The recent New South Wales Court of Appeal case of Strike Australia Pty Ltd v Data Base Corporate Pty Ltd  NSWCA 205 is of relevance to commercial rent valuers, landlords and tenants. More broadly, it has application to any type of commercial agreement which sets out criteria for a third party, such as an adjudicator or expert, to take into account in making a determination. It is an interesting illustration of how common "boiler plate" market rent valuation clauses can create disagreement sufficient to warrant an appellate level decision, all the more so given there was a split between the judges as to the correct interpretation.
Data Base Corporate Pty Ltd (Landlord) leased premises to Strike Australia Pty Ltd (Strike) at the King Street Wharf in Sydney. Strike conducted a ten-pin blowing alley, bar and general entertainment venue on the premises. Those who are familiar with Strike bowling centres might be able to imagine that the premises occupied a large footprint relative to other entertainment venues in central Sydney. They were a place of public entertainment within an entertainment and recreation precinct attracting large numbers of domestic and international visitors.
Strike gave notice that it exercised its option to renew, which triggered a market rent review under the lease.
The market review clause in the lease provided that, in the absence of agreement, the market rent was to be determined by an independent valuer who, amongst other requirements, must have regard to market rents "for comparable premises in the vicinity of the Premises".
The valuer had regard to rents in the King Street Wharf complex, basements in the Sydney CBD and suburban bowling alleys at Macquarie Park and Bondi Beach. The Landlord objected to the use of the suburban properties. At the trial, the Court sided with the Landlord and decided that the valuer had not carried out his determination of the market rent in accordance with the lease as he erroneously included market rents for premises "not in the vicinity of the Premises" (i.e. the premises in Macquarie Park and Bondi Beach). The valuer had testified that he "placed more weight on the available rental evidence in relation to the permitted use and physical characteristics of the premises, than the location".
Strike appealed that decision, as the valuation was more favourable to Strike if those suburban properties were included in the valuer's determination. Strike's argument was two-fold. Firstly, it argued that even if the suburban properties were not "in the vicinity of the Premises", the lease allowed the valuer to have regard to them. That is, the requirement that the valuer must have regard to premises "in the vicinity of the Premises" did not mean that the valuer must exclusively have regard to such premises. Secondly, if that ground was wrong, the suburban properties were "in the vicinity of the Premises".
Court of Appeal findings – does "have regard to" mean "only have regard to"?
The main issue was whether the market review clause was exhaustive as to the matters to which the valuer must have regard. In other words, while it was clear that the valuer must have regard to premises "in the vicinity of the Premises", could the valuer have regard to premises not "in the vicinity of the Premises"? One of Strike's arguments was that if the only rents that the valuer could have regard to were those truly and objectively in the Sydney CBD, then the only rents that the valuer could have regard to would be a bowling alley in Darling Harbour and a basement near Chinatown – which would have led to a rent increase of almost 100 per cent of what Strike was paying. Strike argued that such a result would be incongruous and telling against the interpretation that the direction to the valuer was exhaustive.
Unfortunately for Strike, two of the three judges of the Court of Appeal agreed with the trial judge's conclusion that the market review was exhaustive in regards to the list of properties that the valuer may consider. That is, the valuer must only have regard to premises in the vicinity of the premises, and not premises not in that vicinity. Although not expressed in the clause, this conclusion was supported by the overall drafting of the clause, including the definition of valuer which read:
"Valuer means a person who is both a practising real estate agent and a full member of the API of not less than 7 years standing and active and experienced in the valuation of premises similar to the Premises in the central business district (CBD) and fringe CBD of Sydney."
Court's findings – were the suburban properties "in the vicinity of" the premises?
Strike argued that given the less common nature of its premises, and also given the market review clause required the valuer to take in to account the "Permitted Use", it was open to the valuer, and indeed appropriate, to consider a larger "vicinity" in order to identify genuinely comparable properties.
The Court rejected this argument, with one of the judges stating:
"I do not accept the submission that the notion of 'comparable' premises relevantly informs the geographical ambit of 'in the vicinity'. That is tantamount to saying that the valuer would be entitled to take into account premises in Timbuctoo if the valuer considered those premises (in his or her discretionary judgment) to be comparable premises. That gives no work whatsoever to the limitation 'in the vicinity'."
All three judges agreed that the suburban premises were objectively outside the vicinity of the premises.
The Court of Appeal affirmed the trial judge's decision that the valuer did not carry out the determination of the market rent in accordance with the lease. The valuation was therefore not binding on the parties. This was the result that the Landlord wanted.
- the market review clause in the lease was a common garden variety market review clause. Even though the Landlord was successful in this case, landlords are advised to regularly review and consider the market review clauses in their leases, and ensure that they are appropriate to each and every specific lease that they enter into so that they will not give rise to costly disputes
- if a party does not intend criteria in a contract to be exhaustive, this should be plainly set out. This principle applies beyond commercial leases. It is applicable to any type of commercial agreement where directions are given to an arbiter
- although Strike's arguments were found to be legally wrong, having regard the drafting of this particular lease, tenants who operate a business that might be considered 'unique' in their locality, and who have sufficient bargaining power, should consider negotiating market review clauses that allow the valuer to take into account premises that are located further afield.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.