The recent case of 122 Pitt Street v Universal 1919 provides a useful lesson in how rental increases can be challenged by tenants.
In this case, the landlord proposed a new base rent for leased premises in excess of $1,000,000 per annum. The tenant invoked the rent dispute mechanism under the lease, which allowed for a market review of the base rent by an independent valuer, who would determine the current market rent for the premises. This would become the new base rent. The appointed valuer made a determination that was approximately $500,000 less than the annual rental figure proposed by the landlord.
The landlord claimed that there was a deficiency in the determination, as the lease contained specific provisions about how the valuer was to determine the market rent for the premises. These included the injunction in clause 5.9 that the valuer should, “disregard the value of any goodwill attributable to the Tenant's Business and the value of the Tenant's Fixtures or fitout”. The landlord based its claim on the fact that the valuer made it clear that he had taken into account the tenant's obligation under Clause 28.5.3 of the lease to spend a minimum of $1,000,000 on what was described as "fitout work".
Did the valuer breach the provisions of the lease?
The key issue the court had to tackle was whether or not the valuer had breached the provisions outlined in the lease. The landlord's argument depended upon the court accepting that "fitout" is at least included within, if not equal to, "fitout work".
The tenant's argument depended on the court accepting either that "fitout" is different from the obligation in Clause 28.5.3 to spend money on the "fitout work", or that "fitout" does not become part of "fitout work" until it is completed. The court concluded that "fitout work" is distinct from "fitout", with the latter being the product of the former.
Difference between "spending" and "value"
If, however, the court had found that "fitout" is classified within "fitout work", there is an alternative basis on which it could have found that the valuer complied with Clause 5.9(a).
The valuer had taken into account the tenant's obligation to "spend a minimum of $1,000,000 on the fitout work". Clause 5.9(a) required the valuer to disregard the value of specific things. The court concluded that the valuer took into account an obligation to spend, but not the value of the result of the expenditure and hence was not in breach of the provision.
This case analyses the proper meaning of "value" and the court clearly differentiates between value and cost. "Cost" is what one has spent on something; it does not equate with "value", which is what something is worth.
Market rent determinations can produce unexpected results
This case shows that in the situation of a market rent determination, there can be an enormous difference between what the valuer determines and what the parties may have expected.
The lesson here for tenants is that if your landlord proposes a new base rent which you believe is excessive, it is worth making use of the rent dispute mechanism under your lease to have an independent valuer appointed to determine objectively what the current market rent is for your premises.
Furthermore, before tenants enter into a lease with a landlord, they should ensure that it contains an adequate rent dispute mechanism.
The lesson for landlords is that proposed increases in base rent should be based on a realistic assessment of what the market rent is for the premises and the provisions of the lease. Landlords who merely pluck a number from the air are likely to find their tenants using the rent dispute provisions of the lease to challenge the proposed increase.
Gary Newton and Henry Yuan are part of the property team in the Sydney office of Colin Biggers & Paisley.
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