Sentinel Asset Management Pty Ltd v Primo Moraitis Fresh Pty Ltd
[2014] QSC 200
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- Notable Unreported Decision
- Sentinel Asset Management Pty Ltd v Primo Moraitis Fresh Pty Ltd[2014] QSC 200
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Sentinel Asset Management Pty Ltd v Primo Moraitis Fresh Pty Ltd[2014] QSC 200
Sentinel Asset Management Pty Ltd v Primo Moraitis Fresh Pty Ltd[2014] QSC 200
SUPREME COURT OF QUEENSLAND
PARTIES: | |
FILE NO/S: | |
Trial | |
PROCEEDING: | Application |
DELIVERED ON: | 26 August 2014 |
DELIVERED AT: | Brisbane |
HEARING DATE: | 7 August 2014 |
JUDGE: | Alan Wilson J |
ORDER: | 7173/14:
6489/14:
|
CATCHWORDS: | LANDLORD AND TENANT – RENT – PROVISIONS AS TO RENT IN AGREEMENT FOR LEASE OR LEASE – RENT REVIEW CLAUSES – DETERMINATION BY REFERENCE TO MARKET RENTAL VALUE – where the respondent had been assigned a lease from a previous tenant to lease commercial premises owned by the applicant– where the lease provides for rent reviews every five years and sets out a process for rent review with reference to the current annual market rent – where the applicant gave notice under the relevant clause of its valuer’s assessment of the current annual market rent – where the applicant alleges that the respondent failed to provide its valuer’s assessment on time – where the respondent raises a number of grounds for relief, including for a declaration that the rent should be fixed at its valuer’s assessment – where the applicant submits that it complied with the procedure in the lease and acted reasonably, honestly and in good faith in assessing the current annual market rent – where the applicant also submits that the respondent failed to comply with the procedure in the lease by providing its assessment late because time was of the essence – whether a declaration should be made setting the annual market rent at the rate assessed by the applicant or the rate assessed by the respondent Alcatel Australia Limited v Scarcella & Ors [2001] NSWCA 401, followed Finishing Services Pty Ltd v Lactose Fresh Pty Ltd [2006] FCAFC 177; [2007] ANZ ConvR 93, followed GR Mailman & Associates Pty Ltd v Wormald (Aust) Pty Ltd (1991) 24 NSWLR 80, cited Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, followed Sandhu & Mirusa Pty Ltd v Ferizis (1994) 6 BPR 13,320; [1994] ANZ ConvR 491, cited |
COUNSEL: | KA Barlow QC for Sentinel Asset Management Pty Ltd D Laws, Solicitor, for Primo Moraitis Fresh Pty Ltd |
SOLICITORS: | Russells for Sentinel Asset Management Pty Ltd Stephen E Jones Consultant Lawyer as town agents for Richmond & Bennison Lawyers for Primo Moraitis Fresh Pty Ltd |
[1] Alan Wilson J: Sentinel Asset Management Pty Ltd owns commercial premises at Morningside which it leases to Primo Moraitis Fresh Pty Ltd. The lease was assigned to Primo from a previous tenant as and from 2 March 2013.
[2] The lease is for 15 years and provides for rent reviews every five years. The lease term began on 7 May 2009. Clause 7 provides that the rent is to be reviewed on “market review dates”, being the fifth and tenth year anniversary dates – 7 May 2014, and 2019.
[3] This proceeding, involving applications by both parties, concerns what happened around the time of a rent review in May 2014. Sentinel, the landlord, says the review has led legitimately to a rent increase. Primo, the tenant, disputes that, and says the review process was flawed and should be set aside by the Court.
The rent review mechanism
[4] The process for rent review is contained in cl 2.3 of the lease. The first step in the process allows the landlord and the tenant to exchange their respective assessments of an appropriate current annual market rent. If they are different, then the parties must attempt to agree in writing: cl 2.3(c). If that process fails, they must then attempt to agree, in writing, on a valuer to determine the matter: cl 2.3(d). If they cannot agree on the valuer, then either party may ask the President of the Australian Property Institution Inc (Qld Division) to nominate a valuer, and the parties must then jointly appoint (although a failure to appoint jointly is not fatal – appointment by the other party is, in those circumstances, sufficient): cl 2.3(f).
[5] The process begins with the landlord under cl 2.3(a):
“The Landlord may give the Tenant a notice of the Landlord’s assessment of the current annual market rent of the Premises at the relevant Market Review Date at any time, but not later than the first Market Review Date that occurs after the relevant Market Review Date”.
