Annandale Pharmacies (NQ) Pty Ltd t/as Terry White Pharmacy v The Angliss Estate (Annandale) Pty Ltd [2014] QCAT 171

CITATION: Annandale Pharmacies (NQ) Pty Ltd t/as Terry White Pharmacy v The Angliss Estate (Annandale) Pty Ltd [2014] QCAT 171 PARTIES: Annandale Pharmacies (NQ) Pty Ltd t/as Terry White Pharmacy (Applicant) v The Angliss Estate (Annandale) Pty Ltd (Respondent) APPLICATION NUMBER: RSL009-13 MATTER TYPE: Retail shop leases matters HEARING DATE: On the papers HEARD AT: Brisbane DECISION OF: Member Howard, Presiding Member Member Judge Member McBryde DELIVERED ON: 2 May 2014 DELIVERED AT: Brisbane ORDERS MADE: 1. The miscellaneous application filed on 3 February 2014 is dismissed; 2. It is declared that the determination of current market rent as at 4 December 2010 by G W Eales does not comply with Part 6 Division 4 of the Retail Shop Leases Act 1994 and is not a valid determination for the purposes of that Act or clause 3.4 of the lease; 3. The determination of current market rent is set aside; 4. That a further determination in compliance with Part 6 Division 4 of the Retail Shop Leases Act 1991 be made; 5. That the specialist retail valuer nominated to determine current market rent be provided with a copy of these reasons for decision. -- 1 of 6 -- 2 CATCHWORDS: RETAIL SHOP LEASES - DETERMINATION OF CURRENT MARKET RENT - whether determination by specialist retail valuer complies with requirements of Retail Shop Leases Act 1991 - whether valuer assessed current market rent on basis that premises unoccupied- whether valuer took into account goodwill and fixtures and fittings - whether valuer failed to specify the matters taken into account Acts Interpretation Act 1954 (Qld) s 27B Retail Shop Leases Act 1991 (Qld) s 29, s 31, Schedule Anthony v Coffee Club [2000] QSC 198 Family and Kids Care Foundation Inc v Bilby Lay Enterprises Pty Ltd [2005] QRSLT 7 APPEARANCES and REPRESENTATION (if any): This matter was heard and determined on the papers pursuant to s 32 of the Queensland Civil and Administrative Tribunal Act 2009 (Qld) (QCAT Act). REASONS FOR DECISION [1] A specialist retail valuer was appointed under the Retail Shop Lease Act 1991 (Qld) (‘RSL Act’) to determine current market rent of premises as at a specified date and as contemplated by clause 3.4 of the lease, in the absence of agreement between the parties. The valuer appointed made a determination as at the relevant date, namely 4 December 2010. [2] Annandale Pharmacies (NQ) Pty Ltd trading as Terry White Pharmacy, the lessee, has applied to the Tribunal for orders declaring that the determination does not comply with the RSL Act or the lease; setting the determination aside; and requiring a further determination. Annandale Pharmacies submissions are to the effect that the valuer failed to do what he was required to do by the RSL Act in determining current market rent and explaining what he took into account. [3] The premises in question are used as a pharmacy. The original lease was entered into in 2000 for a ten year term with an option for a further term of 10 years. During the ten year term it was assigned to Annandale Pharmacies as lessee. It is located in a single supermarket anchor shopping centre. The valuer considered various rental arrangements for other pharmacies, as well as the terms of the lease for the subject premises and the submissions made by each of the parties. [4] In the valuer’s opinion, none of the other premises considered were directly comparable, although he reached conclusions about which of them provide -- 2 of 6 -- 3 upper and lower benchmarks. Ultimately, the valuer concludes, having regard to the comparisons, that rental of $875 per square metre per year is appropriate, but discounted it, because of the ten year term and annual increases 1.5% above CPI, to $825 per square metre. [5] The lessor, The Angliss Estate (Annandale) Pty Ltd, submits that the determination is compliant and seeks orders dismissing the application. In effect, the lessor submits that the application of Annandale Pharmacies seeks to discredit the exercise of the valuer’s professional judgment as distinct from whether he complied with the RSL Act. [6] For the reasons explained below, we have concluded that the specialist retail valuer did not comply with the requirements of the RSL Act. [7] There was a preliminary matter for our consideration. The matter was listed for hearing on the papers in light of the nature of the issues. Both parties were directed to file written submissions. Shortly before the hearing was due to proceed on the papers, Annandale Pharmacies filed a miscellaneous application seeking an oral hearing for the purposes of making oral submissions limited to one hour, having regard to the extensive