Landlord unsuccessful in challenging independent rental valuation of commercial premises - 122 Pitt Street v Universal 1919

In brief - Landlord unable to prove deficiency in rental valuation and thus bound by it

In the recent case of 122 Pitt Street v Universal 1919, the landlord unsuccessfully challenged the rental value determination of an independent valuer. The NSW Supreme Court found that the parties were bound by the valuer's determination and rejected the landlord's rent proposal.

Landlord proposes new base rent and tenant requests rent valuation

The case 122 Pitt Street Pty Ltd ACN 104 825 961 v Universal 1919 Pty Ltd [2015] NSWSC 234 concerned a lease made on 20 May 2004, which stipulated that the landlord leases the basement, ground floor, mezzanine level and level 1 of 122 Pitt Street, Sydney to the tenant. The lease was for an original term of 10 years, terminating on 31 May 2014, with an option for a further 10 years. The tenant exercised this option.
 

The landlord proposed a new base rent for the leased premises in excess of $1,000,000 per annum. The tenant invoked the rent dispute mechanism under the lease, which allowed for a market review of the base rent by an independent valuer who would determine the current market rent for the premises. This would become the new base rent.
 

The valuer who was appointed made a determination of the market rent, submitted on 1 June 2014, which was approximately $500,000 less than the annual rental figure proposed by the landlord.
 

The landlord claimed that there was a deficiency in the determination, as the lease contained specific provisions about how the valuer was to determine the market rent for the premises. These included the injunction in clause 5.9 that the valuer should "disregard the value of any goodwill attributable to the Tenant's Business and the value of the Tenant's Fixtures or fitout". The landlord based its claim on the fact that the valuer made it clear that he had taken into account the tenant's obligation under Clause 28.5.3 of the lease to spend a minimum of $1,000,000 on what was described as "fitout work".

Did the valuer breach the provisions outlined in the lease?

The key issue the court had to tackle was whether or not the valuer had breached the provisions outlined in the lease. If he had not, then the determination would stand and would become the new base rent. If he had, then the court would have directed the parties to restart the mechanism under the lease with the nomination of a valuer by the President of the NSW pision of the Australian Property Institute. It would have been solely the President's decision whether to nominate the same valuer again or somebody else.

Relationship between "fitout" and "fitout work"

The court applied the approach set out by the High Court in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7, that "the meaning of terms of a commercial contract [are] to be determined by what a reasonable businessperson would have understood those terms to mean". This led the court to conclude that "fitout work" is distinct from "fitout", with the latter being the product of the former. Consequently, the court found that the landlord and tenant are bound by the determination.

The court also found Clause 28.6.2"... unless the Landlord otherwise requires, remove the Fitout Work and the Signage..." to be constructed poorly. Given the specific definition of "fitout work" assembled by the court, the court deemed its inclusion in the clause absurd, as one cannot "remove" work that has been done. What the parties intended it to mean cannot be determined and thus the court rejected the provision.

Difference between "spending" and "value"

If, however, the court had found that "fitout" is classified within "fitout work", there is an alternative basis on which the court could have found that the valuer complied with Clause 5.9(a).
 

The valuer had taken into account the tenant's obligation to "spend a minimum of $1,000,000 on the fitout work". Clause 5.9(a) required the valuer to disregard the value of specific things. The court concluded that the valuer took into account an obligation to spend, but not the value of the result of the expenditure and hence was not in breach of the provision.
 

This case analyses the proper meaning of "value" and the court clearly differentiates between value and cost. "Cost" is what one has spent on something; it does not equate with "value", which is what something is worth.

Court's ability to disregard non-coherent provisions

The court also delves into the importance of parties constructing coherent contracts, demonstrating that if there are "bespoke provisions", then it may be necessary for the court to modify the strict wording and even reject words or whole provisions. 

Potential of market rent determinations to differ from expectations

This case shows that in the situation of a market rent determination, there can be an enormous difference between what the valuer determines and what the parties may have expected.
 

The lesson here for tenants is that if your landlord proposes a new base rent which you believe is excessive, it is worth making use of the rent dispute mechanism under your lease to have an independent valuer appointed to determine objectively what the current market rent is for your premises.
 

Furthermore, before tenants enter into a lease with a landlord, they should ensure that it contains an adequate rent dispute mechanism.
 

The lesson for landlords is that proposed increases in base rent should be based on a realistic assessment of what the market rent is for the premises and the provisions of the lease. Landlords who merely pluck a number from the air are likely to find their tenants using the rent dispute provisions of the lease to challenge the proposed increase.