Liangis Investsments Pty Limited v National Australia Bank Limited [2002] ACTSC 17 (26 March 2002)

Last Updated: 12 April 2002

LIANGIS INVESTSMENTS PTY LIMITED v NATIONAL AUSTRALIA BANK LIMITED [2002] ACTSC 17 (26 MARCH 2002)

CATCHWORDS

LESSOR AND LESSEE - commercial leases - Commercial and Retail Leases Code of Practice - rent review - valuer's determination - lessor sought to set aside valuer's determination - Valuation Principles for Market Rental Evaluation.

VALUATION OF LAND - valuer's determination on rent review under lease - comparable premises - occupied and unoccupied premises.

VALUATION OF LAND - valuer's determination on rent review under lease - speaking valuation - detailed reasons for determination - reasoning process.

Commercial and Retail Leases Code of Practice, cl 51, cl 57, Schedule 3

Tenancy Tribunal Act (1994) (ACT), s 58, s 75

Spencer v The Commonwealth [1907] HCA 70; (1907) 5 CLR 418

Jones v Sherwood Computer Services plc [1992] 2 All ER 170

Arenson v Arenson & Ors [1973] 1 Ch 346

Orti-Tullo & Anor v Sadek & Anor [2001] NSWSC 855

Brewarrana Pty Ltd v Commissioner of Highways (1973) 6 SASR 541; (1973) 32 LGRA 170

Leichhardt Municipal Council v Seatainer Terminals Pty Ltd & Anor (1981) 48 LGRA 409

ON APPEAL FROM THE TENANCY TRIBUNAL

No. SCA 76 of 2001

Judge: Gray J

Supreme Court of the ACT

Date: 26 March 2002

IN THE SUPREME COURT OF THE )

) No. SCA 76 of 2001

AUSTRALIAN CAPITAL TERRITORY )

ON APPEAL FROM THE TENANCY TRIBUNAL

BETWEEN: LIANGIS INVESTMENTS PTY LIMITED

Appellant

AND: NATIONAL AUSTRALIA BANK LIMITED

Respondent

ORDER

Judge: Gray J

Date: 26 March 2002

Place: Canberra

THE COURT ORDERS THAT:

1. The appeal be dismissed with costs.

1. This is an appeal from a decision of the Tenancy Tribunal dismissing an application by Liangis Investments (the lessor) the lessor of premises upon which the National Australia Bank Ltd (the lessee) carries on business.

Background

2. Pursuant to s 75 of the Tenancy Tribunal Act (1994) (ACT) (the Act), the Commercial and Retail Leases Code of Practice (the Code) applies to the lease and regulates the conduct of the lessor and lessee. The Code, as part of that regulation, contains a regime by which rent may be set on renewal.

3. In the present case, the lessee entered into a written sublease (the lease) with the lessor over premises in the Dickson Group Centre. The lease was for a term of five years from 1 December 1991 and contained a further three five year options. The lessee exercised the first such option commencing on 1 December 1996. The parties at that time were unable to agree upon the rent applicable for the option and on 5 June 1997 the lessee filed a notice of dispute with the Tenancy Tribunal referring to the fact that the parties had been unable to agree on a market rental. In a letter dated 6 June 1997 the lessee sought orders that a valuer be appointed to determine the market rental.

4. The regime provided for in clause 53 of the Code was invoked. That provision requires the Registrar to appoint a valuer on consultation with the President of the ACT Division of the Australian Institute of Valuers and Land Economists to determine the market rent.

5. After the required consultation, Mr Gunna Sirel, a qualified valuer, was appointed. He provided a valuation of the market rental of the premises which he determined as $575 per square metre.

6. The lessor disagreed with this valuation and provided the Registrar with a report from McCann & Associates, Real Estate Valuers, which raised certain matters which were said to require reassessment of the determination. The Registrar referred these matters to Mr Sirel who considered and responded to them but they did not cause him to alter his valuation.

7. Clause 56 of the Code permits a party who has reasonable grounds to believe that the appointed valuer has failed to conduct a valuation in accordance with the provisions of the Division of the Code dealing with Rent Setting and Rent Reviews or the valuation principles set out in Schedule 3 to the Code to apply to the Tribunal for an order for the conduct of a new valuation. Such an application was made and determined by the Tribunal on 24 August 2001. The Tribunal dismissed the application.

