Family and Kids Care Foundation Inc v Bilby Lay Enterprises Pry Ltd [2005] RSLT 7

[2005] RSLT 7 THE RETAIL SHOP LEASES ACT In the matter of Dispute 44/04 FAMILY AND KIDS CARE FOUNDATION INC Claimant - and - BILBY LAY ENTERPRISES PTY LIMITED - Respondent DECISION Coram: Mr Graham Lee Ms Rosalind Hourigan Mr Alan Cole Given in Brisbane on 16 February 2005. -- 1 of 11 -- Dispute No 44/04 Decision 2 On 26 May 2004 a Notice of Dispute was lodged in the registry of the Tribunal by Family & Kids – Care Foundation Inc. and Mr Tass Augustakis (“applicants”) against Bilby Lay Enterprises Pty Limited (“respondent”) seeking the appointment of a new valuer under the Retail Shop Leases Act 1994 (“the Act”) to determine current market rent in accordance with section 29 of the Act. It was alleged that a determination of a specialist retail valuer dated 1 April 2004 had failed to follow the requirements of section 29 of the Act. The remedy sought was later refined in submissions. First, the applicants seek a declaration that the determination of current market rent by a specialist retail valuer previously appointed under the Act is not a valid determination as sections 29 and 31 of the Act had not been complied with. Secondly, a direction is sought that, pursuant to section 28 of the Act, the Chief Executive nominate a different specialist retail valuer to determine the current market rent in accordance with the Act. The respondent opposes the application. A directions hearing was held on 4 August 2004. After the Chairperson raised the question about the Tribunal’s jurisdiction in this matter, written submissions were sought on the issue. A second directions hearing was held on 3 November 2004 and certain orders were made for the parties to file and serve their material. The solicitor for the applicants made oral submissions as to jurisdiction on that occasion. Although invited to do so the respondent’s solicitor did not make any submissions in response. At that directions hearing the Chairperson proceeded to make further directions on the basis that the Tribunal did have jurisdiction to hear and determine the matter. If there was a lack of jurisdiction in the Chairperson’s view at that time, the matter would not have progressed any further. The hearing before the full Tribunal was held on 15 December 2004. Mr P. Franco of counsel appeared for the applicants and Mr T. Entriken of counsel appeared for the respondent. Jurisdiction Although it was thought the question of the Tribunal’s jurisdiction had been resolved at the directions hearing on 3 November 2004 after having considered detailed written submissions received by the parties and inviting further oral submissions, the question was again raised in written submissions by the parties on 15 December 2004. The respondent relies on section 33 of the Act which provides: The current market rent of the leased shop determined by a specialist retail valuer is the current market rent of the shop and the rent payable under the lease for the rental period under review. The respondent submits that as the valuer provided his valuation by applying the matters in section 29 of the Act, the Tribunal does not have jurisdiction to hear the -- 2 of 11 -- Dispute No 44/04 Decision 3 application. In the respondent’s written submissions on this question dated 27 August 2004, it was asserted that the current dispute does no constitute a dispute regarding the procedure for determination of rent so as to enliven subsection 109(3) (a) because the applicants had not particularized how the valuer failed to comply with section 29 and that, as the valuer had complied with section 29, there is no basis for a dispute regarding procedure. The applicants referred to Ballymaloe Pty Ltd v. Retail Shops Lease Tribunal [2004] 1 Qd. R. 600 per Helman J. and a Tribunal decision of another chairperson in case Q/02 to support the view that the Tribunal does have jurisdiction. In Q/02 the chairperson among other things said: I am unable to accept the suggestion that the only remedy for a breach of section 29, no matter how small the amount involved, or the means of the party aggrieved, is an expensive and elaborate application to a superior court for judicial review. If this were the true position, and if the court upheld an argument that the valuation was void, the matter would still have to be decided, in substance, by another valuer agreed by the parties or nominated under section 28. After referring to section 109(3) of the Act, the chairperson concluded: ….the Tribunal may, in principle, deal with a question if whether section 29 procedures have been observed, subject always to the caveats and limitations which are outlined above. The applicants are not seeking a remedy in this case that would fall within the caveats and limitations referred to by the chairperson in case Q/02. For example, the Tribunal does not have jurisdiction to order the same valuer carry out the determination in accordance with section 29. It does not have jurisdiction to review the actual amount of the rent: subsection 109(3) (a). Unlike case Q/02, the applicants in this case simply seek a declaration that the valuer has not complied with section 29 of the Act. While Helman J. in Ballymaloe referred to subsection 109(3) (a), it appears from the passage of the judgment cited in the applicants’ submissions that the Tribunal’s jurisdiction was not in issue in that case. The decision emphasizes though that the Tribunal does have jurisdiction to hear a retail tenancy dispute about the procedure for the determination of rent. We agree with the chairperson’s conclusions in Q/02. We are of the view that the Tribunal does have jurisdiction to hear and determine this dispute and, in particular, the remedy sought in this dispute. The applicants have sufficiently particularized in what respects the valuer is alleged to have failed to comply with section 29. This is the very question that is in issue. -- 3 of 11 -- Dispute No 44/04 Decision 4 Background The applicants are part owners of a shopping centre at Kingston. The respondent is the lessee of shop 11 in that shopping centre. No issue was taken at the hearing requiring the other part owners be joined as parties. The matter proceeded on the basis of the present parties named in the Notice of Dispute. It is not disputed that on either 8 December 2003 (applicant’s submissions) or 18 December 2003 (respondent’s submissions) the respondent validly exercised an option for a further term. Clause 18.2.1 of the lease as amended provided for the determination of rent for the first two years of the further term. Relevant to this matter, in short, unless the parties agreed on the new rent after progressing through a specified process, then the next step provided for in clause 18.2.1 is as follows: If the Lessor and the Lessee cannot agree on a new rent within the time stipulated, the Rent will be the current market rent determined by a specialist retail valuer agreed by the Lessor and the Lessee within 14 days of failing agreement, nominated by the chief executive (as defined in the Retail Shop Leases Act.) The parties were unable to agree on the new rent. On 25 March 2004 a specialist retail valuer (“the valuer”) was appointed by a delegate of the chief executive under the Act in accordance with clause 18.2.1 of the lease to determine the current market rent of shop11: subsection 28(2) of the Act. It is not disputed that the valuer invited submissions from the parties on 30 March 2004 and that no submissions were provided by the applicants. It is also not disputed that the valuer inspected shop 11 on 1 April 2004. While there is some dispute about how the valuer went about making his inquires and the actual date of the determination, the determination was made no later than 6 May 2004. The Determination The determination is in eight parts. Among other things Part 1 lists four documents including the lease and trading figures. No details of the trading figures are given. Part 2 among other things briefly describes the shopping centre, shop 11 and its location. Part 3 refers to basic terms of the lease in list form including the names of the parties, the start and end dates, options, rent and outgoings. Among other things Part 4 indicates that although given the opportunity the lessor did not make any submissions. The market evidence in Part 4 simply refers the reader to Part 5. Part 5 is entitled “Basis For Determination”. Essentially Part 6 just restates information already referred to and in particular the rent arrived at in Part 5. Part 7 recites disclaimers and Part 8 contains three annexures not directly relevant. Part 5 deals with how the valuer arrived at his conclusion and is central to the dispute in this case. It says: -- 4 of 11 -- Dispute No 44/04 Decision 5 5. BASIS FOR DETERMINATION 5.1 Basis and Method Usually with a determination of market rent for a retail shop the subject premises are compared to the rents being paid for similar premises occupied for the same or similar uses. Adjustments are made for differences such as size of shop, location, etc. etc. However, it has not been possible to carry out this type of comparison in this case. In this case the premises are within a failed shopping centre, the floor area is too large for the volume of trade conducted and the prospects for this situation to change are not good. These factors mean that this is a unique situation that is outside the norm. To overcome this problem the approach has been to examine the trading accounts for the business and to assess what is a reasonable rent that the business can afford to pay. The rent has been calculated as, Gross annual rent $30,360 Less Outgoings $ 3,894 Net rent $26,466 For practical purposes adopt $26,500 It should be noted that there are no subparagraphs beyond 5.1 in Part 5. Relevant Sections of the Act Rent review on basis of current market rent 28(2) The current market rent is to be determined by a specialist retail valuer agreed by the lessor and lessee, or failing agreement, nominated by the chief executive. Matters to be considered by specialist retail valuers 29 In making a determination of the current market rent, the specialist retail valuer-- (a) must determine the rent-- (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 -- 5 of 11 -- Dispute No 44/04 Decision 6 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) submissions from the lessor and lessee about the market rent of the shop; and (ii) the other matters prescribed by regulation. Requirements of determination 31 (1) The specialist retail valuer's determination of the current market rent must be in writing, identify the location of the leased shop and specify the matters taken into consideration by the valuer in making it. (2) The determination must also state-- (a) whether the current market rent includes GST; and (b) if the rent includes GST, the GST amount. Section 5 of the Act has the following definition: "effective rent basis", for the determination of rent under a retail shop lease, means the determination of the rent taking into account all associated advantages and disadvantages under arrangements made between the lessor and lessee that reflect the net consideration passing to the lessor from the lessee under the lease and associated arrangements. Applicants’ Case The provisions cited above required the valuer to follow a certain procedure – • Determine rent that a hypothetical purchaser would pay if the shop were offered on an unoccupied basis (s.29 (a) (i)). • Have regard to the terms of the lease. This is one of the arrangements between the parties (s.5). • Have no regard to goodwill of the respondent’s business, and fixtures and fittings (s.29 (b)). • Specify the matters taken into consideration in determining the rent (s.31 (1)). -- 6 of 11 -- Dispute No 44/04 Decision 7 The valuer did not follow that procedure. First, the valuer examined