in the vicinity of the Premises” are not relevant, and his views about whether Mr Anderson failed to disregard the Tenant’s Property were really no more than his own interpretation of Mr Anderson’s report in that regard.

The plaintiff has established that Mr Anderson’s determination of the Market Rent was not carried out in accordance with paragraph 4.5 of the First Schedule to the sub-lease. The erroneous inclusion of rents for premises that are not “in the vicinity of the Premises” within the meaning of paragraph 4.5(c)(ii) meant that Mr Anderson did not have regard to market rents in the manner prescribed by paragraph 4.5(c)(ii). Accordingly, it is open to the Court to intervene, and declare that the determination of the Market Rent is not binding upon the parties to the sub-lease. A declaration to that effect will be made. In these circumstances, paragraph 4.6 of the First Schedule operates so that the plaintiff is required to make another request for a valuer to be appointed to determine the Market Rent in accordance with paragraph 4.5.

The Court will further order that the defendant pay the plaintiff’s costs of the proceedings.