The appeal

8. The lessor appeals to this court pursuant to s 58 of the Act which permits an appeal on a question of law. The grounds of appeal set out what are said to be errors of law but do not articulate as clearly as they might the way the case was put to me. Before me, Mr Arthur, counsel for the lessor, put his case on the basis that the Tribunal erred in law in two ways. One, that the valuation did not give effect to Clause 3 of the Valuation Principles set out in Schedule 3 to the Code and that the Tribunal erred in finding that it did. Secondly, that it was an error of law to regard as comparable premises for valuation purposes, premises that were occupied.

9. As a sub-set to the argument as to the failure to give effect to the Valuation Principles, he complained that the fact that the tenancy of one of the premises used as comparable premises, was only a tenancy for a term of one year and that factor was not specifically evaluated nor was the fact that it was occupied taken into account.

10. The grounds of appeal also complained that the Tribunal had, in addition to its conclusions of law, exercised a general discretion taking into account, in effect, irrelevant factors. At the conclusion of this hearing, he conceded that unless he could succeed in showing that there was an error of law, the question of there being an additional discretionary grant of relief utilised by the Tribunal did not arise. I do not think that, in any event, it would become necessary for me to consider that ground as, if I find that Mr Arthur has demonstrated an error of law, I would probably be obliged to require the Tribunal to act in accordance with my directions.

The Valuation Principles for Market Rental Evaluation

11. I summarise the Valuation Principles for Market Rental Evaluation (the Valuation Principles). They provide in Clause 1 that in the valuation of premises no consideration should be given, in general, to any special interest or value that the tenant has in the premises by reason of the existence of the current lease agreement. Clause 2, in summary, provides for a number of matters for which consideration is to be had in making the valuation. They are all matters which embody good valuation practice and include the traditional valuation principle of :

"...[that] which would be agreed as at the date of the valuation, between a willing owner and a willing tenant in an arms length transaction, after proper marketing of the premises, in which transaction the parties act knowledgeably, prudently and without compulsion." [see Schedule 3, p 46]

(See clause 2(c) and cf Spencer v The Commonwealth [1907] HCA 70; (1907) 5 CLR 418). Clause 2(b) also provides for the well recognised valuation approach to be that of:

"market evidence relating to comparable premises ...".

Clause 4 requires the valuation to include a statement concerning whether relevant rental concessions were disclosed for the purpose of the valuation and is not material here.

12. The clause that I have not summarised is Clause 3 of the Valuation Principles. That clause provides the foundation for the argument on this appeal. It provides that a valuation is to be a "speaking valuation". Clause 3 provides:

"A valuation shall be a "speaking valuation", that is, the valuer must give detailed reasons for his or her determination and must specify the matters to which he or she had regard for the purposes of making his or her determination."

The Valuation

13. In this case, the gravamen of Mr Sirel's approach to the valuation that he made was to have regard to rental levels being paid for accommodation within Dickson that can be considered comparable in accommodation and usage to the subject accommodation. He then summarised the ground floor premises within the subject building by area, annual rent, date effective from, rate per square metre and comments in relation to matters which I assume he took to be significant including the use to which the premises were put. He then expressed the test for market rent as set out in Clause 5 of the Code. He concluded:

"Having regard to the permitted use of the premises as defined in the lease and the two rentals for identical use premises within the same complex, both commencing in June 1997, it is considered that the gross rents of $582 and $600/m² provide the best evidence in respect to the rental value of the subject premises.

After taking into consideration the Lessee's contribution to outgoings of $33/m², it is considered that the base rental value for the subject premises as at the 1^st December 1996 is a rate of $542/m², equating to a gross rental rate of $575/m²."

14. In making his valuation, Mr Sirel listed as the "identical use premises within the same complex" a lease to the ANZ Bank and a lease to the Colonial Bank. The lease to the ANZ Bank involved a lease of one year to a previous sitting tenant. At the time of the valuation it was occupied. The lease to the Colonial Bank was a new tenancy and lease entered into for five years with a five year option. No reference is made as to whether the premises were occupied. These matters were duly noted in the comments that Mr Sirel expressed in his valuation.

