Devery's Pharmacy Services Pty Ltd t/a Westcourt Plaza Pharmacy v Direct Factory Outlets Cairns Pty Ltd [2015] QCAT 275

CITATION: Devery’s Pharmacy Services Pty Ltd t/a Westcourt Plaza Pharmacy v Direct Factory Outlets Cairns Pty Ltd [2015] QCAT 275 PARTIES: Devery’s Pharmacy Services Pty Ltd t/a Westcourt Plaza Pharmacy (Applicant) v Direct Factory Outlets Cairns Pty Ltd (Respondent) APPLICATION NUMBER: RSL011-14 MATTER TYPE: Retail shop leases matters HEARING DATE: 13 February 2015 HEARD AT: Brisbane DECISION OF: Member Paratz Member Judge Member McBryde DELIVERED ON: 15 July 2015 DELIVERED AT: Brisbane ORDERS MADE: 1. The Application by Devery’s Pharmacy Services Pty Ltd t/a Westcourt Plaza is dismissed. 2. It is declared that the rent applicable to the first year of the new term of the lease between the parties of premises at Shop T218 in the Direct Factory Outlets Cairns shopping centre situated at 274 Mulgrave Road, Cairns, is the amount payable in the last year of the previous lease. CATCHWORDS: RETAIL SHOP LEASES – where the tenant elected to lease premises for a further term – where the parties were unable to agree as to the current market value and a Specialist Retail Valuer was appointed – where the determined valuation of current market rental was lower than the rent at the end of the previous term – where the lease contained a ratchet clause preventing a decrease in rent for a further term – whether the ratchet clause was void – where the parties -- 1 of 9 -- 2 sought declarations as to the rent payable for the first year of the new term Retail Shop Leases Act 1994 (Qld), s 20, s 27, s 29, s 33, s 36A, s 134 Connor Hunter (A Firm) v Keencrest P/L & Ors [2009] QCA 156 REPRESENTATIVES: APPLICANT: Devery’s Pharmacy Services Pty Ltd t/a Westcourt Plaza Pharmacy represented by Mr S Bullow of Counsel (Direct Brief) RESPONDENT: Direct Factory Outlets Cairns Pty Ltd represented by Mr R Anderson of Counsel instructed by Barry and Nilsson, Solicitors REASONS FOR DECISION [1] Devery’s Pharmacy Services Pty Ltd (the Tenant) entered into a lease of premises with Direct Factory Outlets Cairns Pty Ltd (the Lessor) to operate a retail pharmacy at its shopping centre located at 274 Mulgrave Road, Cairns on 9 March 2010. [2] The lease was for a period of five years from 8 September 2008 to 7 September 2013, with provision for two further terms of five years each. [3] The tenant lodged a Notice of Dispute under the Retail Shop Leases Act 1994 (Qld) in the Tribunal on 17 February 2014. The tenant sought the following Orders: (1) A declaration that clause 2.6 of Appendix 2 of the Lease is void. (2) A declaration that the rent for the first year of the renewal term is the rent as determined by the SRV (specialist retail valuer). (3) An order that the Respondent repay/pay to the Applicant all rent and other monies paid by the Applicant to the Respondent in excess of those which the Applicant was or is required to pay under the terms of the renewal lease (as at the date of the order) and be paid/repaid within seven (7) days of the Order with interest. (4) A declaration that the Respondent can not charge the Respondent legal fees for work done by solicitors employed or contracted on a full time basis by the Respondent. (5) An Order that the $495.00 paid by the Applicant to the Respondent on or about 11 February 2014 be returned to the Applicant within 7 days. (6) Such other declaration(s) and or order(s) as the Tribunal thinks fair. -- 2 of 9 -- 3 [4] An oral hearing was conducted on 13 February 2015. Directions were given for the filing of written submissions, with a decision to be delivered not before 28 March 2015. This is the decision in the matter. [5] This matter concerns the calculation of rent due upon the renewal of the lease for a further term. The tenant renewed the lease. The lease contained provisions as to the rent for the first year of the new term. [6] The tenant and the lessor were unable to agree as to the new rent, and the calculation was referred to a Specialist Retail Valuer nominated by the Chief Executive of the Tribunal. [7] The amount assessed by the Specialist Retail Valuer was assessed on the basis of the current market rent, and was lower than the previous rental. The tenant has argued that a clause in the lease, which prevents the rent from decreasing, is of no effect. The principal issue in this matter is whether that clause is void or not. [8] The other claims as to a legal fee paid by the tenant, and as to repayment of the monies paid by the tenant under the renewed term which were greater than the determined valuation, follow on from whether the clause is void or not. The rent assessment [9] The valuation of the Current Market Rent was made in a valuation