ORTI-TULLO & ANOR v SADEK & ANOR

Judges:
Bryson J

Court:
New South Wales Supreme Court

MEDIA NEUTRAL CITATION: [2001] NSWSC 855

Judgment date: 28 September 2001

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Bryson J

The plaintiffs challenge a determination by a valuer of the current market rental value of commercial premises on the exercise of an option to renew a lease. The challenge is based on the treatment of Goods and Services Tax (GST). The defendants conduct a Vartex branded Service Station on the leased land at 127-129 Marion Street, Leichhardt at the corner of Edith Street. The plaintiffs as lessors granted to the defendants as lessees a lease of the land for a term of five years from 1 August 1995 to 31 July 2000 with an option to renew for five years. In the schedule to the lease Item 3 showed the yearly rent as $50,868.72. There was no provision for annual market reviews. It is not disputed that the option to renew the lease was duly exercised and that the defendants are entitled to the grant of a lease for five years from 1 August 2000.

2. The Summons claims a declaration that the valuer's determination is not a final and binding determination, an order that it be set aside and an order that the parties instruct the valuer to determine the current market rental pursuant to the lease. The claim for a declaration and the claim to set aside the determination are claims for legal remedies, in the case of the declaratory order for a statutory remedy. The claim for an order requiring the parties to go on with the valuation process is a claim for an equitable remedy, specific performance of part of their obligations on renewal of the lease. If the Court ordered specific performance the order would not be limited to part of their obligations. However there is no indication in the evidence that either party is unwilling to enter into a new lease on whatever may be the proper terms, or that any equitable remedy is necessary.

3. In the lease cl. 2.2 deals with Option to Renew and contains the following provisions:

``2.2.3 In the event that the Lessee exercises an option to renew this Lease the Lessor will, within 1 month of the date of service of the Option Notice, submit a lease to the Lessee on the same terms and conditions as this Lease except that:-

• (a) the provisions of this Clause 2.2 will not appear in such lease;
• (b) the rental to be specified in Item 3 of the Reference Schedule to such lease will be such amount as the parties may agree, within 7 days of the date of service of the Option Notice, to be the market rental for the Premises as at the Commencing Date of such lease or, in the absence of agreement by that date, such amount as may be determined to be the market rental for the Premises as at the Commencing Date of such lease in accordance with clause 2.2.4.

2.2.4 If the parties fail to agree, within 7 days of the date of service of the Option Notice, on the amount to be inserted in Item 3 of the reference schedule to such lease, such amount will be the amount determined to be the current market rental for the Premises as at the Commencing Date of such lease by a person agreed upon by the parties within 7 days of the date of service

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of the Option Notice or, failing agreement, by the President for the time being of the Australian Institute of Valuers and Land Economists (NSW Division) Inc or his nominee in accordance with the following principles:-

• (a) the current market rent for the Premises is the rent that, having regard to the terms and conditions of this Lease and such other matters as are relevant to the assessment of current market rent, would be reasonably expected to be paid for the Premises if they were unoccupied and offered for renting for the use to which the Premises may be put in accordance with this Lease;
• (b) the value of the goodwill created by the Lessee's occupation and the value of the Lessee's fixtures and fittings in the Premises are to be ignored for the purposes of the assessment of current market rent;
• (c) the parties are to pay the costs of a valuation pursuant to this clause in equal shares unless the amount determined to be the current market rent for the Premises equals or exceeds any amount proposed by the Lessor prior to the appointment of such valuer, in which case the Lessee will pay all such costs.''

4. The parties did not agree on the rental amount for the new lease and the lessors' solicitors applied to the President of the Australian Institute of Valuers and Land Economists (NSW Division) Inc to appoint a valuer. The President nominated Mr Michael Paris, a certified practising valuer who is a director of Handley Paris & Partners, Property Valuers, Consultants and Land Economists who practise at 36 Clarence Street, Sydney. Mr Paris undertook the determination, and gave the parties an opportunity to make submissions to him; and one party did. Then on 1 September 2000 Mr Paris gave to the parties his determination in writing (Exhibit A, Tab 6).

