Leases and contracts commonly include clauses requiring a dispute to be determined by an expert. Matters for determination can include the rent payable under a lease or the value of land under an option agreement. The decision of an impartial expert is often considered to be a fair way to resolve a deadlock. However, it is important to carefully craft the expert determination clause to make sure the expert is bound to comply with the parties’ requirements.

The Victorian Supreme Court recently considered whether an expert had carried out the expert determination in accordance with the requirements of an option deed. In the case of Adnow Pty Ltd (as trustee for the Adnow Pension Fund) v Greenwells Wollert Pty Ltd [2016] VSC 153, the parties were in dispute as to whether an expert valuer properly valued the land in accordance with an option deed.

Greenwells Wollert Pty Ltd was granted an option to purchase land from Adnow Pty Ltd (as trustee for the Adnow Pension Fund) (Adnow). The option deed provided that the price was to be agreed by negotiation, and failing which, determined by an independent valuer. “Independent valuer” was defined to mean a certified practising valuer approved by both parties and, failing agreement, nominated by the president for the time being of the Australian Property Institute (Victorian Division).

The parties were unable to agree on a valuer and an independent valuer was appointed for them.

Clause 5.7 of the deed stated that the valuation must:

  • be in writing;
  • have regard to the valuation guidelines (being the Australia and New Zealand Valuation and Property Standards published by the Australian Property Institute);
  • proceed on the assumption that a Precinct Structure Plan affecting the property had been approved by the Minister for Planning;
  • specify the matters to which the independent valuer had regard in making the determination; and
  • be provided within one month of his or her appointment.

Adnow argued that the valuation should be set aside as:

  • The valuer failed in his assessment to assume that the Wollert Precinct Structure Plan had been approved by the Minister. Justice Judd understood this to mean that the valuer did not have regard to, or disregarded, the content of the Plan.
  • The valuer failed to carry out a ‘valuation’ in making his determination because he failed to state the matters to which he had regard and the report failed to satisfy the minimum requirements for a valuation, because the valuer failed to identify comparable transactions on which he relied, and provided no analysis or workings to show the basis for his assessment.
  • The valuer failed to have regard to the valuation guidelines, specifically the valuation procedures in part 8.1 and the guidelines in relation to feasibility studies in part 11.5.

The Court dismissed Adnow’s application. His Honour Justice Judd considered that the parties, by their agreement to appoint the valuer, had accepted that his determination would be final and binding.

His Honour did not regard the absence of an express acknowledgement in the report that the valuer had applied the valuation guidelines as a defect or omission vitiating the report as non-compliant with the terms of the contract. Instead he found that the valuer was, by reason of his appointment, qualification and status, bound to apply the valuation guidelines.

This case serves as a useful reminder that expert determination clauses must be prepared carefully, whether included in a lease, an option deed or a construction contract. For example, you may wish the expert determination clause to:

  • set out any particular guidelines or other matters that the parties require the valuer to have regard to and note that the report must expressly identify how those matters were considered;
  • note the consequences of the valuer failing to take these matters into account; and
  • note whether the parties intend the determination to be final and binding.