To what extent is a specialist valuer required to have “adequate regard” to certain factors when determining the current market rent? If a valuer omits or does not refer to those factors in a valuation report, does that mean those factors were not taken into account and the valuation is ineffective? Deren Hassan explains…

Parties to a retail or commercial lease agreement may take various considerations into account when deciding the length of a lease, whether to include options to renew and the manner and circumstances in which the rent is to be reviewed. It is not uncommon for parties to agree to annual reviews on a fixed or CPI basis with market reviews to occur every four or five years. Market rent reviews are seen as a fair way to re-set the applicable rent so as to keep pace with prevailing market conditions.

The “current market rent” is considered the rent that would reasonably be expected to be paid for the premises as between a willing lessor and lessee in an arm’s length transaction, determined on an effective rent basis in circumstances where the parties are acting knowledgeably, prudently and without compulsion.

Often, the market rent is assessed by considering how much rent a lessee would pay for comparable premises. Where the use of the premises is retail, state retail leasing legislation in Australia prescribes the process by which the current market rent is to be determined, including the factors required to be taken into account by the retail valuer.

Hanave v Nomad Sydney

The recent case, Hanave Pty Ltd v Nomad Sydney Pty Ltd (formerly Wine Nomad Pty Ltd)[i], considered whether a specialist retail valuation of current market rent complied with section 31 of the Retail Leases Act 1994 (NSW) (RLA) which requires a consideration of the following four factors:

1. The lease provisions;
2. The rent that would reasonably be expected to be paid for the shop if it were unoccupied and offered for renting for the same or a substantially similar use;
3. The gross rent, less the lessor’s outgoings payable by the lessee; and
4. Rent concessions and other benefits that are frequently or generally offered to prospective lessees of unoccupied retail shops.

The Facts

Hanave Pty Ltd (Hanave) as lessor entered into a 12-year lease (Lease) with Nomad Sydney Pty Ltd (Nomad) as lessee over premises located at 16-28 Foster Street, Surry Hills New South Wales (the Premises). The permitted use is a “Restaurant and Bar”.

The Lease was subject to a market rent review on each fourth anniversary of the commencement date of the Lease. The Lease provided that if rent cannot be agreed by the parties, the “Fair Market Rent shall be determined by a valuer agreed between the parties or failing agreement appointed for such purpose”. The Lease was due for a market rent review in 2020. The parties could not agree on the rent to apply on the market review date.

Nomad applied to the Office of the Small Business Commissioner for the appointment of a specialist retail valuer to determine the fair market rent. In February 2021, the valuer issued a valuation report which determined the fair market rent as at 14 July 2020 to be $252,000 exclusive of GST.

Does a valuer need to have ‘adequate regard’ to matters prescribed by the Act?

Hanave commenced proceedings in the NSW Civil and Administrative Tribunal (NCAT) alleging the valuation did not comply with the requirements of s 31 of the RLA. NCAT held the valuation was invalid and not binding on the parties because it did not have “adequate regard” to comparable properties.

In particular, the valuation failed to comply with s 31 by omitting or not referring to whether there were any incentives for comparable properties; the failure to explain the relevance of the presence or absence of incentives in comparable properties; the failure to comment about a ‘25% abatement (rent-free)’ incentive clause; the valuer only having regard to adjusted rents for comparable leased properties that deduct incentives; and the valuer’s failure to specify whether any incentives are available for “on market” properties.

On appeal, the Appeal Panel overturned NCAT’s decision that the valuation was invalid, stating that to require a valuer to have ‘adequate’ regard to the factors in section 31 (in particular comparable properties) goes beyond the requirements stipulated in the RLA, and that the imposition of the concept of “adequate” goes beyond the requirement to “have regard to”, resulting in an examination of whether the valuer was correct in reaching his or her opinion. The Appeal Panel considered that such an approach had the effect of substituting NCAT in the role of the valuer which in legal terms is tantamount to a “merits review”.

The Appeal Panel’s decision was then appealed to the Supreme Court of NSW.. The Supreme Court ultimately agreed with NCAT’s first instance decision. The use of the phrase “adequate regard” by NCAT was not intended to add to the requirement to have regard to s 31 factors; rather NCAT was merely using this expression to describe whether the valuer had given consideration to the necessary factors. NCAT was not, contrary to what the Appeal Panel held, adding to the statutory language by imposing an additional requirement of “adequacy” to the requirement of “having regard to”, with the effect of substituting NCAT into the role of the valuer. It was apparent from the key passages of NCAT’s reasons[ii] that the analysis undertaken by NCAT was directed at determining whether there had been compliance with the provisions of s 31(1)(a) of the RLA.

NCAT was not attempting to decide if the valuation was correct on its merits but was instead engaged in a conceptually distinct but necessary task of evaluating whether the valuation complied with requirements of the RLA. It was the Appeal Panel who was in error in finding that NCAT had added the requirement of “adequacy” to section 31 when it had not.

In short, the Court determined that:

1. a valuer need only consider the factors set out in s 31(1)(a) of the RLA. A valuer is not required to have sufficient regard to any factor. A valuation will be considered a legitimate methodology if the valuation in substance considers the section 31(1)(a) factors; and
2. the weight to be given to each factor is determined by the valuer. The valuer need not give proportionate weight to all factors.

Final Say

If there is a factor that a valuer is required by statute to take into consideration when determining the current market rent that is omitted or not referred to in a valuation, courts and tribunals will find that the factor was not taken into account by the valuer. Valuations that fail to provide sufficient reasons and detail may be scrutinised in deciding whether the valuation complies with statutory requirements. This is a necessary task but one that does not mean the correctness of the valuation is being reviewed. To help ensure valuations are compliant, valuers ought to specifically address any factors that they are required by legislation to take into consideration. The risk of non-compliance may be mitigated by the parties providing valuers with clear and specific instructions and directions to provide reasoned and detailed reports[iii].

[i] [2023] NSWSC 265

[ii] See at [93]-[99].

[iii] I acknowledge the contribution of Diahna Angelis, Paralegal, Mills Oakley for assisting me with this article.

This article is published in the latest issue of SCN magazine.