5. The determination contains six pages. The determination identifies and describes the property and gives particulars of it such as zoning details, particulars of the lease, description of the property and improvements, land dimensions and title details. The determination does not expose on its face the underlying facts such as comparable agreements for leases or other material on which the valuer relied, and does not state any analysis or reasoning showing how the rental as determined was derived. It is not what it has been called in the case law a ``speaking valuation''.

6. The determination included the following statement:

``We have been instructed by letter dated 16 June 2000 from the Australian Property Institute to determine the current market rental value of the `Vartex' branded service station property at 127-129 Marion Street corner Edith Street, Leichhardt NSW 2040, as at the 1st of August 2000 subject to the terms and conditions of the lease. Lessor Salvatore Orti-Tullo and Antonia Orti-Tullo and Lessee Daniel Sadek.''

7. At p. 6 under the heading ``Rental Valuation'' appears the following:

``We received a letter and verbal submissions from the lessee Daniel Sadek including various letters between the lessor and lessee regarding rent, together with profit and loss statements for the years 1999 and 2000. No submission was received from the lessor.

Details in the submission were noted and the writer carried out independent research to check the information supplied and in addition to the submissions we carried out our own research into fuel throughputs, shop turnovers together with rentals paid for the various components and lease rentals paid for service stations as near as comparable to the subject property.

After having regard to and analysising the relevant market transactions we have determined the market rental.

We are of the opinion that the current market rental value of the subject property at 127-129 Marion Street the corner of Edith Street Leichhardt, taking into account the existing terms and conditions of the current lease as at the 1st of August 2000, is SIXTY THOUSAND DOLLARS ($60,000) PER ANNUM .

We have not sighted an Environmental Audit nor are we aware of any soil contamination which may have affected this property but we reserve the right to amend any report accordingly should the presence

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of soil contamination be established by soil analysis above standard levels.

This rental valuation is for the use only of the parties to whom it is addressed and no responsibility is accepted by this company to any third party in respect of the whole or part of its contents.''

8. The determination also includes a summary in which this appears.

``Rental Determination:

In accordance with the foregoing report and after taking into account the terms and conditions of the subject lease we assess the current market rental value of the subject property, as at the 1st of August 2000 at SIXTY HOUSAND DOLLARS ($60,000) PER ANNUM .''

9. The determination does not refer to GST. It does not explain in any way how the valuer treated GST, or any other charge or levy.

10. After the determination was made there was correspondence between the solicitors for the parties about the terms of the new lease, and a draft was prepared by the lessor's solicitors. In some way Mr Paris must have been asked how he treated GST in the determination. Whatever it was that led him to deal with this further does not appear by evidence. On 10 November 2000 Mr Paris wrote a letter to the lessors' solicitors (Exhibit A, Tab 14) which, apart from formal parts says no more than this: ``We wish to confirm that our rental determination dated 1 August 2000 for the above property did not include Goods and Services Tax (GST)''.

11. The lease did not contain any provision dealing in terms with the incidence of taxes levied on or in respect of the premises or the lease. There was no GST legislation when the lease was entered into. The lease was engrossed on a standard form which included cl. 4.2 Outgoings Contributions dealing with payment of water sewerage and drainage rates and charges. This clause was struck out at or before execution of the lease. It did not deal with GST, or with land tax, income tax or any other tax. The terms of a clause which the parties did not adopt but struck out have no influence on my decision.

12. A complex scheme of legislation relates to GST, which burdens taxable supplies made on or after 1 July 2000. The basic rules relating to liability for GST are set out in Ch. 2 of A New Tax System (Goods and Services Tax) Act 1999. By s. 9-10 leasing land for occupation is a supply having regard to subs. 2(d) with the definition of ``real property'' in s. 195-1, and to subs. 2(e). Section 7-1 imposes GST on taxable supplies and s. 9-40 imposes the liability on the supplier. Under s. 9-70 the rate is 10 per cent of the value of the taxable supply, and the value is determined by a formula in s. 9-75. Instalments of rent collected at the rate of $60,000 per annum will render the lessors liable to payments of GST at the rate of $5,454 per annum so that the rent as determined will yield the lessors $54,545 after GST. The lessors' overall position in relation to GST is probably more complex as they may be entitled to some input credit. The GST levied on the taxable supply becomes an input credit in the lessees' liability for GST which they incur on taxable supplies which they make in their Service Station.