report prepared by Mr Don Gilbert, dated 13 November 2013. Mr Gilbert discussed the history of the shopping centre, and summarised his task as:1 In sum: what is the current market rent for a pharmacy shop in a 431 square metre equivalent store without outside access, located in a DFO-format centre which appears not to have been fully accepted by the Cairns market, post GFC, facing stiff competition in its immediate catchment (including discount pharmacies), all when quite enormous changes are taking place both within the centre and the pharmacy industry, and the current Tenant business has been on rent relief but has just recently completed a refit? This is a complex task. [10] The current annual gross rent at the time of the valuation2 was $375,636.00 plus GST. The Lessor proposed a new rent of $383,125.00. The tenant proposed a new rent of $225,000.00. Mr Gilbert determined that3 the current market rent for the lease year commenced 8 September 2013 calculated on a gross rental basis was $171,000.00 excluding GST for the commencement of the five year option. 1 Australian Lease & Property Consultants Pty Ltd Report dated 13 November 2013, p 5. 2 Ibid, p 23. 3 Ibid, p 46. -- 3 of 9 -- 4 The Lease provisions and legislation [11] Appendix 2 of the Lease provides as to “Adjustment and review of rent”. Clause 2.6 of Appendix 2 provides: 2.6 Despite anything else in this appendix, unless the Act applies and requires otherwise, the new base rent must not be less than the annual base rent payable immediately before the rent review date. [12] Section 33 of the Retail Shop Leases Act 1994 (Qld) (the Act) provides: 33 Effect of Determination The current market rent of the leased shop determined by the specialist retail valuer is the current market rent of the shop and the rent payable under the lease for the rental period under the review. [13] The question then arises as to whether clause 2.6 of Appendix 2 is valid, and can stand, in the face of s 33, where the specialist retail valuer determines a current market rent that is in fact lower than the annual base rent payable immediately before the rent review date. [14] If a provision of the Act is inconsistent with a provision of a retail shop lease, s 20 of the Act provides that the provision of the lease is void to the extent of the inconsistency. [15] The provisions of the Act in relation to clauses preventing a decrease in rent, which are known as “ratchet clauses” was considered in Connor Hunter (A Firm) v Keencrest P/L & Ors4 where it was held that the provisions of the Act did not render void clauses in a lease which permit increases but not decreases in rent.5 [16] The Act was subsequently amended6 by the introduction of s 36A which expressly provided that a ratchet rent provision which prevented the rent decreasing under a rent review was void. However, s 134 provided as a transitional provision that s 36A only applies to a retail shop lease entered into after the commencement of that section. As this lease was entered into before s 36A commenced, that section does not apply to this matter. [17] This matter is therefore to be considered in terms of the law that applies similarly to that in Connor Hunter. [18] There is another provision in the Lease, in clause 1.3 of Appendix 2, which refers to “Adjustment of rent”: 1.3 No reduction Unless the Act applies and requires otherwise, the adjustment is not made if it would result in a decrease in the base rent payable. 4 [2009] QCA 156 – in these Reasons referred to as Connor Hunter. 5 Holmes JA at [34]. 6 Inserted 2011 No.7, s 24. -- 4 of 9 -- 5 [19] A further question then arises as to whether Clause 1.3 of Appendix 2 is inconsistent with Clause 2.6 of Appendix 2, and that whether this then offends s 27 of the Act, and renders Clause 2,6 void. The tenant’s submissions [20] The tenant argues that: (a) Clause 2.6 of Appendix 2 to the Lease is not worded the same and does not operate in the same way as the ‘ratchet clause” in Connor Hunter (b) Clause 2.6 directs the Specialist Retail Valuer; (i) To determine the base rent; and (ii) That new base rent must not be less than the annual base rent payable immediately before the rent review date; (c) If clause 2.6 is not void the specialist Retail Valuer should have determined the new base rent at not less than the annual base rent payable immediately before the rent review date; however (d) Clause 2.6 is void, not because it is or was intended to be a ‘ratchet clause’ but because it directs the Specialist retail valuer to determine rent other than the current market rent. [21] The tenant submits that the lessor could have included in the Lease a provision making it clear that, notwithstanding what the current market rent as determined might