In this article, partner Mark Lyons reviews a recent case where the Victorian Civil and Administrative Tribunal (Tribunal) clarified when a valuer's market rent determination can be set aside under the Retail Leases Act (RLA). The market review provisions in retail legislation in Queensland and New South Wales are similar to Victoria, so this decision may also be relevant for these jurisdictions.
In the Jagjit Associates Pty Ltd case, the valuer determined the market rent to be substantially lower than the commencing rent. The landlord challenged the rental determination on the basis the valuer failed to comply with the relevant provisions of the RLA.
What does the RLA require?
The RLA requires the valuation to be in writing, contain detailed reasons for the valuer's determination, and to specify the matters the valuer had regard to in making the determination.
The valuer must have regard to the following when making the determination:
- 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 the premises may be put under the lease
- the landlord's outgoings, to the extent the tenant is liable to contribute to those outgoings
- rent concessions and other benefits offered to prospective tenants of unoccupied retail premises.
However, the current market rent is not to take into account the value of goodwill created by the tenant's occupation or the value of the tenant's fixtures and fittings.
What did the Tribunal decide?
The Tribunal said the critical question is whether the valuation was made in accordance with the terms of a lease. If so, and in the absence of fraud, the valuation is binding between the parties, and it is irrelevant the valuer made an error in making the determination or the valuer had grossly overstated or understated the rent. A party who sustains loss from a negligent valuation may only claim damages and cannot otherwise object to a valuation made in accordance with the lease.
The Tribunal said the valuer had erred in making its determination on the following grounds:
- As the lease did not confer on the tenant any further rent free or incentives at the market review date, the valuer did not take incentives into account in making its determination. The Tribunal said the valuer failed to take into account "rent concessions and other benefits offered to prospective tenants of unoccupied retail premises"
- The premises were offered to the tenant with substantial fitout and landlord's installations which were set out in Annexure E to the lease which the valuer annexed to its rental determination. However, the Tribunal said simply annexing the list was inadequate to show how the valuer had taken into account the landlord's installations
- The lease required the tenant to maintain the premises (and the landlord's installations), fair wear and tear excepted. This was inconsistent with the provisions of the RLA which required the landlord to maintain the landlord's installations. While the determination noted the valuer had assumed the parties had complied with their respective obligations under the RLA, the valuer did not articulate how the relevant provision affected his determination. The Tribunal said just because the provisions of the RLA are implied into the lease that is not a reason for assuming the valuer was aware of those provisions.
Ultimately, the Tribunal set aside the determination. The Tribunal said due to the nature of these errors the valuer did not discharge the contract he had made with the parties to apply the terms of the lease, including all the terms implied by the RLA.
Points to note
The case highlights the following:
- It is difficult to set aside a rental determination on the ground of the valuer's mistake or because the valuation is unreasonable
- Rental determinations under the RLA can be set aside if the valuer fails to provide 'detailed reasons' as required under the RLA or fails to take into account the prescribed matters
- A valuer undertaking a determination under the RLA must ensure their written reasons fully detail the matters they are required to take into account under the RLA and the determination must clearly demonstrate the reasoning process.
For more information about how this impacts your real estate transactions please contact a member of our Real Estate team.