13. Special provision relating to periodic supplies under agreements spanning 1 July 2000 is made by Pt. 3 of A New Tax System (Goods and Services Tax Transition) Act 1999. The effect of subs. 13(2) with the definition of ``review opportunity'' in subs. (5) is that rent paid under Mr Paris' determination is not free of GST.

14. As appears from the terms of cl. 2.2.4, the amount of rent in the renewed lease is to be the amount determined by the nominee valuer; that is the effect of the parties' agreement. The parties did not agree that the amount of the rent would be what objectively is the current market rent in accordance with the principles stated in subcll. (a) and (b); and a decision of the Court on what the current market rent is on those principles would not establish the parties' rights.

15. As I have said, in my opinion Mr Paris' determination is not a speaking valuation in the sense in which that expression has been used in case law. The expression was used by Lord Denning MR in
Arenson v. Arenson [1973] Ch 346 at 363 and in
Campbell v. Edwards [1976] 1 WLR 403 at 407, which form parts of a series commencing with
Dean v. Prince [1953] Ch 590. If the determination should be read with Mr Paris' letter of 10 November 2000 it still would not be a speaking valuation because the letter does not explain the underlying reasoning. In my opinion the susceptibility of a valuation to review by the Court does not depend on

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whether it is a speaking valuation: see
Horwitz Grahame Books Pty Ltd v. Mid-City Centre Pty Ltd (1990) NSW ConvR ¶55-514 at 58,843-5. There is a significant body of opinion which does not accept this: authorities to different effect were referred to in
Strang Patrick Stevedoring Pty Ltd v. James Patrick & Co. Pty Ltd (1993) 32 NSWLR 583 at 587 and see
Ricciardello v. Caltex Oil (Aust.) Pty Ltd [1991] ANZ ConvR 445.

16. The law relating to the examinability of valuations was considered extensively in the judgment of McHugh JA in
Legal & General Life of Australia Ltd v. A. Hudson Pty Ltd (1985) 1 NSWLR 314 particularly at 331-336. Although the Legal & General Life case was disposed of on other grounds, both in the Court of Appeal and in the Privy Council (1986) 61 ALJR 280, McHugh JA's judgment has often been referred to and followed. McHugh JA discussed the cases dealing with the concept of a speaking valuation at 332-335.

17. McHugh JA dealt with the significance of a mistake in a valuation at 335D to 336D. His Honour pointed out that the significance of a mistake for legal remedies may differ from its significance for equitable remedies. In the course of a valuable exposition McHugh JA said at 335G:

``While mistake or error on the part of the valuer is not by itself sufficient to invalidate the decision or the certificate of valuation, nevertheless, the mistake may be of a kind which shows that the valuation is not in accordance with the contract. A mistake concerning the identity of the premises to be valued could seldom, if ever, comply with the terms of the agreement between the parties. But a valuation which is a result of the mistaken application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case the critical question must always be: was the valuation made in accordance with the terms of a contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account or has failed to take into account matters which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract.''

18. In
Holt & Anor v. Cox (1997) 15 ACLC 645; (1997) 23 ACSR 590 the decision of the Court of Appeal proceeded on the basis that the law is as stated by McHugh JA in Legal & General Life at 335-336. It was common ground between the parties that it should: see Mason P at ACLC 649-650; ACSR 595; but the Court of Appeal lent its authority to the concession. It appears from the leading judgment delivered by Mason P that the majority approved of the law as stated by McHugh JA, although Mason P emphasised (at ACLC 651; ACSR 596-597) that it is the task of the Court to classify the mistake which is brought to its attention and said ``As Sir Frederick Jordan once reminded us, `there are mistakes and mistakes'...''. Mason P referred (at ACLC 651; ACSR 596) to the operation of judicial restraint but did not depart from the grounding in the parties' contract which McHugh JA gave for the limits of the Court's powers. Cole JA, who dissented, also cited McHugh JA's judgment with approval. See too in Western Australia
WMC Resources Ltd v. Leighton Contractors Pty Ltd (1999) 20 WAR 489 and in Victoria
Commonwealth of Australia v. Wawbe Pty Ltd (1999) ANZ ConvR 597.

