Australia: Valuers beware – invalid rental valuation upheld by Supreme Court of Victoria

Last Updated: 15 July 2016
Article by Rohan A Ingleton

In brief: A recent VCAT decision addresses the need for valuers to ensure that detailed reasons are given by a valuer in a market rent valuation, or the valuation can be set aside.

What you need to know:

  • Section 37(6) of the Retail Leases Act 2003 (Vic) (Act) requires valuers to provide detailed reasons in a market rent valuation for a property. What comprises detailed reasons is considered in the decision.
  • This decision also comments on what methodologies valuers should use when assessing the market rent for restaurants and bars as opposed to hotels.

Background

On 19 May 2016, the Supreme Court of Victoria upheld a VCAT decision in relation to the matter of Higgins Nine Group Pty Ltd v Ladro Greville St Pty Ltd [2016] VSC244.

In this case, Madgwicks acted for Ladro Greville St Pty Ltd (Tenant) who objected to a market rental valuation carried out by an independent valuer to determine the market rent in 2014, for the restaurant operated by the Tenant in Prahran. The Tenant objected to the valuation on numerous grounds and Higgins Nine Group Pty Ltd (Landlord) initiated an action at VCAT seeking a declaration that the valuation was binding on the parties.

The valuer determined a market rent based on a comparative market methodology and included in the valuation, a secondary valuation based on a trading profits methodology, which resulted in a rent being $2,000 less than the comparative market methodology.

Interestingly, on the eve of the VCAT hearing, the Landlord conceded that the valuation based on a comparative market methodology was erroneous and not in accordance with the lease. This was because the valuer had incorrectly measured the gross lettable area of the premises. However, the Landlord argued that VCAT could rely on the secondary valuation based on the trading profits methodology, which could be substituted for the rent determined using the comparative market methodology.

The decision

VCAT determined that it did not have jurisdiction to simply substitute the trading profits methodology valuation for the primary method used in the valuation, being the comparative market methodology. Even if this could be done, VCAT determined that the valuation was not in accordance with the Act.

VCAT formed the view that the valuer had failed to give proper reasons in determing the market rent. In arriving at a rent based on the trading profits methodology, the valuer assumed that the premises could have achieved a 26% increase in gross annual turnover from the trading figures that were received by the valuer from the Tenant. In this regard, VCAT relevantly noted the following:

  • the valuer failed to give detailed reasons in the valuation and did not specify the matters to which the valuer had regard as required by section 37(6) of the Act;
  • very few reasons were given as to how the valuer could conclude that the higher turnover was achievable and VCAT was left to speculate as to how the valuer arrived at such a determination; and
  • the valuer failed to provide details as to what other venues were used as a comparison, for instance, did other venues have similar lettable area? Did other venues have the same type of liquor licence? Were other venues being operated as a restaurant/bar? Were other venues in a similar location with a similar demographic?

It is crucial that valuers provide detailed reasons for any valuation and a step-by-step guide as to how a valuer forms an opinion as to the rent. VCAT noted that the "requirement" is not satisfied by a decision padded with preliminary, non-contentious material, reportedly based on "a full consideration" of the relevant facts, followed by a "leap to judgement."

Furthermore, in relation to the trading profits methodology used by the valuer, VCAT stated "those premises, by and large, relate to hotel premises. There is no adequate explanation as to how the expenses of those other premises compare to the expenses of the restaurant/bar operated by the Tenant."

This raises an important issue following the decision in Serene Hotels Pty Ltd v Epping Hotels Pty Ltd [2015] VSCA228, in which the use of the trading profits methodology was effectively validated. Whilst the VCAT decision does not seek to question the trading profits methodology, it queries whether it is appropriate for use in determining the rent for a restaurant/bar.

In Madgwicks' view, the trading profits methodology should only be used for determining the rent for hotels (not restaurants, bars and other such venues) and only where there is inadequate comparable market rental evidence.

The Landlord sought leave of the Supreme Court to appeal the decision of VCAT. Justice Croft of the Supreme Court denied leave to appeal but notes that even if leave had been granted, the decision of VCAT was affirmed.

Conclusion

The VCAT decision, which was upheld by the Supreme Court, raises the need for valuers to consider the following:

  • prior to delivering a determination of a market rent, a valuer should engage a surveyor to undertake a survey of the premises to ensure that the correct area is being valued;
  • the valuer must give detailed reasons as to the rental determination and provide a step-by-step guide as to how the valuer has arrived at the valuation; and
  • valuers should exercise caution in using the trading profits methodology for venues that are not hotels, but operate as a restaurant or bar, and only do so where there is inadequate comparable evidence available.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.

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