Epping Hotel Pty Ltd v Serene Hotels Pty Ltd decision – the profits method and consideration of supplementary report approved

April 29, 2015

Uncategorized

Justice Croft in the Supreme Court yesterday overturned the controversial decision in Serene Hotels Pty Ltd v Epping Hotels Pty Ltd (Retail Tenancies) [2014] VCAT 97.

The decision at first instance had two important aspects:

  1. it suggested that the ‘profits method’ of determining the rent was prohibited by s 37(2) of the Retail Leases Act 2003 (Vic), at least in the context of a gaming venue; and
  2. the Tribunal found that it was entitled to disregard a supplementary report by the specialist retail valuer elaborating on his reasons.

The decision at first instance is discussed in more detail in an earlier post here.

In his Honour’s decision handed down yesterday, a copy of which is available at Epping Hotels Pty Ltd v Serene Hotels Pty Ltd [2015] VSC 104, the Court found that:

  1. the ‘profits method’ did not offend s 37(2) of the RLA 2003; and
  2. the Tribunal erred by refusing to consider the supplementary report.

The argument in relation to the profits method was based on whether the methodology offended the requirements to disregard the value of the tenant’s fittings and fixtures and to assume that the retail premises was unoccupied and available for rent. It did not consider other aspects of the profits method that have been controversial in the past, particularly the mechanism for disregarding the value of the tenant’s goodwill. However, his Honour rehearsed a large amount of caselaw supporting the use of the profits method generally and did not criticise the treatment of tenant’s goodwill in the determination.

His Honour also made some other interesting observations.

First, there is an ongoing question over whether s 148 of the VCAT Act allows the Court to hear an appeal from the Tribunal only on a pure question of law or whether it extends to a mixed question of fact and law. The Court of Appeal recently declined to resolve the issue (see See Cosmopolitan Hotel (Vic) Pty Ltd v Crown Melbourne Ltd [2014] VSCA 353 at [52], [171]).

On this issue, Justice Croft made the following remarks (footnotes omitted):

67.    For the sake of completeness, I note a possible argument that Question 2 raises a mixed question of fact and law. This possibility was raised in passing by the parties but taken no further. This leads me to observe, simply, that it is suggested that the question of whether s 148(1) of the VCAT Act allows appeals on mixed questions of fact and law is unsettled. Had it been necessary to decide this point, I would have been disinclined to curtail the operation of s 148(1) of the VCAT Act by finding that mixed questions of fact and law cannot form grounds of appeal. As the authorities indicate, there is no “bright line” between questions of law and questions of fact and in many cases these questions will not be pure in their elements — law or fact. In the context of the provisions of s 148(1) of the VCAT Act, I do not regard such authorities as transcending the clear language and purpose of these provisions, which is to provide an effective appeal mechanism to this Court to correct errors of law — whether or not arising out of a mixed question of fact and law — without crossing the line into something in the nature of a merits appeal which would, as indicated previously, be at odds with Parliament’s intention to establish a specialist tribunal. Moreover, the purpose of s 148(1) of the VCAT Act in providing an effective appeal mechanism with respect to questions of law is likely to be subverted if mixed questions are excluded and wasted time and expense flows from the need to search for a non-existent “bright line” for the purpose of isolating “pure” questions of law.

Secondly, s 37(2) of the RLA 2003 and the text of the lease together set out all assumptions that the valuer must make and the things that the valuer must have regard to or disregard (Croft J refers to this combination as the valuer’s ‘charter’).

I often see rental determinations in which the determining valuer has simply recited the text of the valuer’s charter and confirmed compliance, but has not elaborated on the consideration given to one or more of the items.

It is common for a party trying to impugn a determination to say that the valuer has not given due consideration to elements of the valuer’s charter and has merely ‘paid lip service’ to them, relying on the following passage from Salem Enterprises Pty Ltd v CSJ Food Enterprises Pty Ltd [2008] VCAT 320 (emphasis added):

26.   Relatedly there is the further matter of compliance with s 37(6). The provisions of s 37(2)(b) are also mandatory in my view. Why specify them, unless not? Yet in furtherance of the issue concerning s 37(2)(b) I am unable to detect where [the determining valuer] says he had regard to s 37(2)(b). Merely to recite it is to pay it lip service . His determination in paragraph 8 (his “Basis of Determination”) does not specifically mention this. Why should I regard this as something so unimportant it can be overlooked as a mere error of process? In my view I cannot so overlook it. I do not consider it a mere technicality – to be disregarded as if it counts for nothing.

In the Epping Hotels case, Croft J found that (emphasis added):

78.   At paragraph 2.2 of the Rental Determination, under the heading “Basis of Determination”, the Valuer recites s 37(2) and states that these requirements were complied with in the preparation of the Rental Determination. The matters set out in sub-s (2)(d) are not mentioned elsewhere in the Valuation; however, this is consistent with the Valuer’s statement in the Supplementary Report that the rental evidence considered as part of the Valuation was not affected by concessions or other benefits offered to prospective tenants, rather than an indication that these matters were disregarded.

79.   Nevertheless, having regard to the requirement in s 37(6)(c) of the Act, that the valuation “specify the matters to which the valuer had regard in making the determination”, it may be that a general reference of the kind found in the Rental Determination may in some instances be insufficient. Nevertheless, in the present circumstances a reading of the Rental Determination as a whole would indicate to a reasonable reader that all relevant matters as required by the Act had been addressed. In any event, the fact that Epping requested the Supplementary Report and sought to have it considered by the Tribunal suggests that Epping considered the absence of a specific reference to the matters set out in sub-s (2)(d) might have been, at least, problematic. It is on this basis then that I proceed to determine the question of whether the Tribunal should have had regard to the Supplementary Report.

This suggests that reciting the terms of the valuer’s charter and confirming compliance may, in the right circumstances, be sufficient.

Thirdly, his Honour did not find that a supplementary report must be taken into account in all circumstances, providing the following caution:

100.   This is not to say that a tribunal or a court must have regard to supplementary correspondence, or material provided outside the timeframe set by s 37(7)(a), in every case. Indeed, there may be cases where the supplementary material is provided so late that to consider it would deprive a party of procedural fairness. This is, however, not such a case. …

The second and third points above give rise to the following comments for practitioners:

  1. valuers conducting a rental determination should ensure that their report describes the consideration given to every item in the valuer’s charter and avoid merely reciting its terms and confirming compliance;
  2. practitioners seeking to either impugn or defend a rental determination where the determining valuer has merely recited the terms of the valuer’s charter and confirmed compliance without elaborating on one or more item should consider:
    1. writing to the valuer at the earliest opportunity to request a supplementary report (if they are seeking to defend the report); and
    2. whether a reading of the determination as a whole would indicate to a reasonable reader that all relevant matters as required by the valuer’s charter had been addressed.

About Sam Hopper

Sam is a property and insolvency barrister.

View all posts by Sam Hopper

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  1. Epping Hotel v Serene Hotels appeal | Sam Hopper Barrister - July 3, 2015

    […] those following the Epping Hotel v Serene Hotels rent determination case (see here), an application for leave to appeal the decision the decision of Croft J has been filed in the […]

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