19. The lease does not expressly provide to the effect that the determination of the valuer is to be final and binding upon the parties, but the intention that it should be so clearly appears from the terms of cl. 2.2.3. Words such as ``final and binding'' would be superfluous when the parties have expressly stated in cl. 2.2.3 that the amount determined under cl. 2.2.4 is to be the amount specified in the Reference Schedule of their new lease. See Holt v. Cox at ACLC 659; ACSR 605.

20. Central to the plaintiffs' argument is formulation of the mistake on which the attack on the valuation is based. In his written submissions counsel said that the question is whether the valuer assessed the current market rent for the premises as at 1 August 2000 in accordance with cl. 2.2.4 of the Lease. Counsel there said that the valuer's rental determination was exclusive of GST or, to put it slightly differently, did not allow for the impact of GST on the lessors. It was also said that the overall result for the parties of the rental determination is that the lessors will receive $54,545 as rent,

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the lessees will pay $60,000 as rent and receive an input tax credit of $5,454; and counsel contended that this demonstrates that the valuer failed to determine the current market rent for the premises in accordance with cl. 2.2.4.

21. Counsel's written submissions continued:

``His valuation ($60,000) could not be the current market rent that having regard to the terms and conditions of the lease would be reasonably expected to be paid by a willing lessee to a willing lessor for the premises if they were unoccupied when the lessor would be liable to pay GST on that sum without recovery from the lessee who would, nonetheless, derive the benefit of an input tax credit. It is clear that the valuer had no regard to the terms and conditions of the lease as they would operate in a GST setting or to the impact of the GST on the lessors' supply of real property to lessees for consideration on and after 1 August 2000. His valuation was based on a state of affairs which no longer existed, i.e, where there was no GST legislation. That old state of affairs no longer constituted the market in which lessors and lessees negotiated with respect to the letting of commercial premises. As a matter of common sense, his valuation could not be the `current market rent'.''

From this Counsel drew the conclusion that the valuer did not value the thing which he was required to value, or that it is as if he had valued the wrong thing.

22. In oral submissions counsel expressed the complaint in these terms: ``He failed to have regard to the impact of GST on the parties' bargain. So he valued the premises in a pre- GST setting. This is an error of the same kind as in Legal & General .'' The plaintiffs' counsel also expressed the complaint thus: ``We say that Mr Paris failed by failing to take into account the burden of GST within the legal framework as it was on 1 August 2000. He valued a thing which was no longer the thing which the parties required him to value. The identity of the thing which he valued was no longer the same as it once had been because of the existence of the GST legislation.'' It was contended that this was a mistake and that it was a mistake of a kind which vitiates the valuation.

23. It was contended that the existence of this mistake was shown by evidence. I admitted the letter of 10 November 2000 into evidence on that subject, on the view that the question whether there was a mistake of the kind to which McHugh JA referred in Legal & General Life is open to evidence and proof on material additional to the terms of the determination itself. There is a significant body of opinion against admissibility, but the state of opinion in this Division appears from the judgment of Palmer J in
Kanivah Holdings Pty Ltd v. Holdsworth Properties Pty Ltd & Ors [2001] NSWSC 405. Mr Paris' statement on 10 November that the rental determination did not include GST reveals nothing which can clearly be understood about the consideration if any which he gave to GST in making his determination, or about the influence if any which GST had on his arriving at $60,000. He may have been of the view that the determination should not be inclusive of GST; and several meanings of references to the inclusion of GST in a determination are open. The letter of 10 November does not in any way indicate a view that the determination ought to have been inclusive of GST, or what result would have followed if it had been inclusive of GST.