written submissions already filed and settled by its Queens Counsel. The Angliss Estate opposed the application for an oral hearing. [8] Having regard to the extensive written submissions available to us, we dismiss the miscellaneous application. Matters required by the RSL Act [9] By virtue of the transitional provisions of the RSL Act,1 the RSL Act, as in force before the Retail Shop Lease Amendment Act 2006, continues to apply to leases entered into before the commencement (and any extension or renewal of them) as if the 2006 Act had not been enacted. The RSL Act as in force before the 2006 Act therefore applies here in respect of the option to renew the lease which had been entered into in 2000. [10] The RSL Act prior to the 2006 amendments is contained in Reprint number 3E. All subsequent references to the RSL Act in these reasons for decision are references to Reprint 3E unless otherwise stated. It sets out matters to be considered by a specialist retail valuer in making the determination of current market rent. These are prescriptive. All of the requirements in s 29 must be complied with. It is useful to set them out in full as they provide a checklist for considering whether the determination complied with the RSL Act.2 [11] Section 29 provides as follows: In making a determination of the current market rent, the specialist retail valuer- - (a) must determine the rent— 1 RSL Act s 129. 2 See discussion in Anthony v Coffee Club [2000] QSC 198; Family and Kids Care Foundation Inc v Bilby Lay Enterprises Pty Ltd [2005] QRSLT 7. -- 3 of 6 -- 4 (i) on the basis of the rent that would be reasonably expected to be paid for the retail shop if it were unoccupied and offered for leasing for the use for which the shop may be used under the lease or a substantially similar use; and (ii) on the basis of gross rent less lessor's outgoings payable by the lessee under the lease; and (iii) on an effective rent basis; and (b) must not have regard to the value of the goodwill of the lessee's business or the lessee's fixtures and fittings in the retail shop; and (c) must have regard to— (i) the terms and conditions of the lease; and (ii) submissions from the lessor and lessee about the market rent of the shop; and (iii) the other matters prescribed by regulation. [12] Effective rent basis is defined.3 It means determination of the rent having regard to all associated advantages and disadvantages under the arrangements between the parties to the lease which reflect the net consideration to the lessor from the lessee under the lease and associated arrangements. [13] Section 31 also requires that the valuer’s determination, amongst other things, be in writing; and specify the matters taken into consideration by the valuer in making it.4 Did the valuer comply with the requirements of s 29 of the RSL Act? [14] The valuer makes various references to how he has assessed rent. He refers to assessing fair market rental.5 Elsewhere he says he has undertaken the valuation on the basis of open market rental value.6 He provides a definition for open market rental to the effect that it is the value for which premises should rent between a willing lessor and willing lessee in an arm’s length transaction, where the parties act prudently, knowledgably, without compulsion and having regard to the usual terms and conditions of similar leased premises. [15] The definition he provides for open market rent, unlike the requirements imposed by s 29 of the RSL Act, does not contemplate valuation as if unoccupied, and without any component for goodwill. On the contrary, it could be applied equally to negotiating rent for vacant premises or renegotiating rent on the exercise of an option for occupied premises. 3 RSL Act, s 5, effective rent basis. 4 RSL Act s 31(1). See also discussion in Anthony v Coffee Club [2000] QSC 198; and Family and Kids Care Foundation Inc v Bilby Lay Enterprises Pty Ltd [2005] QRSLT 7. 5 Rental Assessment, page 43. 6 Rental Assessment, page 6. -- 4 of 6 -- 5 [16] He did set out the requirements of s 29.7 In the earlier stages of his report, the valuer said that he must assess on the basis that the premises are unoccupied and may not take goodwill and fixture and fittings into account. He stated in various places throughout his report that he must apply s 29 of the RSL Act in response to submissions made by the parties, which he considers inconsistent with the requirements of the RSL Act.8 However, his acknowledgment of these requirements is not sufficient. In reaching our conclusions, we must consider whether he did actually comply with them. [17] In Part 9 of his report, entitled ‘Basis of Rental Assessment’,9 he considers, in some considerable detail, rental details for 11 other pharmacies. Analysis