Commonwealth of Australia v MTAA Superannuation Fund Property Pty Ltd and Sparad Pty Ltd & Anor [2009] ACTSC 115 (11 September 2009)

COMMONWEALTH OF AUSTRALIA v MTAA SUPERANNUATION FUND (R G CASEY BUILDING) PROPERTY PTY LTD ACN 081 290 860 and SPARAD (NO. 24) PTY LIMITED ACN 057 975 087 & ANOR
[2009] ACTSC 115 (11 September 2009)

LANDLORD & TENANT – commercial lease – rent review – valuer acting as expert – review of valuation by court – whether valuation vitiated by mistake

IN THE SUPREME COURT OF THE )
) No. SC 944 of 2008
AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: COMMONWEALTH OF AUSTRALIA AS REPRESENTED BY DEPARMENT OF FOREIGN AFFAIRS AND TRADE

AND: MTAA SUPERANNUATION FUND (R G CASEY BUILDING) PROPERTY PTY LTD ACN 081 290 860 and SPARAD (NO. 24) PTY LIMITED ACN 057 975 087

1. The originating application be dismissed.
2. The applicant pay the respondents’ costs of the proceedings.

1. The first respondents are the registered proprietors as Crown lessees of block 2 section 15 Barton, a large block of land bounded by State Circle, Brisbane Avenue, Sydney Avenue and Windsor Walk, upon which stands an office building, the R. G. Casey Building. The applicant occupies the majority of the building under a registered lease which commenced in April 1998 and will terminate in February 2012. The building is the headquarters of the Commonwealth Department of Foreign Affairs and Trade. A smaller part of the building is leased to the Commonwealth for the purposes of another instrumentality. Comparatively small areas of the building are used for ancillary purposes such as a cafeteria and a childcare centre.
The lease and the umpire’s determination
2. The lease between the parties specifies a yearly rent and provides for the rent to be reviewed every two years. The first four rent reviews appear to have been undertaken without incident. The present application arises out of fifth review, the date for which was 1 March 2007.
3. The lease provides in clause 5 that on each review date the rent is to be reviewed in accordance with schedule 4. The schedule sets out a detailed procedure for review of the rent. Unless there is agreement between the parties as to the rent for the ensuing two years, the parties must cause the current annual open market rental value to be determined by two valuers, one appointed by each of the parties. If the valuers are unable to agree on a joint valuation, either party may request the President of the Institute of Valuers and Land Economists to appoint another valuer as umpire. The umpire then makes a determination of the rental.
4. In the present case, the process proceeded to the appointment of the second respondent as umpire. The second respondent gave his determination as at 1 March 2007, and gave reasons for it in writing as required by the lease. The schedule included clauses in the following terms:
A.4 (i) The Valuers and the Umpire act as experts and not as arbitrators and their respective determinations are final and binding on the Lessor and the Lessee and the current annual open market rental value so determined in accordance with the provisions of this clause A.4 is the rent payable by the lessee.
. . .
(k) In determining or agreeing upon a current open annual market rental value for the premises, upon review of rent under this lease the Lessor and the Lessee must each take into account and must each require the Valuers and the Umpire to take into account all relevant matters on the date when that rent is to apply for the premises assuming that:
(i) The Lessor is a willing but not anxious Lessor and the Lessee is a willing but not anxious Lessee;
And taking account of:
(ii) Open market rental value ... at the Review Date in respect of any comparable premises in the town or city within which the building is situated: such value is to be determined in respect of new lettings with vacant possession and in respect of occupied premises;
. . .
(vii) The terms and conditions generally of this lease; . . .
but not taking into account:
. . .
(xvi) Areas other than the net lettable area of the premises; and
. . .
5. The definitions in clause 2.1 of the lease include:
“building” means the building described in item 1;
“net lettable area of the building” means the area of the building measured in accordance with clause 3;