the respondent’s trading accounts for the purposes of assessing “what is a reasonable rent the business [the respondent] can afford to pay”. The only documents relied on by the valuer other than lease documents were the respondent’s trading figures. This approach must have required the valuer to have regard to the goodwill of the respondent’s business and fixtures and fittings as these would have impacted on the goodwill. The valuer adopted an incorrect approach when he undertook the subjective exercise of what the respondent could afford to pay. On this test, a business on the verge of insolvency would pay little or no rent at all whereas a thriving business would be able to pay a premium rent well above market rental. Contrary to section 31, the valuer failed to expressly specify the matters he took into consideration in making his determination of current market rent. In looking at Part 5.1 of the determination cited earlier, the reader is left to guess whether the trading figures were the sole criterion for the determination, and what trading period the figures relied on relate to. The figures relied on are not mentioned anywhere. The determination does not say whether the rent has been calculated as the difference between the respondent’s income and expenses (excluding rent) or whether it leaves the respondent with a profit margin. The case Anthony v. Coffee Club [2000] QSC 198 per Atkinson J. was cited. In addition, on the face of the determination the terms of the lease played no part in his assessment. Part 5 of the determination only refers to what the respondent could afford to pay. Further, the valuer did not afford the applicants procedural fairness in a number of respects. A number of authorities were cited in a variety of different contexts. In view of the Tribunals conclusions, it is not necessary to mention this further. Respondent’s Case Submissions addressed section 29. Section 29 is not an exclusive list of considerations and a valuer can take other matters into account in addition to those mandatory requirements. Section 29(a) (i) As shop 11 was a poor investment prospect, assessment of rent under this provision could only have been made by taking into account the business turnover. The valuer considered the location [Part 2.8 of the determination], the condition of the shopping centre and the fact that other shops in the centre were unleased [Part 2.9]. The valuer also considered the unsuitable size of shop 11 [Part 2.10] and expressly indicated his difficulty in determining current market rental for shop 11. This is a unique situation. The valuer took all section 29 considerations into account and, due to necessity, had to examine the trading accounts. -- 7 of 11 -- Dispute No 44/04 Decision 8 Section 29(a) (ii) The valuer was aware of this requirement: see Parts 1.8, 2.3 and 2.4 of the determination. Section 29(a) (iii) In considering “effective rental basis” the rent for shop 11 had to be heavily discounted by any potential lessee for a number of reasons. The shop is in a failed shopping centre with a “disreputable general appearance” and vandalism problem, and the floor area of shop 11 is too large for that business. The appraisals of two real estate agents obtained by the applicants are not qualified valuers and that they had not visited the shopping centre. Section 29(b) Goodwill and lessee’s fixtures and fittings only relate to the sale of the business. Turnover or profit and loss don’t. Therefore, this provision has not been infringed. Section 29(c) (i) The valuer gave both parties the opportunity of making submissions by letter dated 30 March 2004. He attended the shopping centre on 1 April 2004 and spoke to the respondent but was turned away by the applicant. Further, the valuer phoned the applicant’s then solicitor but there was no response. In summary, the valuer is experienced and was faced with a unique set of circumstances. He gave reasonable consideration to the matters in section 29 but had to go further by looking at the trading accounts. In doing so, he arrived at a fair result so that his determination should be upheld. Consideration The valuer gave oral evidence at the hearing. It is not intended to summarise all of his evidence. In response to a Tribunal question he said he did not look at any other centre. He spoke to others in an effort to find a similar shopping centre. This was not referred to in the determination. He referred to a failed shopping centre at Whites Hill but this was being rebuilt. Another one was at Salisbury but there was no food shop. He did not refer to these in his determination. As for the trading figures he referred to in making his determination, he said he was given a computer printout from the respondent details of which are not in evidence nor are the details specifically referred to his determination. It appears they were not audited statements. He then consulted another person who had a computer program that could compute a reasonable profit from the turnover. A lot of time was spent in applying the computer program to the trading figures provided. He did not fully understand the computer program and appeared to rely on the other person to a significant extent. He said that if he didn’t have the trading figures, he would have used similar shops and discounted for the floor area. -- 8 of 11 -- Dispute No 44/04 Decision 9 Mr Augustakis, one of the applicants also gave oral evidence. Among other things, he told the Tribunal about his attempts at leasing other shops in the shopping centre and his evidence was to the effect that the shopping centre is not run down as suggested by the respondent. He said he was not the person the valuer had spoken to on 1 April 2004 when the valuer inspected the shopping centre. It is true that the matters to be considered in section 29 are not exclusive as the respondent suggests. However, those matters are mandatory. Atkinson J. in Anthony at 198 said: So that there should