[6] After it receives the landlord’s notice, the tenant then has 30 days to provide its own assessment. If it does not do so, the rent from the market review date will be the amount in the landlord’s notice under cl 2.3(b):
“Unless the Tenant gives the Landlord a notice stating the Tenant’s assessment of the current annual market rent of the Premises at the relevant Market Review Date within 30 days after the Landlord gives its notice, the Rent on and from the relevant Market Review Date is the current annual market rent in the Landlord’s notice”. (emphasis added)
[7] On 16 April 2014 Sentinel sent Primo a notice in these terms:
“We refer to your Lease over the above premises and in accordance with Clause 2.3(a) confirm your rent is due to be reviewed to market as at 7 May 2014.
After careful consideration, receipt of formal advice and review of the current rent and market conditions, the Landlord assesses the market rent for the Premises effective from 7 May 2014 to be $1,296,295 + GST net per annum ($185 per square metre net)”.
[8] Sentinel sent the notice by prepaid express post to Primo’s registered address (and the address it had notified to Sentinel when the lease was assigned) in New South Wales. The uncontested evidence is that it was delivered early on the morning of 17 April. A copy was also sent by email to Primo’s site operations manager at the lease premises, Mr Peter Roughan. The email was headed “Market Rent Review”.
[9] The lease terms address communication between the parties by mail. Clause 20.1(e) says that a letter is taken to have been received by the recipient on the third day after the date of posting, or at 9:00am on the next working day. The deed by which the lease was assigned to Primo says the same thing, in cl 13.2(c)(i). Here, three days after posting was a Saturday, so Primo is deemed, under the lease, to have received the notice at 9:00 am on Monday 21 April 2014.
[10] On and from that date it had 30 days to provide its own assessment of the market rental – i.e., by 21 May. Primo does not dispute that it received the notice by no later than 21 April 2014, but it was not until 22 May that it responded by saying that was obtaining its own market rent review, and would revert to Sentinel when that occurred.
[11] In fact, Primo did not inform Sentinel of its assessment until 16 June.
[12] On 14 July 2014, Sentinel filed an application for a declaration that, according to cl 2.3, the current annual market rent from 7 May 2014 was the figure nominated in its notice - $1,296,295 per annum, plus GST. That application was set down for hearing on 7 August. On 4 August Primo filed an application for a declaration that Sentinel had not carried out an assessment of the current annual market rent as required by cl 2.3(a) and, for that reason, no rent had actually been determined under that clause.
[13] Primo also sought relief on a number of other grounds: it sought a declaration that cl 2.3(a) and cl 2.3 (b) were “… required to be read together, and not disjunctively”; that the notice from the landlord to the tenant was required to state that the tenant had the right to proffer its own assessment within 30 days, failing which the landlord’s assessment was the current market rent – i.e., in effect, an implied requirement under the lease that the notice from the landlord must give this warning to the tenant; that the landlord wrongly failed to give a notice with that warning and that it was not, therefore an effective notice; and, that because the landlord’s notice did not alert the tenant to the fact that it insisted upon strict compliance with the time limit in cl 2.3(b), the landlord “… thereby represented to the Tenant that it did not assert the times stipulated in cl 2.3(b) of the Lease were essential terms”.
Was the landlord’s notice sufficient?
[14] The notice refers to the lease, and specifically to cl 2.3. Then, using the terminology of that clause it speaks of the landlord assessing the market rent for the period from 7 May 2014, at the figure set out above. The letter is headed with the address of the leased premises.
[15] On any view the letter plainly referred to those premises, the lease for them, the clause in the lease relating to rent, the date upon which a new rent might apply, and the amount assessed by the landlord. Unsurprisingly, there is evidence that when the notice eventually came to the attention of Primo’s chief financial officer, he immediately understood what it was, and its terms.
[16] The test to be applied to determine the validity of a notice of this kind involves asking whether a reasonable recipient, with knowledge of the terms of the lease, would have any doubts as to the meaning of it: Finishing Services Pty Ltd v Lactose Fresh Pty Ltd [2006] FCAFC 177 at [18], [25]-[26]; [2007] ANZ ConvR 93 at 98, 100-101.[1] That case is also authority for the proposition that the landlord is under no obligation, in a notice of this kind, to advise the tenant of its rights. All three members of the Full Court of the Federal Court in Finishing Services adopted and applied a test laid down in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 – i.e., whether a reasonable recipient, who is credited with knowledge of the terms of the lease, and taking into account the surrounding circumstances, would have doubt as to the meaning of the notice or have regarded it as equivocal.