“net lettable area of the premises” means the area of the premises measured in accordance with clause 3;
“premises” means the premises described in item 1;
“public areas” means the land external to the building and those areas of the building which are cross-hachured on the sublease plans and includes without limitation the rooftop of the building;
“sublease plans” means the registered sublease plans numbers 4322-4339 inclusive.
6. The interpretation clause also includes, in subclause 2.2:
(h) in the interpretation of this lease no rules of construction apply to the disadvantage of any party on the basis that it put forward this lease;
7. In subclause 3.2 of the lease, the parties agree “that the net lettable area of the building and the net lettable area of the premises are as specified in item 9, and the parties acknowledge that the rent specified in item 5 is calculated at a rate per metre squared based on the net lettable area of the premises.”
This agreement is expressed to be subject to precise measurement if either party requires it.
8. Item 5 states the annual rent applicable from the beginning of the lease in 1998 at an all-up dollar figure. Item 9 gives the net lettable area of the building as 47,313 m2 and the net lettable area of the premises as 43,218m2. I take it that the difference between these two figures represents that part of the building sublet other than to the plaintiff for DFAT purposes.
9. Clause 21A of the lease is relevant to the issues for determination in the action. That clause is in the following terms:
21A PUBLIC AREAS
21A.1 The Lessor must not:
(a) carry out alterations or additions; or
(b) erect or install any structure, equipment or display,
in the public areas without the consent of the Lessee which may be given or withheld in the discretion of the Lessee.
21A.2 The Lessor shall keep the public areas open at all times for access to the premises by the Lessee and any person authorised by the Lessee. The Lessee shall have exclusive access to and use of the public areas for all purposes connected with the Lessee’s occupation and use of the premises, including without limitation:
(a) to install and replace artworks;
(b) to construct and maintain fences, barriers, gates, desks, sensors and other installations relating to the security of the premises and the public areas;
(c) to erect, maintain and replace signs, directory boards and displays;
(d) to hold functions and exhibitions; and
(e) to operate exclusively the reception desk in the foyer.
21A.3 The Lessor must not grant any other lease or right of occupation or use of any part of the land or building, except:
(a) a lease of part of the building to the Commonwealth of Australia represented by Austrade;
(b) a lease of that part of the building in accordance with clause 45; or
(c) as contemplated by this lease.
Clause 45 provides that the Lessor must give the Lessee right of first refusal in respect of space becoming available for lease in the building
10. The dispute between the parties in this action relates to the requirement contained in schedule 4 (Rent Review), clause A.4(k)(xvi), that the umpire not take into account, in determining the current open annual market rental value, “areas other than the net lettable area of the premises.”
11. In his reasons for arriving at his valuation, the second respondent set out a description of the building and identified the tenancy area occupied by the plaintiff. He set out the rent review provisions contained in schedule 4 to the lease. He then summarised the submissions made on behalf of the parties. He summarised evidence about rent in comparable buildings in Canberra.
12. At paragraph 8.7 of his reasons, the valuer said this:
8.7 PUBLIC AREAS
As noted under the terms of the current lease DFAT as the Lessee “have exclusive access to and use of public areas for all purposes connected with the Lessee’s occupation and use of the premises.”
Although outside the area of the premises, these areas are extensive and do add to the overall amenity of the premises. This exclusive right to access and use the public areas of the building should attract a premium over and above the base building rental. In preparing this determination I have made an allowance of $25/m2 pa over the NLA premises.
13. Mr Flannery went on to determine the rent, in dollars per square metre, at the review date (1 March 2007) as follows:

Gross effective rental adopted	$400.00
Plus allowance for special amenities	$25.00
	$425.00
Less allowance for lessee’s base energy costs	$17.50
Less allowance for base building security system	$2.50
	$405.00
Storage areas	$150.00

He did not take the next step of multiplying the figure he had reached by the area of the leased premises in square metres, but neither party complains about that.
14. The principal submission on behalf of the plaintiff is that the valuer fell into error at paragraph 8.7 of his reasons by adding to his valuation a figure of $25.00 per square metre as a premium reflecting the plaintiff’s exclusive right to access to and use of the public areas of the building. The plaintiff’s argument is that this was an impermissible breach of the directive in clause A.4(k)(xvi) that the valuer was not to take into account areas other than the net lettable area of the premises.
Applicable principles
15. The applicable legal principles are not in contention.
16. The availability of a challenge to a valuation under a rent review clause in a lease was considered by the NSW Court of Appeal (Mahoney, Priestley and McHugh JJA) in Legal and General Life of Australia Limited v A Hudson Pty Limited (1985) 1 NSWLR 314. The appellant was the lessor and the respondent the lessee of commercial premises. The lease contained a rent revision clause providing, in default of agreement, for a qualified valuer to be appointed, to act as an expert, to determine the market rent. The parties had agreed that the valuer’s decision was to be final and binding. The valuer’s valuation was found at first instance to have contained an error, and the lessee had been granted a declaration that the valuation was not binding. The Court of Appeal unanimously allowed the appeal. McHugh JA accepted for the purpose of argument that the valuer had made a mistake in the valuation process. This left for decision the question as to whether the mistake had been one which invalidated the valuation. At page 335, his Honour said:
In my opinion the question whether a valuation is binding upon the parties depends in the first instance upon the terms of the contract, express or implied . . . it is easy to imply a term that a valuation must be made honestly and impartially. It will be difficult, and usually impossible, however, to imply a term that a valuation can be set aside on the ground of the valuer’s mistake or because the valuation is unreasonable. The terms of the contract usually provide, as the lease in the present case does, that the decision of the valuer is “final and binding on the parties”. By referring the decision to a valuer, the parties agree to accept his honest and impartial decision as to the appropriate amount of the valuation. They rely on his skill and judgment and agree to be bound by his decision. It is now settled that an action for damages for negligence will lie against a valuer to whom the parties have referred the question of valuation if one of them suffers loss as the result of his negligent valuation . . . but as between the parties to the main agreement the valuation can stand even though it was made negligently. While mistake or error on the part of the valuer is not by itself sufficient to invalidate the decision or the certificate of valuation, nevertheless, the mistake may be of a kind which shows that the valuation is not in accordance with the contract. A mistake concerning the identity of the premises to be valued could seldom, if ever, comply with the terms of the agreement between the parties. But a valuation which is the result of the mistaken application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case, the critical question must always be: was the valuation made in accordance with the terms of the contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account or has failed to take into account matters which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract.
17. His Honour went on to find that the mistake which had been identified was one made in the process of valuation, but was not a departure from the terms of the contract and did not enable the Court to set aside the valuation.
18. The judgment of McHugh J A in Legal and General Life has been accepted in the Supreme Court of Victoria as correctly stating the law: Commonwealth of Australia v Wawbe Pty Ltd per Gillard J [1998] VSC 82; and accepted in a previous decision of mine as a correct statement of the law for this Territory: Parsons v CB Richard Ellis (V) Pty Limited [2007] ACTSC 37.
19. Gillard J in Wawbe expanded on the reason for the principle in para [17] as follows:
The parties to a contract agree that the value is to be determined by an expert acting as such and using his own skill, judgment and experience. He is not a lawyer. His authority derives from the contract. The terms of the contract are to be considered by him. It would be contrary to the parties’ common intention to expect the valuer to construe the contract and apply it as a court would. The parties have entrusted the task to an expert valuer, not a lawyer. They must be taken to accept the determination “warts and all” and subject to such deficiencies as one would expect in the circumstances. The parties put in place the procedure, they must accept the result unless it would be contrary to their common intention.
20. His Honour went on to say at para [44]:
The trend of the authorities establish that the mistake must be of a kind which demonstrates that the valuer did not perform his task as required by the contract, making allowance for the fact that the valuer in construing the agreement, where necessary, is a valuer and not a lawyer.
The competing submissions
Applicant
21. Senior counsel for the applicant submits that the umpire took into account a matter which the lease stipulated was not to be taken into account, and that this was a mistake invalidating the determination. In making an allowance of $25.00 per square metre per annum for the amenity afforded by the access to and use of the public areas, the umpire took into account areas other than the net lettable area of the premises, contrary to paragraph A.4(k)(xvi) of schedule 4 of the lease. That paragraph obliged the umpire not to take into account areas other than the net lettable area of the premises, which must include any effect that those areas might have upon the amenity of the net lettable area.
22. Counsel submitted that the amenity of an area was not something separate from the area itself. Without the area, the amenity would not exist.
23. Counsel submitted that paragraph A.4(k)(xvi) must be construed as having been intended by the parties to have some operation. The umpire should have excluded the public areas from consideration. If he had done so, there could have been no premium added arising from the features of those areas.
