Avoiding challenges to rental determinations by providing detailed reasons

Specialist retail valuers play a key role in market rent reviews pursuant to retail premises leases.

Where the parties are unable to agree on the market rent obtainable at the time of the review, the rent is to be determined by a valuation undertaken by a special retail valuer (“valuer”).  However, the provision of a rental determination by a valuer does not always resolve the parties’ disagreement as to what the market rent should be.  A party who is dissatisfied with the determination will often seek to have set it aside.

To ensure that a rental determination cannot be successfully challenged by a party, and in view of recent decisions by the Victorian Civil and Administrative Tribunal (“VCAT”), this article discusses the significance for a valuer to include detailed reasons for his/her determination in the valuation report.

Relevant provisions of the Act

Pursuant to section 37 of the Retail Leases Act 2003 (Vic), a retail premises lease that provides for a market rent review, is taken to provide that, amongst other things:

• where the parties cannot agree on the current market rent obtainable at the time of the review, the rent is to be determined by a valuation undertaken by a valuer (subsection 37(3));
• in determining the rent, the valuer must take into account the matters set out in section 37(2) of the Act (subsection 37(5)). Those matters include the provisions of the lease, and the rent that would reasonably be expected to be paid for the premises if they were unoccupied and offered for lease for the same, or a substantially similar, use to which the premises may be put under the lease; and
• the valuation must be in writing, contain detailed reasons for the valuer’s determination, and specify the matters to which the valuer had regard in making the determination (subsection 37(6)).

Can a rental determination be challenged if reasons are not provided by the valuer?

Courts in Victoria have accepted that in order to determine whether the parties are bound by a rental determination, it is necessary to consider the terms, express or implied, of the contract between the parties, such contract being the lease.  If the determination does not correspond to what the valuer is required to determine under the contract, the determination may be set aside.

As noted above, subsections 37(5) and 37(6) of the Act are taken to be terms of the lease.  It follows that where a valuer makes a determination, it must comply with the requirements of those subsections, which include that the valuer’s valuation contain detailed reasons for the rental determination.

In the cases of Dalmantino Pty Ltd v Creative Laser Pty Ltd (Building and Property) [2017] VCAT 875 (16 June 2017) and Josephine Ung Pty Ltd v Jagjit Associates Pty Ltd (Building and Property) [2007] VCAT 2111 (15 December 2017), VCAT held that the relevant rental determination was vitiated on the ground that, amongst others, the valuer had not provided adequate reasons in respect of matters to which the valuer had regard in providing the rental determination.  Consequently, in each of those cases, the valuer’s reasoning was inconsistent with the Act, and therefore the terms of the lease.

The question of whether a valuation provides adequate reasons for the valuer’s determination requires a case by case assessment in light of, amongst other things, the nature and characteristics of the premises the subject of the valuation.  However, set out below are some general guiding principles as to the level of detail that VCAT will require in a valuation.

Firstly, the valuation must provide adequate detail as to how the valuer formed his/her opinion.  A valuation that leaves the reader to speculate as to how the valuer formed his/her opinion is likely to be contrary to what is required under the Act.

Secondly, whilst the valuation must specify what matters the valuer has taken into account, it is not enough to simply state that the valuer has had regard to those matters.  The valuer must adequately explain how each matter has been taken into account.

If you require advice or further information in relation to any of the matters discussed in this article, please contact our Corporate & Commercial team on 03 5273 5273.