24. On its face the letter is a statement of the obvious as, in the absence of some contractual undertaking dealing with the subject, a lessee is not liable to pay the lessor, as part of the rent or otherwise, any sum in respect of GST. On the other hand the existence of GST is likely to have some effect on economic behaviour and on current market rental.

25. Also in evidence is Exhibit B containing all the documents produced by the valuer under subpoena. These documents include what appear to be working papers. I was told that the object of tendering them was to show that there was no reference to consideration of GST and no allowance for its incidence in the working papers. Exhibit B does not reveal, either in the documents which apparently are working papers at pp. 73, 74 and 75 or anywhere else, any detail which can be understood of the valuer's reasoning processes. At p. 73 there is a reference in some figures to GST, showing that the valuer was aware of GST, but these notes reveal nothing about the influence of that awareness on the overall reasoning. The reference at p. 73 may well be a statement about the rent, in some unclear circumstances, of the subject property. The calculations at p. 74 while

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difficult to follow can be seen to produce $60,000 per annum, which could be supposed to be the rent which the valuer deduced, on the basis of allowing $600 per week and $31,200 per annum for the workshop, $24,000 per annum for the shop (possibly derived from $2000 per month) and $4,800 for the forecourt. The significance of the calculations is not clear and it does not appear where the unit rates applied in the calculation were derived from. The figure $57,839.16 appears on both pages but not in a way which shows clearly what it refers to.

26. The plaintiffs called and relied on the evidence of Mr Ernest Craig Miller, a registered valuer. Mr Craig Miller referred to the operation of GST on leases and expressed this view: ``It is because of the financial consequences that flow when a lease becomes GST liable that a valuer must determine whether or not the lessor is entitled to recoup the GST payable from the lessee and take that fact into account in arriving at his rental valuation or rental determination''. He illustrated the operation of GST in various situations and said:

``ll. Accordingly, in my opinion, it is necessary for a valuer, when conducting a rental valuation or rental determination, to have regard to both the GST status of the lease and the liability or otherwise of the lessee to pay GST in determining the market rent payable under the terms of that lease. Where the lease provides that the lessee is liable to pay the GST on the rent, the rental valuation or rent determination should be made on a GST exclusive basis. However, where there is no liability on the lessee to pay GST the rental value or rental determination shall be made on a GST inclusive basis.''

27. Mr Craig Miller's Report concluded with his opinion that the rental determination should have been made on a GST inclusive basis but that it had been on the GST exclusive basis. Mr Craig Miller was of the view that Mr Paris omitted to have regard to the fact that the lease did not contain a GST recovery clause, and the effect of this omission was that Mr Paris had failed to determine the ``Current Market Rent for the Premises'' as was required of him in accordance with cl. 2.2.2.

28. When cross-examined Mr Craig Miller declined to accept that it would be open to a valuer to consider the terms and conditions of the lease and conclude that there is no obligation upon the lessee to pay GST and that he should purposely exclude any reference to the GST in his valuation on the basis that the lessee had no obligation to make such a payment. He based his position on the behaviour of a hypothetical prudent lessor and lessee acting as in Spencer's case, who do not overlook any proper business consideration.

29. It was Mr Craig Miller's evidence that in the period leading up to 1 July 2000, when liability for GST commenced, negotiations of the market place were producing agreements in which the lessor was to pass on to the lessee the full increment of GST. However Mr Miller has seen some leases which did not include such a provision.

30. I do not accept Mr Craig Miller's position because no way can be clearly seen in which regard paid by persons acting in the market to the operation of GST as a proper business consideration would lead to any recognisable market outcome which it would necessarily be incorrect not to perceive and adopt.