not be any doubt whether or not the specialist retail valuer has taken into account those matters which he is obliged to take into account under section 29, including the effective rent basis as defined in section 5, section 31 provides that the specialist retail valuer’s determination of the current market rent must be in writing identify the location of the leased shop and specify the matters taken into consideration by the valuer in making it. It seems to me that, in order to avoid litigation of this type and in order to follow the statutory requirements, specialist retail valuers must be careful to ensure that their determination of the current market rent carefully specifies the matters taken into consideration and that those matters are the matters specified in the Act and each and every one of them. A glaring feature about the valuer’s determination in this case is that the basis for his determination in subparagraph 5.1 does not specify precisely the matters taken into consideration in determining the rent. Reference is made to the trading figures but, as the applicant has pointed out, details of them have not been stated in the determination. A summary of those figures and of the reasoning process in arriving at the rent is not given. There is a quantum leap from paragraph 2 of subparagraph 5.1 in identifying a unique situation to the next paragraph where the valuer simply states that he will use trading figures. Even if this approach were acceptable, the determination should have gone through the steps in the reasoning that lead to the conclusion of using the trading figures and then give details as to how the trading figures were applied. After concluding that the trading figures should be used in paragraph 3 of subparagraph 5.1, the determination then says “The rent has been calculated as,”. It then gives the ultimate figures for rent etc. without any explanation how they were arrive at. The Tribunal accepts the applicants’ submission in that respect. The determination is silent on this. Further, in view of the valuer’s oral evidence, the Tribunal gained the distinct impression that the valuer did not fully understand the computer program itself and the way in which the computer program was applied to the trading figures. He seemed to defer to the other person who he consulted on this point. That person has not given evidence. There is no hint of the use of a computer program in the determination let alone an explanation of how it was applied. Further, there is insufficient evidence before the Tribunal explaining what the computer program actually does and the how it was applied in this case. -- 9 of 11 -- Dispute No 44/04 Decision 10 The Tribunal finds that the valuer has not complied with subsection 31(1) of the Act. Further, in the Tribunal’s view the determination on its face does not show that the valuer complied with section 29 either. As Atkinson J. observed in Anthony, a valuer must be careful that all mandatory matters under the Act taken into account are specified. If the valuer in the present case has expressed everything he took into account, it is clear in the Tribunal’s view that subsection 29(a) (i) at least has not been complied with. It is mandatory. In deciding that this was a unique situation, the valuer approached the problem by looking at trading figures to see what the respondent could afford to pay. Notwithstanding his view that use of the trading figures was the way to determine rent, this approach is clearly contrary to subsection 29(a)(i). That provision requires that rent be determined by reference to what a hypothetical purchaser would pay if the shop were offered on an unoccupied basis. On the face of the determination it appears that the valuer approached it on the basis of the respondent’s business as a going concern. In saying this, the Tribunal is not suggesting that the valuer is necessarily precluded from looking at miscellaneous factors outside section 29 not inconsistent with it, but that the valuer must apply the principles in section 29. The respondent submitted that the valuer considered other factors cited in other parts of the determination. For example, at paragraph 2.9 most other shops were unleased. There are other examples. Paragraph 1.8 entitled “Critical Assumptions” lists documents used in the determination – the lease, the deed of assignment, an amendment and trading figures. The relevant text or substance of these documents is not discussed in any detail in the determination. Simply listing these seriatim does not convince the Tribunal that he had proper regard to the parties’ arrangements for the purposes of subsection 29(a)(iii) and section 5 [“effective rent basis”]. It appears that Atkinson J. took a similar view in Anthony where she said: In cl. 7 he [the valuer] sets out the determination considerations. The only one that might be read so as to suggest he has taken into account any arrangement between the lessor and the lessee is that he says he has had regard to the Retail Shop Leases Act, but that is hardly enough to convince me that he has had regard to the arrangements, which he is required to have regard to under that Act. On this basis, the Tribunal finds that the valuer has not complied with section 29 of the Act also. The orders the Tribunal will make are as follows: 1. It is declared that the rent determination of the specialist retail valuer (Valuation report No. 193513: 1 April 2004) relating to registered lease number 701031923 in respect of premises described as Shop 11, 2 Yalumba Street, Kingston is not a valid determination pursuant to sections 29 and 31 of the Retail Shop Leases Act 1994. -- 10 of 11 -- Dispute No 44/04 Decision 11 2. Unless the parties otherwise agree, the parties are to apply to the chief executive for the appointment of another specialist retail valuer to determine current market rent in accordance with law. Graham Lee Chairman Retail Shop Lease Tribunal -- 11 of 11 --