be, the rent for the first year of the renewal term would not be less than the rent payable in the immediately preceding year - but that the lessor did not do so.7 [22] It argues that Clause 2.6 is inconsistent with s 33 of the Act as to the references as to “base rent” rather than “current market rent”, and that the effect of s 20 of the Act is to make that provision of the lease void to the extent of the inconsistency. [23] It argues that in Connor Hunter a different expression was considered.8 In clause 16.2 of that lease, the references as to rental for a further term were that “the rental for the first year of the renewal period is not less than that payable during the immediately preceding Rental Year”. [24] It then submits that9 Clause 2.1 in this matter and clause 16.2 in Connor Hunter are not ‘materially identical”. [25] It submits that10 “if the specialist retail valuer is directed to determine the new base rent and not the current market rent, clause 2.6 is inconsistent with a provision of the Act and clause 2.6 is void by operation of section 20 of the Act”. 7 Applicant’s submissions filed 13 March 2015, at [19]. 8 Ibid, at [49]. 9 Ibid, at [53]. 10 Ibid, at [104]. -- 5 of 9 -- 6 [26] The tenant claims repayment of the monies it has paid under the renewal of the lease from 8 September 2013 which are in excess of the determination of Mr Gilbert. The Lessor’s submissions [27] The Lessor’s Counsel argued that the parties were entering into a new lease:11 What occurred in this case was that the first term of the lease had or was about to expire and at issue in this proceeding is the determination of the base rent for the second term. As the authorities say, two of which I’ve handed up, but I don’t need to refer to, the entry into the second term in fact is the entry into a new lease. [28] The Lessor submits that Clause 2.6 is valid. It says that: a) There is no operative inconsistency between Clause 1.3 of Clause of Appendix 2; and Clause 2.6; because the sections are not intended by the lease to interact. It says that Clause 1.3 relates to the adjustment of rent whereas Clause 2.6 relates to rent review. b) Section 33 of the Act does not apply to the setting of rent in a new lease [29] The Lessor submitted12 that the terms of the lease in Connor Hunter were materially identical to the terms of Clause 2.6; that there is a provision for the setting of the base rent in the new lease, which is to be market rent provided that market rent is not less than the base rent as it applied at the end of the previous term. [30] The Lessor submitted that the same reasoning applied in this matter as in Connor Hunter:13 The reasoning is brief, but if you turn to page 18, commencing at paragraph 64 and concluding at paragraph 66 is the Court of Appeal’s reasoning that what, in effect was occurring in relation to that lease – and my submission, obviously enough is that it applies here – is not the introduction of a second method of calculation,. There is only one method of calculating any change but what the proviso provides in its place is that it sets a floor to value. In other words, it doesn’t contravene the section because it doesn’t introduce a second method of calculation. If Connor Hunter is on all fours with the facts in this case, it ought to be applied and it would mean that clause 2.6 is not void. And that’s the primary argument raised against the respondent by the applicant. The applicant says that clause 2.6 is void. Discussion [31] There is no dispute between the parties as to the determination made by Mr Gilbert. 11 Transcript of proceedings (2), line 30. 12 Ibid, line 11. 13 Ibid, line 40. -- 6 of 9 -- 7 [32] There is also no dispute that s 36A of the Act, which renders a ratchet clause void, does not apply to this lease. [33] The essential question is as to whether Clause 2.6 of the lease is void or not. [34] The lease must be read on its face. The parties entered into a lease for an initial term of five years. They agreed that the landlord must renew the lease for a further term of five years if the tenant gave the lessor a written request for renewal.14 [35] If a renewed term was to be entered into, the rent was to be at a “base rent” determined in accordance with Clause 2 of Appendix 2.15 That Clause is entitled “Review of Base Rent”. [36] The contentious clause, Clause 2.6 refers to the “new base rent” in comparison to the “annual base rent payable immediately before the rent review date”. [37] The expression “base rent” is defined in Clause 1.1 of the lease: “base rent” means the annual sum specified in Item 6 as varied from time to time [38] Item 6 appears in the Schedule to the lease: Base rent (clause 3.1) $321,095.00 per annum (plus GST) [39] Clause 3.1 provides