[17] In Finishing Services the Court also accepted a finding of the judge at first instance that, to be valid, the notice was not required to refer specifically to the relevant lease clause or inform the recipient of the period in which it must act under that clause – again, in reliance upon the decision of the House of Lords in Mannai, and what Lord Steyn said in that case at 768:
“… inquiry is objective: the question is what reasonable persons, circumstanced as the actual parties were, would have had in mind. It follows that one cannot ignore that a reasonable recipient of the notices would have had in the forefront of his mind the terms of the leases. Given that the reasonable recipient must be credited with knowledge of the critical date and terms of [the relevant clause] the question is simply how the reasonable recipient would have understood such a notice”.
[18] The application of this test, which I respectfully adopt, compels the conclusion that the notice sent by the landlord here was entirely fit for purpose, and the tenant’s arguments about its alleged defects or shortcomings are without merit.
The tenant’s failure to comply with the time limit in cl 2.3(b)
[19] To enliven the procedure in cl 2.3, the tenant was required, by cl 2.3(b), to react to Sentinel’s notice by giving the landlord its assessment of the current annual market rent of the premises at the relevant market review date within 30 days after the landlord gave its notice. Primo did not give its notice until 16 June 2014, almost two months after the deemed date upon which it received the landlord’s notice, 21 April. Primo’s only step in the intervening period had been, on 22 May, to tell Sentinel that it was in the process of obtaining its own market rental review. (That date was also, of course, outside the 30 day period after 21 April, albeit by only one day.)
[20] The nature and effect of that time limit and whether it is imperative, or can be safely ignored by a party – in the usual phase, whether the time stipulated in it is of the “essence” of the lease – was considered at length in the New South Wales Court of Appeal in GR Mailman & Associates Pty Ltd v Wormald (Aust) Pty Ltd (1991) 24 NSWLR 80. The Court was comprised of Gleeson CJ (as His Honour then was), Samuels and Meagher JJA.
[21] The relevant rent clause was not dissimilar to cl 2.3, while providing a slightly different mechanism for resolution: upon receipt of the lessor’s notice, the lessee could within 14 days dispute the amount set out and nominate a valuer to give an opinion. The lease provided that if the lessee did not serve that notice within the prescribed time, it would be deemed to have agreed that the amount set out it the notice was the current market rent – i.e., again, in terms very like those appearing in cl 2.3(b).
[22] As the decision in Mailman shows, when a lease contains a mechanism like this which prescribes the consequences, for a party, of failing to submit its own assessment of the market rent within a certain period, that is indicative that time is an essential consideration and is “of the essence” for that purpose. The question is whether the lease, by express words or necessary implication, signifies an intention to that effect, and with that consequence. In Mailman the Court of Appeal unanimously concluded that the clause there was sufficient to have that effect. As Meagher JA observed:[2] “Once a contract expressly spells out the consequences of non-compliance with a time-limit I cannot see how it can argued that the time-limit is non-essential”.
[23] Clause 2.3(b) can only be construed in the same way. The time limits it imposed were essential terms, requiring strict compliance. Primo, by its conduct, breached an essential term and cannot, by this argument, escape the consequences.
Must each party’s “assessment” under cl 2.3 be reasonable? Is the landlord’s assessment unreasonable?
[24] Primo’s lengthy written submissions pointed to the rent before 7 May this year ($1,061,347.47 per annum, or $132 per square metre) and the landlord’s proposed new figure of $1,296,295 plus GST ($185 per square metre) and argued that such an increase, involving a growth in the rental figure of 22%, could not be a true, reasonable or genuine assessment. This argument lay behind Primo’s application for a declaration that, by reason of those shortcomings, the landlord had not in truth carried out a proper “assessment” of the kind the lease required.
[25] The lease says nothing, of course, to the obligations that might lie upon each party in formulating its assessment, or the question of whether each party’s assessment for the purposes of clauses 2.3(a) and (b) must be “reasonable” – or, the criteria which might attach to a requirement of that kind.
[26] It is not disputed that the director of Sentinel who performed the exercise of formulating the assessment for the landlord, Mr Ebert, is an experienced property owner (and a qualified valuer) who, for the purposes of the exercise, drew upon his own knowledge and experience and, also, considered an independent valuation of the leased property and rent assessments prepared by valuers for the very purpose of the assessment.
[27] In the course of subsequent exchanges between the parties Sentinel disclosed the valuer’s assessment which, after comparing rents for other commercial premises, estimated the current net market value at $1,245,190 excluding GST.
[28] It is accepted that the lease here came into effect at a time when landlords were prohibited from imposing upon tenants, or passing onto them, land tax payable by the landlord. Much was made in submissions for Primo of some of the comparative rentals in the valuer’s report and references in them to rental calculations including, or excluding, allowances for land tax. It was said that the figure ultimately adopted by the valuer appeared, wrongly, to have included a land tax component.