24. It was significant, counsel for the plaintiff submitted, that there was no rental or even licence fee payable under the lease in respect of the public areas, despite the lessee being given exclusive access to and use of those areas. The lease should not be interpreted in a manner which would allow the lessor to recover income from the public areas in these circumstances. To interpret paragraph A.4(k)(xvi) so as to allow the lessor to recover income in respect of those areas would be an anomalous result.
25. Further, the lease as originally drawn included a total annual rent figure based on a rate per square metre multiplied by the net lettable area of the premises. There was no indication in the lease that the initial rent included any consideration of, or premium for, other areas such as the public areas. To allow a premium in respect of those areas on review of the rent would fundamentally change the basis for its calculation and would undermine the original bargain between the parties.
26. Paragraphs A.4(k)(x) to (xvii) listed a number of other matters which were not to be taken into account on rent review, including alteration or improvements made to the premises by either party. It would subvert the purpose of paragraph A.4(k) generally if the matters listed as not to be taken into account could be taken into account under another guise on the basis that they affected the amenity of the net lettable area. The purpose of paragraph A.4(k)(xvi) would be similarly subverted if the public areas were taken into account with the effect of increasing the market rent on the basis that they increased the amenity of the net lettable area. Exclusion of a matter from consideration must mean substantive exclusion, not a nominal exclusion which allows the very matter to be considered under another guise.
First respondents
27. Queen’s counsel for the first respondents did not take issue with the submissions on behalf of the plaintiff as to the principles to be applied. He referred me to a useful distillation of the principles to be applied as to when an expert’s determination on a rent review is final and binding by Palmer J in Kanivah Holdings Pty Limited v Holdsworth Properties Pty Limited [2001] NSWSC 405; (2001) BPR 97896 at paras 47 and 48, affirmed by the Court of Appeal at [2002] NSWCA 180; (2002) 11 BPR 97968.
28. As to the principles to be applied in the construction of leases, counsel for the first respondents drew my attention to the decision of the Court of Appeal (Beazley, McColl and Campbell JJA) in Waterways Authority of NSW v Coal and Allied (Operations) Pty Limited [2007] NSWCA 276, in particular at paras 38-40 per Beazley JA and 214-216 per McColl JA.
29. Counsel submitted in the light of the principles emerging from those decisions, that the proper purpose of paragraph A.4(k)(xvi) was to direct the valuer’s mind to the value of the area actually subject to the lease, and for the valuer to perform his task by reference to that area and not by reference to the whole of the lettable area of the building. The intention of the paragraph was that no calculation or quantification should be attempted to determine the lettable area of any other part of the building for the purpose of working out the rental value of the net lettable area of the premises themselves.
30. Counsel for the first respondents submitted that in paragraph A.4(k)(xvi), the word “areas” in the expression “areas other than the net lettable area of the premises” should be construed as limited to the balance of the net lettable area of the building, that is to say, the portion of the building leased to the Commonwealth other than for DFAT purposes. In his submission, the word “areas” should not be interpreted to include the public areas of the building or the rest of the block of land. To do otherwise, counsel submitted, would produce an absurdity compelling the conclusion that the valuer should disregard such obvious matters as the building as a whole, including its age, condition and architectural significance, even though those matters would have to fall within the overriding objective to take into account “all relevant matters” and even though there was a specific requirement to have regard to comparable premises, which might themselves exhibit similar features.
31. Counsel generally submitted that what the umpire had done was to take into account an amenity derived from a contractual provision in the lease (the right to exclusive use of and access to the public areas), as opposed to taking into account other areas, which was plainly not the same thing. The public areas might readily enough be said to be the source or origin of the benefits identified by the umpire, but it was those benefits acting upon the net lettable area to which the umpire had had regard, rather than having regard to the public areas themselves.
32. Counsel further submitted that the commercial rationale of schedule 4 to the lease was to establish a market value rental of the premises. Clear and unambiguous words would need to be employed in the lease to limit or otherwise impose restrictions on the application of normal valuation principles. The plaintiff had not attacked the umpire’s application of orthodox valuation principles, except in relation to the proper construction of clause A.4(k)(xvi). The umpire had discharged his obligation to perform the valuation in accordance with the terms of the contract between the parties and had not taken into account any irrelevant or impermissible matter. Accordingly, even if it might be thought that the allowance made by the umpire for the benefits of the use of and access to the public areas was excessive, that was a matter for his judgment as an expert and was not capable of invalidating his determination.
33. Counsel for the first respondents noted in passing that the effect of deducting the $25.00 per m2 included by the umpire to reflect the amenity arising from the use of and access to the public spaces would be to reduce the overall rental rate to $385.00 per m2, $10.00 less than the rate which had fixed or agreed upon for the two years prior to 1 March 2007, notwithstanding the umpire’s observation that there had been significant rental growth during the period leading up to that date.
Applicant in reply
34. Senior counsel for the applicant in reply referred to the terms of the first respondents’ lease to the Commonwealth for the purposes of the Department of Defence of the non-public areas of the building not leased to the applicant. That lease grants to the tenant the non-exclusive use of the common areas of the building, defined as those areas provided for common use with other occupants of the building or members of the public. Counsel submits that the common areas, as defined in that lease, correspond or at least overlap with the public areas identified in the lease to the applicant, detracting from the apparent exclusivity of the applicant’s rights with respect to the public areas.