for payment of the base rent by electronic funds transfer and the day for payment; as well as for adjustment on each rent adjustment date and each rent review date. [40] The initial base rent was $321,095.00 per annum plus GST. By the end of the first five year period, that amount had increased, due to the operation of the relevant provisions of the lease, to $375,636.00 plus GST. [41] The effect of the definition of “base rent” in Clause 1.1 is that the base rent as at the end of the first term of the lease was the increased amount which had varied in accordance with the lease. [42] It is therefore clear that the annual base rent immediately before the second term of five years was $375,636.00 plus GST. [43] The expression “rent review date” is defined in the schedule to the lease: “rent review date” means each date specified in Item 8 [44] Item 8 of the Schedule provides: “Rent review dates” (clause 3.1) On the commencement date of each further term 14 Lease Appendix 1, cl 1. 15 Ibid, cl 2(b). -- 7 of 9 -- 8 [45] Item 8 directly refers to each “further term”. The plain reading then is that the expression “rent review date” in Clause 2.6 is the date of “each further term”. There therefore is no inconsistency in the wording of the lease which would prevent the plain meaning of Clause 2.6 to apply. [46] The lease provides in Clause 2 as to “Review of base rent”. If the parties cannot agree, then a valuer is appointed under Clause 2.1 which is headed “Market review procedure”. The expression “valuer” expressly includes a “specialist retail valuer” in Clause 2.1(c). [47] Clause 2.1(d) clearly states that that the valuer determines the new base rent. The task of the valuer is made explicit in Clause 2.5 that: 2.5 The valuer must try to establish the current market rent for the premises [48] When these provisions of the lease are read together, the consequence is that clause 2.6 effectively provides that the new base rent for each further term is calculated as the current market rent for the premises. [49] The effect is that Mr Gilbert was given the correct task under the lease. Mr Gilbert made his determination in accordance with s 29 of the Act which refers to matters to be considered by specialist retail valuers. [50] The resulting legal situation is similar to that in Connor Hunter that the subclauses do not provide for two bases for reviewing the rent.16 The subclauses therefore do not offend s 27(4) of the Act which provides: 27(4) The rent may be reviewed using different bases during the term of the lease, but each review must be made using only 1 basis. [51] We do not find any operative inconsistency between Clause 1.3 of Appendix 2 and Clause 2.6 of Appendix 2. [52] We also do not find that Clause 2.6 of Appendix 2 is inconsistent with s 33 of the Act. [53] As there is nothing in the Act that applies and requires otherwise, the provisions of Clause 2.6 are effective in preventing the base rent on the renewed term from being less than the rate immediately before the renewal date. [54] It follows from this finding that no repayment of rent is due to the tenant. Legal costs [55] The lessor gave the tenant a “Notice to Remedy Breach of Covenant”. The notice provided: (b) In accordance with clause 6.5(c) of the lease, we also require you to pay $450.00 (plus GST) for legal fees incurred by us in relation to your breach of the Lease. 16 Chesterman JA at [72]. -- 8 of 9 -- 9 [56] The tenant paid the claimed legal costs. It has sought refund of the amount, in the Application, on the basis that the claimed legal services were provided by Ms Tebbutt who was an employee of the lessor. [57] In its submissions however, the tenant submits that the notice of dispute should not have been given, and for this reason the legal fees should also be repaid.17 [58] As we have found that the rent as claimed by the lessor was payable, the giving of the notice was able to be given. The claim for refund of the legal fees paid is therefore not upheld. Declaration [59] The Lessor has sought that a declaration be made as to the rent payable in the event that the application is dismissed, to ensure that there is no doubt about the rent payable. In the circumstances, and to remove any uncertainty, we will make a declaration as sought. Orders [60] We order that: 1. The Application by Devery’s Pharmacy Services Pty Ltd t/a Westcourt Plaza is dismissed. 2. It is declared that the rent applicable to the first year of the new term of the lease between the parties of premises at Shop T218 in the Direct Factory Outlets Cairns shopping centre situated at 274 Mulgrave Road, Cairns, is the amount payable in the last year of the previous lease. 17 Applicant’s submissions filed 13 March 2015, at [114]. -- 9 of 9 --