[29] There was no evidence about Sentinel’s exposure, if any, to land tax. The final calculation and figure in the valuer’s report, mentioned earlier, is a little confusing in the sense that it appears to contain a reference to land tax but then goes on to say: “…The subject lease details that Land Tax is a non recoverable outgoing and therefore has been grossed up in the table to provide a market rent, on the basis that Land Tax is a non recoverable outgoing, as per the terms set out in the lease”.[3]
[30] In light of that disclaimer I am not persuaded that the valuer’s final assessment figure is wrongly tainted by the inclusion of a component for land tax. The arguments around that figure are, also, academic in the sense that the final assessment put forward by Sentinel is in any event higher than the valuer’s assessment. Any attempt to assess “reasonableness” must necessarily focus upon Sentinel’s figure.
[31] As to the question whether, or to what extent, assessments undertaken by parties in an exercise of this kind must be reasonable, I did not have the benefit of any reference to an authority in submissions for Primo. Mr Barlow QC, for Sentinel, referred me to a decision of Young J in Sandhu & Mirusa Pty Ltd v Ferizis (1994) 6 BPR 13,320 at 13,324; [1994] ANZ ConvR 491 at 494, to the effect that a landlord’s obligation in making such an assessment might impose an expectation that it would act honestly, bone fide and reasonably. That was a case, however, in which the lessor’s assessment of the current market value and its method of computing the new rental were final and binding upon the lessee – i.e., the lease lacked the mechanism for an exchange of offers followed, if necessary, by independent arbitration provided here by cl 2.3.
[32] The starting point for determining a landlord’s obligation must be the language used in the lease.[4]
[33] Nothing in this lease suggests the tenant is entitled to require the landlord to justify the reasonableness of its conduct in assessing the rent. Nor was I referred to any authority for that proposition (save for Sandhu). It is difficult to see how it would apply, in any event, in a case containing lease provisions about rent reviews like cl 2.3, in which the tenant is given both the opportunity, and the mechanism, to challenge the landlord’s assessment.
[34] Affidavits were filed by Mr Roughan, Primo’s site operations manager, in which he asserts that Sentinel did not carry out the process set out in cl 2.3(a) “… according to the spirit of the Lease or its terms, neither was that process conducted either competently or correctly”.[5]
[35] Mr Roughan obtained an “indicative market rental assessment” which assessed current annual market rent at less than the figure applying at the time this process commenced ($980,980 per annum, or $140 per square metre).[6] Because the lease does not allow rent to fall, the assessment Primo ultimately put forward, out of time, was therefore at the same figure as the rent pre-7 May 2014: $1,061,347.47, or $131.47 per square metre.
[36] The only evidence addressing the question is, then, the difference in the figures put forward by the landlord and the tenant. There is no other evidence that, in conducting its assessment, Sentinel has acted anything but honestly, reasonably or in good faith. The Court is asked, in effect, to infer some default of that kind on the landlord’s part because the figures ultimately advanced by each party are markedly different, and Sentinel’s is higher than that estimated by the valuer it engaged.
[37] The landlord’s figure is higher than that put forward by its own valuer, and much higher than the assessment eventually advanced by Primo. Those assessments were advanced, however, under the auspices of cl 2.3, and that clause, on its face, envisages a negotiating process which, if unresolved, will lead to determination by an independent umpire. That the first figure advanced by a landlord in that process might be higher than the tenant expects, or believes to be reasonable, is not itself evidence of unreasonableness. A similar accusation may be made about the tenant’s assessment.
[38] I was not confident of fully understanding some other aspects of the submission made for Primo. It is said, for example, that cl 2.3(a) and cl 2.3(b) should be read conjunctively, rather than disjunctively. The proposition is unexceptionable. Reading the clause in that way does not, however, produce any different meaning or construction.
[39] In the absence of any requirement in the lease, express or implied, that the parties exercise something to be categorised as “reasonableness” in the assessments undertaken for the purposes of cl 2.3, or persuasive authority to that end, it cannot be said that Sentinel’s assessment involved any breach of the lease terms. In any event, there is no evidence that it has acted unreasonably or other than honestly and in good faith. The fact the respective assessments differ is not, itself, evidence of unreasonableness – a conclusion more readily available in this case, where that possibility is specifically envisaged in the mechanism set up for rent determination under the lease.
[40] For these reasons, Primo’s application in BS7173/14 should be refused. There should be a declaration in the terms sought by Sentinel in its application BS6489/14. I will hear the parties on costs.