Market rent reviews under the Retail Leases Act 2003: Applying to the VSBC for the appointment of a Specialist Retail Valuer under the Act

In Part 1 of our blog series, we explored market rent reviews generally. This is Part 2 of our 2 part blog series, in which we explore the VSBC’s role in appointing a Specialist Retail Valuer in the event of a dispute.

If the parties fail to agree on a Specialist Retail Valuer, then either party may apply to the VSBC for the appointment of a Specialist Retail Valuer under the Act.

The VSBC will then select an independent Specialist Retail Valuer who has the requisite experience and who does not have a conflict of interest with either party.

1.2.1    What needs to be provided?

Within 14 days after a request from the Specialist Retail Valuer, the landlord must supply the Specialist Retail Valuer with relevant information about leases for retail premises located in the same building or retail shopping centre to assist the Specialist Retail Valuer to determine the current market rent.

1.2.2    What does it cost?

The cost of the valuation will be shared equally between the parties, and is set by the Specialist Retail Valuer appointed by the VSBC.

The cost of a Specialist Retail Valuer can be quite significant as it is based on the time and effort needed by the Specialist Retail Valuer to satisfy their obligations under the Act, and can depend on things like the type and complexity of the premises and permitted use, geographic location, and availability of rental data.

1.2.3    What is the Specialist Retail Valuer’s role?

The Specialist Retail Valuer will act as an expert, not as an arbitrator. Their role will be to determine the current market rent, not to resolve any dispute between the parties.

Section 37(2)(a) of the Act allows the Specialist Retail Valuer to have regard to the provisions of the lease. A lease may provide for the Specialist Retail Valuer to have regard to things like the current open market rental value of the premises, the position of the premises, the permitted use, rent for comparable premises, improvements and alterations made to the premises by the landlord, outgoings,  and usual valuation principles.

Types of retail premises vary and as such, the valuation process will be quite specific to the premises in question. For example, the VSBC recognises that certain premises may have special distinguishing features, or a permitted use that prevents them from being easily compared with others. Such examples are hotels, gaming venues, service stations, theatres, racecourses, car dealerships, premises with specific planning or licence approvals, and geographically isolated premises (See Item 6.6 of the Victorian Small Business Commission “Guidelines to the Retail Leases Act 2003 – Current Market Rent and Engaging Specialist Retail Valuers”).

Indeed, the permitted use may be quite a driving factor in the assessment method used by the Specialist Retail Valuer. A discussion on the assessment methodologies used by valuers is beyond the scope of this blog. Please don’t hesitate to reach out to us for tailored advice if you have received a valuation and have concerns or queries regarding the method of rent assessment used.

1.2.4    What cannot be taken into account?

Section 37(2) of the Act further specifies that the current market rent is not to take into account the goodwill created by the tenant’s occupation or the value of the tenant’s fixtures and fittings.

Goodwill is a somewhat intangible concept which is difficult to define. Courts have endeavoured over the years to define it. For example, the High Court of Australia in Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 at 615 defined goodwill as: “…the legal right or privilege to conduct business in substantially the same manner and by substantially the same means which in the past have attracted custom to it. It is a right or privilege that is inseparable from the conduct of the business.”

Goodwill is quite intrinsically linked to a tenant’s occupation of premises, so it may seem counter-intuitive for goodwill to be excluded from the assessment of current market rent. Arguably, though, something like locational goodwill is a relevant consideration, as opposed to the tenant’s own reputational/industry goodwill, as noted below.

Indeed, according to the VSBC in their Guidelines to the Retail Leases Act 2003 Current Market Rent and Engaging Specialist Retail Valuers”, there are two types of goodwill which are implicitly recognised by section 37(2) of the Act, including:

1.    locational goodwill, namely the goodwill that attaches to the premises itself and is not the result of some special work by or a special feature of the tenant. Locational goodwill is normally taken into account by a Specialist Retail Valuer when considering things like the rent and outgoings paid in other comparable premises, the permitted use, and any distinguishing features of the land, building, or location.

2.    tenant’s goodwill that is the result of the tenant’s occupation, labour, reputation, industry, and its fixtures and fittings – this type of goodwill cannot be taken into account by the Specialist Retail Valuer and the impact of such goodwill are essentially diluted in the valuation process by assuming that a hypothetical tenant is leasing the premises.

1.2.5    What if the lease has its own provisions regarding market rent reviews?
A retail premises lease will usually also contain its own provisions in relation to the market rent review process, however the Act will prevail and any inconsistent provisions in the lease will be void to the extent of their inconsistency.

1.2.6    What must the Specialist Retail Valuer provide?

The Specialist Retail Valuer must provide a valuation which:

• is in writing; and

• contains detailed reasons for the Specialist Retail Valuer’s determination; and

• specify the matters to which the Specialist Retail Valuer had regard in making the determination.

1.2.7    How long does the Specialist Retail Valuer have to make a decision?

Once appointed, the Specialist Retail Valuer has 45 days to complete the valuation, unless the parties agree to a longer period (or failing agreement the VSBC can determine a new time limit in writing).

2.         What happens next?

2.1       Applying the new rent

After the Specialist Retail Valuer hands down its valuation, the relevant trigger date for the market rent at the premises is the market review date in the lease, irrespective of the date on which the valuation is handed down.

The parties will usually need to make adjustments between themselves to ensure that any excess or shortfall of rent is accounted for. For example:

• if the valuation results in a rent lower than what is currently being charged, an adjustment will occur in the tenant’s favour to accommodate any excess payments.
• If the valuation results in a rent higher than what is currently being charged, an adjustment will occur in the landlord’s favour to accommodate any shortfall.

2.2       What if the parties are still in dispute?

The grounds for setting aside a market rental determination are quite limited. Case law suggests that:

1. when making a determination, a Specialist Retail Valuer should ensure that their written reasons fully detail the reasoning processes behind their determination; and

2. if looking to challenge a determination, it will be relevant to consider whether the Specialist Retail Valuer’s written reasons are adequate.

If the parties have a dispute relating to rent review that is not capable of being resolved by the Specialist Retail Valuer, then the landlord, the tenant or the Specialist Retail Valuer may apply to VCAT for resolution of the dispute under section 89 of the Act. Logically this may require the parties to first attend mediation at the VSBC  to obtain a certificate confirming that the appropriate form of alternative dispute resolution has failed or is unlikely to resolve the dispute. We encourage you to reach out to us for tailored legal advice if there is any dispute regarding the assessment of market rent under your lease.

If you have any questions in relation to market rent reviews, if you require legal advice in relation to specialist retail valuations, or if you otherwise are a landlord or tenant that would like more information or advice on rent reviews or leasing generally, please contact Angela Kordos or a member of our Property Law Team.