35. The essential submission of senior counsel for the applicant was that the umpire was prohibited by clause A.4(k)(xvi), not merely from valuing areas other than the net lettable area of the premises, or from permitting the lessee to be charged rental in respect of those areas, but rather from taking those areas into account at all for the purposes of the valuation.
Analysis
36. The Court is required to resolve an issue which arises out of an inconsistency in the provisions of the lease, albeit not a glaringly obvious one. The inconsistency is contained in schedule 4 to the lease, which sets out the procedure to be followed in reviewing the rent on each biennial review date. The inconsistency is contained in clause A.4(k) of schedule 4, which sets out a number of considerations which a valuer must take into account in determining a current open annual market rental value for the premises, and a number of other factors which the valuer must not take into account. The valuer is require to take into account all relevant matters, and must also take account of the terms and conditions generally of the lease. But the valuer must not take into account areas other than the net lettable area of the premises.
37. It is not entirely clear what the parties intended by that last phrase. It must be construed in its context. It is one of eight matters which the valuer must not take into account. Some of these, one would think, would, if taken into account, have the effect of reducing the rental value: for example, paragraph (x) (the adverse effect on the condition of the premises of any breach by the lessee of the lease). Others would be more likely to result in an increase in the rent: for example, paragraph (xi) (improvements to the premises paid for by the lessee or owned by the lessee). It is not so obvious what the parties intended by paragraph (xvi) (areas other than the net lettable area of the premises).
38. The word “areas” is not defined in the schedule or in the interpretation clause of the lease itself. The word “area” is used in different senses in different parts of the lease. I am not attracted to the submission of senior counsel for the first respondents, that the word should be limited to areas within what is defined as the net lettable area of the building. Indeed, it is not clear whether it should be read as limited to areas within the building or even areas within the boundaries of the block of land.
39. The valuer is required to take account of the terms and conditions generally of the lease. These include part 21A of the lease, dealing with public areas. Clause 21A gives the lessee rights in relation to the public areas. I have set out the definition of “public areas” in paragraph 5 of these reasons. They include identified parts of the building, and also the land external to the building. The lessor agrees not to alter or add to the public areas, or erect or install any structure, equipment or display in the public areas, without the lessee’s consent. The lessor agrees to keep the public areas open for access to the premises by the lessee at all times, and grants to the lessee exclusive access to and use of the public areas. This includes the right to install artworks, to construct barriers, gates, desks, and sensors relating to security, to erect directory boards and displays, to hold functions and exhibitions, and “to operate exclusively the reception desk in the foyer”. The clause gives the lessee significant rights in relation to the public areas of the building, of a kind, I think I can reasonably say as a matter of common knowledge, not generally found in leases of office buildings. If I were to interpret schedule 4 as senior counsel for the applicant submits that I should, the effect would be that the valuer should not have taken clause 21A into account in his valuation, notwithstanding the significant rights that clause confers upon the lessee, because to do so would involve taking into account areas other than the net lettable area of the premises.
40. Normally one would assume that a lease of premises within an office building had been drafted on behalf of the lessor. The evidence suggests in the present case that it may have been a condition of the grant of the Crown lease to the first respondents that they erect a purpose-built building to be occupied by the applicant and that the terms of the lease to the applicant were effectively imposed upon the lessor as part of that process. Regardless of the position in that regard, the parties have agreed that in the interpretation of the lease, no rules of construction are to be applied to the disadvantage of any party on the basis that it put forward the lease. I must accordingly interpret the lease without the benefit of any such rules of construction.
41. It seems to me that whatever the parties precisely intended by the injunction to the valuer not to take into account areas other than the net lettable area of the premises, if they had intended that the valuer was not to take into account the benefits conferred on the lessee by clause 21A of the lease, they would have said so in so many words.
42. It follows that I am not persuaded that the valuer fell into error by making an allowance of $25.00 per square metre per annum (based on the net lettable area of the premises) for the reasons which he set out in clause 8.7 of his reasons for determination. It is noteworthy in that regard that the allowance of $25.00 was based on the area in square metres leased to the applicant, not on the dimensions of any other area of the building or the land.
43. I have found the task of reconciling the requirements of schedule 4 to the lease difficult enough. It must be borne in mind that the valuer is not a lawyer and is not expected to approach his task as a lawyer. Still less would he be expected to obtain his own legal advice about an apparent inconsistency in the provisions about rental review.
44. I am satisfied that the second respondent properly undertook the task required of him as umpire, and in doing so arrived at a proper market rental determination.
Conclusion
45. The applicant has not made out its case for relief. The originating application will be dismissed with costs.

I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Master.

Counsel for the applicant: Mr A Robertson SC
Solicitors for the applicant: Mallesons Stephen Jaques
Counsel for the first respondents: Mr BAJ Coles QC
Solicitors for the first respondents: HWL Ebsworth Lawyers
Date of hearing: 31 August 2009
Date of judgment: 11 September 2009

Supreme Court of the ACT

Commonwealth of Australia v MTAA Superannuation Fund Property Pty Ltd and Sparad Pty Ltd & Anor [2009] ACTSC 115 (11 September 2009)