Comparable premises

15. This difference between "occupied" and "unoccupied" premises was put at the forefront of Mr Arthur's argument. As I understood what he was putting, it was that the provisions of Clause 51 of the Code preclude the use as comparable premises, premises which are unoccupied. Clause 51 provides that:

"... the market rent of the premises is the rent that could reasonably be expected to be paid for the premises if unoccupied and offered for rent for the use to which the premises may be put in accordance with the lease."

16. I am completely unable to understand why that provision, which defines market value, should exclude as market evidence relating to comparable premises those premises that are occupied at the time of the valuation. The clear purpose of Clause 51 of the Code is to be consistent with the fact that Clause 1 of the Valuation Principles excludes any factor of special interest arising from the occupation of the premises the subject of the valuation. It is to be borne in mind that Clause 51 is directed to the situation where the rent is being determined in respect of a sitting tenant. I see no warrant to restrict "the market evidence relating to comparable premises" to only market evidence of unoccupied comparable premises. Rent is paid in respect of occupied or to be occupied premises and that will provide market evidence in respect of comparable premises. It matters not whether the premises were or were not occupied in fact. The Tribunal did not err in law in its conclusion on this aspect.

"Speaking" valuations

17. The view that Mr Arthur took that the lease to the ANZ Bank was not a lease of comparable premises led to a submission that the failure of Mr Sirel to acknowledge that, or to so discount its relevance for that and other reasons, meant that the valuation could not be said to be a speaking valuation in terms of Clause 3 of the Valuation Principles. It was put that the valuer had not given "detailed reasons for his or her determination" as required by that clause.

18. The concept of a "speaking" valuation has been regarded as satisfying a requirement of "what the valuer or certifier has done and why he has done it" (Jones v Sherwood Computer Services plc [1992] 2 All ER 170 at 177 per Dillon LJ). Lord Denning MR in Arenson v Arenson & Ors [1973] 1 Ch 346 at 363 regarded a speaking valuation as the giving of reasons or explaining the basis upon which the valuer proceeded.

19. In Orti-Tullo & Anor v Sadek & Anor [2001] NSWSC 855 a decision of Bryson J in the Supreme Court of NSW, his Honour did not regard the determination by a valuer of the renewal of rent of a bank as a speaking valuation because:

"The determination does not expose on its face the underlying facts such as comparable agreements for leases or other material on which the valuer relied, and does not state any analysis or reasoning showing how the rental as determined was derived." [see para [5]]

20. In this case, the market evidence of comparable premises was said to mirror the comparable sales approach to the valuation of land. It was then said that approach required reasons for the assessment of comparable sales. That proposition does not distinguish between the process by which particular sales might be regarded as comparable and the process whereby those sales found to be comparable are then assessed to determine the value of the subject property. The former circumstance may or may not admit reasons, the latter is one which, depending on the circumstances, may be one that only utilises skill and judgement to reach the result. In both cases it will be sufficient to constitute a speaking valuation if the approach is identified, or if the basis for the approach undertaken is clear from the matters which are referred to in the valuation.

The reasoning process

21. Mr Arthur referred to the decision of Wells J in Brewarrana Pty Ltd v Commissioner of Highways (1973) 6 SASR 541 at 551; (1973) 32 LGRA 171 at 180. In the passage he cited Wells J said:

"What I am concerned to emphasize is that, as I understand the evidence, and according to the inferences that I feel I can safely draw from it, there is no hard and fast rule by the application of which a valuer may, whatever the circumstances, draw the line that clearly separates the sales that are comparable from those that are not. It is, in my view, all a matter of degree: some adjustment is always necessary; too much adjustment will render it unsafe to use a sale, subject to such a degree of adjustment, for the purpose of the reasoning process in the comparable sales method. Just where the line is to be drawn is, it seems to me, the very sort of question that is fit for the expert valuer to determine; the assessment of the risks of adjustment is peculiarly within his sphere of skill. The valuer must use his skill to winnow out the element of comparability if it is there, and use it with discretion. It is perhaps worth while adding that just because a sale is excluded from use in the comparable sales process of reasoning, it does not necessarily follow that it must be discarded from all consideration. The evidence in this case suggests strongly to my mind that, at the initial stages, a valuer will almost certainly look at all known sales in potentially relevant areas, if for no other reason than to discern patterns of prices and changes in price levels over important periods. He will, while doing so, also be culling possibly comparable sales for further consideration. The process, seen as a whole, is not unlike that of using items of circumstantial evidence that possess varying degrees of cogency and weight."

