In a previous alert, we outlined the steps involved for a commercial landlord and tenant who cannot agree on a new rent in appointing an expert to determine the rent.

We also outlined the steps under the Retail Shop Leases Act 1994 (Qld) to be taken by the expert in determining the current market rent, and how you can challenge that expert’s determination if you are still unsatisfied.  In essence, there were three key criteria for the expert to meet:

  1. the expert must determine the rent on the basis of what would be reasonably expected if the shop were unoccupied and offered for a similar use, and on the basis of gross rent less landlord’s outgoings, and on an effective rent basis (i.e. less any rent free periods or other incentives);

  2. the expert must not have regard to the value of goodwill or the tenant’s fixtures and fittings; and

  3. the expert must have regard to the terms and conditions of the lease, and submissions from either party.

These criteria are generally standard across the states and provide a level of stability for commercial landlord and tenant dealings Australia wide. A recent decision in Victoria questioned whether a valuer breached the Victorian Legislation by looking at the tenants’ profits to determine the rent, and in doing so impliedly gave value to the tenants fixtures and fittings (in this case 40 gaming machines that were boosting the tenants profits) breaching the second criteria above. The decision has been watched in Victoria for the past 12 months as it made its way from VCAT (the equivalent of QCAT here in Queensland) to the Victorian Supreme Court, and then finally on to the Victorian Supreme Court of Appeal. In Serene Hotels Pty Ltd v Epping Hotels Pty Ltd [2015] VSCA 228, ultimately it was found that an expert valuer using the profits method (and mentioning the gaming machine fixtures and fittings) did not contravene the Act.

The Victorian legislation has the same three key criteria as the Queensland legislation, and in this case the second criteria that a valuer must not have regard to the value of goodwill, fixtures and fittings came into question. The tenant, a publican, entered into a 14 year lease of a hotel. The lease required a rent review after five years. The hotel operated not only a bar, bottle shop, bistro and TAB facility, but also 40 gaming machines which the tenant had to purchase licences for at a price of $49,540.00 each. The idea behind this part of the legislation is that a tenant should not have to suffer a rent increase due to its own improvements.

The specialist retail valuer determined that the rent should be increased (significantly) because of the profits being made by the tenant. At VCAT, the tenant argued that by using the profits method the valuer was impliedly making an allowance for the goodwill, fixtures and fittings (i.e. the gaming machines) of the hotel in breach of the Victorian Legislation. The tenant was successful at VCAT and the valuer was initially ordered to recalculate his rental determination.

The landlord sought a review of that decision and was successful at the Supreme Court, and again at the Court of Appeal. Whilst it may initially seem that the tenant was correct in that goodwill, fixtures and fittings must have been included in any calculation of profit, the Court of Appeal reasoned that it is sufficient to use the profits method if the valuer then later on “cancels out” any implied amount allowed for in respect of the tenant’s fixtures and fittings. In this case, the valuer was found to have proceeded on the basis of the rent that a hypothetical future tenant would pay for leasing a “bare shell” (i.e. without the 40 gaming machines) and was therefore found to have allowed to “cancel out” any implied amount for goodwill, fixtures and fittings in the calculation of the rent.

The case has been widely followed in Victorian legal circles, and will have implications more broadly for expert determinations of rent. The case affirms that valuers may use a profits method in determining future rent, provided that any implied inclusion of amounts for goodwill, fixtures and fittings is cancelled out, in essence by the valuer referring to a hypothetical future tenant leasing a bare shell.