of the rental arrangements is undertaken separately in 10.1 (sic) entitled ‘Rental Evidence’ for the 11 other pharmacies and then compared with the subject premises in section 10.2 (sic), entitled ‘Rental Reconciliation’. [18] Annandale Pharmacies makes several criticisms of his determination. One of those criticisms is that it appears that the relevance of the rent for the (only) one of the premises which could be regarded as unoccupied at the time its rental amount was negotiated,10 was effectively disregarded because the valuer did not consider it could have been foreseen that the anchor supermarket tenant in those premises would achieve the volumes of sales it did. Therefore, the valuer considered that rent would be negotiated on the basis of lower anticipated trading levels. This is of itself not necessarily problematic in our view since the requirement is to determine rent on the basis as if the premises was unoccupied. There is no requirement in the RSL Act for rent to be determined as though the premises are located in a centre which has no relevant trading history. [19] However, the valuer ultimately formed the view that rental of $875 per square metre was appropriate having regard to the rental comparisons discussed by him. In arriving at $875 per square metre, if he made, or considered (and decided against) making, adjustments because he was required under the RSL Act to determine current market value on the basis of unoccupied premises, he does not explain or indicate that he has done so. Indeed, he considers that minimum rental is set by a recently negotiated (for purposes of exercising an option) ‘fair market rent’ of $842 per square metre for premises in a centre which did not perform to the same level. The amount of $875 arrived at is slightly more than the $842, suggesting in context that he made this adjustment upwards because of the lesser performance of the other centre. We consider that it is reasonable to infer that he did so. However, given the relatively small adjustment made and that no other distinctions are drawn in addition to the lesser trading performance, it does not appear that any other adjustment was considered at this stage given that the comparison used was not for unoccupied premises and was the result of a renegotiation of rent. 7 Rental Assessment, pages 7 and 18. 8 Rental Assessment pages 20 and 22. 9 Rental Assessment pages 26 to 39. 10 Rental Assessment, pages 26-39, especially at 41. -- 5 of 6 -- 6 [20] The valuer then adjusted the amount of $875 per square metre on the basis of the lease terms, that is, for a ten year lease with annual increases of 1.5% above CPI, which he discounted by 8%, to $825 per square metre.11 The matters he refers to suggest that the only other matters he adjusted for were those he specified. [21] Annandale Pharmacies further submits that the valuer must have taken goodwill and or fixtures and fittings into account. It argues that because all of the premises considered were occupied that the tenants concerned may therefore have negotiated rent from the viewpoint of not wanting to move and other factors which are not relevant to assessments under the RSL Act and which therefore build in a component for goodwill. [22] This is a compelling argument. Factors irrelevant to the determination required under the RSL Act may well have influenced the negotiations. We find that it is reasonably likely that in using the rentals for renegotiations as direct comparisons, that the valuer included a component for goodwill and fixtures and fittings into account to some extent. [23] In any event, if the valuer has somehow adjusted to take the relevant matters into account, we can not discern that this is the case from his written assessment, contrary to his obligations to comply with the requirements of section 31 of the RSL Act to specify the matters taken into consideration. [24] Accordingly, we are unable to be reasonably satisfied that that the valuer has assessed current market rent as required by s29 of the RSL Act, in particular, s 29(a)(i) and s 29(b). [25] Annandale Pharmacies also raises various other issues about errors in the figures used by the valuer. However, in light of our conclusions about the issues discussed, it is not necessary for us to consider these. [26] We find that the determination does not comply with the requirements of the RSL Act. Orders [27] We make orders declaring that the determination does not comply with the RSL Act, and for completeness clause 3.4 of the lease, and setting it aside. We make orders requiring a further determination of current market rent in compliance with the RSL Act and for the valuer to be provided with our reasons for decision. 11 Rental Assessment, pages 41-42. -- 6 of 6 --