Challenging Rental Determinations
By Evelyn Marcou, Senior Associate, MST Lawyers
Most leases set out the process for a market review and usually provide that in the event the parties cannot agree to a market rent, the parties will agree to appoint an independent valuer and that the valuer’s determination is binding.
But what happens when a landlord or tenant wants to challenge a determination of the current market rent under a retail premises lease?
The grounds for setting aside a rental determination are quite narrow.
However, three recent cases have seen rental determinations under the Retail Leases Act 2003 (the “Act”) set aside because the specialist retail valuer failed to provide ‘detailed reasons’ as required under s 37(6) of the Act.
A review of three recent valuation disputes helps to explain what is required for a robust valuation.
In this case, the valuer’s reasons for the valuation were held to be inadequate because the specialist retail valuer used the ‘profits method’ as an alternative means of determining the rent. When using that method, he looked at the sitting tenant’s turnover figures and formed the view that another hypothetical tenant seeking to lease the premises could generate over $500,000 more revenue than the sitting tenant was currently generating.
The determination was set aside for a number of reasons. One being that the valuer did not provide detailed reasons to explain how he calculated the higher turnover figures that he projected for the new term.
The decision was upheld on appeal before Croft J in Higgins Nine Group Pty Ltd v Ladro Greville Street Pty Ltd  VSC 244.
Both of these cases discuss in depth the principles surrounding detailed reasons.
The landlord challenged a rental determination on the basis that the specialist retail valuer took into account rent paid for properties that were put to a different use to the use that the tenant was allowed to put the property under the lease. The Tribunal rejected the grounds on which the landlord sought to challenge the determination.
However, the Tribunal went on to criticise the specialist retail valuer’s reasons and set aside the determination on the basis that the determining valuer’s reasons were inadequate. In particular, the Tribunal held that s36 of the Act requires the valuer to have regard to the rent paid for properties that are put to the same, or substantially the same, use. While the valuer, in this case, had regard for some leases that were for the same or similar use, he also had regard to some that were not. It was not clear from the reasoning in his determination what consideration (if any) was given to the properties put to the same or similar use.
In this case, Member Edquist at VCAT made orders setting aside a rental determination on the grounds that (amongst other things):
- the determining valuer did not explain in his reasons how he dealt with the unusual amount of fitout that the landlord provided to the tenant under the terms of the lease; and
- the determining valuer incorrectly assumed that, except for fair wear and tear, the tenant was responsible for repair and maintenance at the leased premises and did not give reasons for explaining his consideration of the landlord’s obligations to repair and maintain the premises under s 52(2) of the RLA 2003.
In summary, these cases highlight that:
- valuers must provide carefully written reasons fully detailing the reasoning processes for the market rent determination; and
- landlords and tenants should consider whether the specialist retail valuer’s written reasons are adequate.