22. In that case, Wells J was demonstrating the reasoning process in the comparable sales approach to valuation in order to arrive at comparable sales for the purposes of evaluation. It shows how difficult it is to set out reasons in determining comparability. The references to "matter of degree" "just where the line is to be drawn", and "use his skill to winnow out the element of comparability if it is there" all show that the process is not capable of reasoning in other than the way Wells J describes. That way is to identify the factors which may be pertinent. In the event that there may be said to be comparable sales, then that too may require reliance merely upon a valuer's judgement in adjusting a comparable sale for the purpose of valuing the subject property. In Leichhardt Municipal Council v Seatainer Terminals Pty Ltd & Anor (1981) 48 LGRA 409 at 434, Hope JA remarked:

"The need to make adjustments to values deduced from sales in order to arrive at the true valuation of the land to be valued does not preclude the court which has the task of valuing the land from relying upon the sales as comparable in the relevant sense, nor from the making by the court or by valuers of adjustments which may be nothing more than the best guess that can be made."

I take the approach referred to by Hope JA in requiring the making of adjustments as indicating a process which does not admit of reasoning in the sense of analysing a weighting to be given to each adjustment. It is merely an exercise in judgement.

23. For these reasons, I am satisfied that an approach such as Mr Sirel has taken to his valuation in this case does not contravene Clause 3 of the Valuation Principles requiring that the valuation be a speaking valuation. What he has done is to set out in detail the matters to which he has had regard, identified the approach that he should adopt, had regard to the market evidence in respect to what he has then adjudged as comparable premises and exercised his judgement in assessing the market rent for the subject premises. The Tribunal has not erred in law in holding that the valuation undertaken in this way satisfied the requirements of the Code.

Another valuer's approach

24. I add that Mr Arthur's arguments appeared to have derived from an affidavit and reports of Mr Lindsay Roberts, a certified practising valuer. Mr Roberts shares with Mr Arthur the same misconceptions concerning what might constitute comparable premises and what might constitute a speaking valuation. Mr Roberts' affidavit and his reports were apparently before the Tribunal but appear to have played no role in the Tribunal's decision. Nor should they have. As Mr Arthur conceded, they were generally argumentative and could provide no more than an illustration of the valuation process that he said should have been undertaken. Further, apart from the misconceptions that I have identified, Mr Roberts opined:

"It is clear that Mr Sirel has acted properly in accordance with normal valuation principles using the best information available to him at the time of doing the determination. The supporting correspondence identifies his attempts to obtain full and complete information and there is logic to the approach adopted."

I take Mr Roberts' "logic" to mean reasons.

25. In fact there are but two significant aspects in respect of which Mr Roberts disagreed with what Mr Sirel had done. One related to the use of the ANZ lease as comparable premises because it was "occupied". As I have said, the Code provides no warrant for excluding that lease from consideration on that basis. The other was that no consideration had been given to the fact that the ANZ lease was only for one year. I reject that assertion. That matter was the subject of specific reference in Mr Sirel's valuation as a matter to which he had regard for the purposes of making his determination. It follows that I do not accept that Mr Sirel's valuation had the defects which Mr Roberts sought to identify and otherwise Mr Roberts accepts the reasoning of the valuation.

Conclusion

26. The lessor has not demonstrated that the Tribunal erred in law in dismissing its application. I dismiss the appeal with costs.

I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Gray.

Associate:

Date: 26 March 2002

Counsel for the Appellant: Mr R Arthur

Solicitor for the Appellant: Macphillamy Donald

Counsel for the Respondent: Mr F J Purnell SC

Solicitor for the Respondent: Mallesons Stephen Jaques

Date of hearing: 13 December 2001

Date of judgment: 26 March 2002