31. The defendants called the expert evidence of Mr Alan Hyam, a registered valuer who is also a practising barrister. The principal admissible passage of Mr Hyam's Report adopted a passage in a paper circulated by the Australian Property Institute in December 1999 dealing with GST implications at market rental reviews which contained a statement to the effect that a valuer would have to apply to a review the evidence which was found in the market place, which may vary in its treatment of GST; the evidence available and importantly the weight of that evidence should govern the outcome of a rental review. Mr Hyam said:

``In making a rent review determination a valuer should gather the comparable rental evidence from market sources, then make enquiries as to whether the rent disclosed is inclusive of GST, and if not enquire as to what proportion of the GST, if any, was passed onto the lessee by the lessor. A survey of the relevant market should then be undertaken to establish as to whether all, none or some of the GST is passed on to lessees by lessors in negotiating commercial rentals, exercise of options to renew, and review of rentals.''

32. It was also Mr Hyam's evidence that in leasing transactions there was no clear-cut

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application of a market trend and negotiations relating to the incidence of GST resulted in a multiplicity of outcomes. When cross-examined Mr Hyam recurred repeatedly to his reference to the market and market experience and to how the market reflected GST in the rents of comparable premises as the basis on which the valuer was to act. In my view he was correct in doing so, in terms of valuation principle and also in terms of the application of the words of cl. 2.2 of the Lease.

33. As lessors and lessees with different taxation circumstances participate in the market, the taxation status of any particular market participant is not usually relevant to a determination of market value. On proper principles the incidence of GST could well have some relation to the valuer's task. If in a comparable transaction the parties agreed that the lessor was to pass on to the lessee the full increment of GST the rent treated as comparable rent in a valuation exercise would be the sum of the rent and the GST which the lessee agreed to bear, and for a lease where there was no separate treatment of GST, determination of the market rent would have regard to the totals which lessees agreed to pay in comparable lease agreements. The valuer may have done this: there is no evidence that he did not. GST, which on 1 August 2000 had recently come into effect, is an ordinary market consideration of the kind which a prudent lessor or lessee would not overlook, such as was referred to in the classic statement of the valuation task in
Spencer v. Commonwealth (1907) 5 CLR 418 at 441 (Isaacs J). The commercial market in leases can be taken to have been informed about the operation of GST and to have reflected the influence of that operation on market behaviour. It does not in any way follow however that both prudent parties would see it as appropriate to increase what would otherwise have been their agreed rent by 10 per cent. The answer does not lie in speculation about the likely response of hypothetical persons but in market events.

34. The view is reasonably open that the incidence of GST on rent received is not a primary concern of the valuer, and is not a prominent consideration at all in determining the current market rent for the premises. The market could respond in various ways to the incidence of GST. Current market rent conceivably could rise at the introduction of GST so as to give lessors the same net return as they previously had, but markets can behave in many ways, and it is conceivable that with the commencement of GST the market might not respond at all, or might respond so as to return only part of the tax liability of the lessors. There might be some movement in market rent which gave them much more. Conceivably GST could have no market impact and the amount of money which lessees generally were prepared to pay for premises may not have changed when lessors came under a new tax system. It would be plainly erroneous to determine what the current market rent was as of 1 August 2000 and then adjust it upwards so as to return that amount net of GST to the lessor. What reasoning the valuer employed is unknown, and it is not shown by the brief statement in his letter of 10 November 2000.

35. In my opinion it has not been established by the terms of the determination or otherwise on the evidence that the valuer made a mistake with respect to his treatment of GST in determining the current market rent, or a mistake of any other kind. There is no evidence tending to show that the assessment of $60,000 as the current market rental is improbable or unreliable. No mistake of the valuer has been established or exposed to consideration of its effect in the law as stated by McHugh JA.

36. A mistake of the kind which was asserted by the plaintiffs' counsel to have taken place, although it was not established, would not in my view have been a mistake of the kind which is open to examination by the Court if it had been established. The supposed mistake would not be analogous to a mistake as to the identity of the property. Failing to have regard to some factual matters which should be regarded, whether the incidence of a tax or otherwise, is not a mistake of the kind on which the Court can act. What the valuer decided was the current market value was a matter of fact and of valuing principle which the parties left it to him to resolve. His determination says that he did determine the matter referred to him and his letter of 10 November does not qualify that statement.

37. For these reasons I am of the view that the plaintiffs should not succeed.

38. ORDER: Give judgment for the defendants with costs.