Market rent determinations might be "final and binding", but are they valid?
Rent determination clauses are often drafted to include a standard set of criteria that a valuer should consider when determining what the market rent should be after a market rent review under a lease.
The recent case of Da Staal Property Pty Ltd v Commonwealth of Australia  QSC 216 highlights the importance of valuers complying with the criteria set out in the market rent review clause in the lease. It also demonstrates how failure to comply with the criteria can result in an invalid rent determination, despite the fact that the determination was supposed to be final and binding on the parties.
In this case, the applicant (Landlord) was the owner of a commercial property in Berserker, a suburb of Rockhampton, Queensland. The respondent (Tenant) leased the property for use as a Centrelink office.
In March 2019, the parties were unable to reach an agreement on the market rent and requested a valuer to determine the new market rent.1
The valuer returned a market rent determination representing a 30% reduction in the rent payable before the review.2
The rent determination clause in the lease required the valuer to take into account:
- the open market rental value of "comparable premises in the suburb or town within which the [property] is situated"; and
- "where there is insufficient evidence of comparable premises in the relevant suburb or town, then of comparable premises within a comparable suburb or town within the immediate vicinity of that in which the [property] is situated".3
The valuer considered the most relevant comparable premises to be premises in Aitkenvale (a suburb of Townsville), Hervey Bay and Maryborough, placing the most weight on the Aitkenvale premises.4
The landlord disputed the valuer's rent determination.
The court's finding
The court held that the words "immediate vicinity" mean "next or nearest" to the suburb or town in which the property is situated. Further, these words were said to provide a limitation on the market of rents; that market being central Queensland (not northern Queensland or southern Queensland).5
Aitkenvale, which is located in northern Queensland, could not reasonably be considered "next or nearest" or "within the immediate vicinity" of the premises as required by the lease.6
By placing considerable weight on the premises in Aitkenvale, the rent determination contained an error sufficient to render the rent determination invalid because the valuer did not sufficiently comply with the criteria set out in the lease.7
If the error had been of a kind that fell within "the exercise of discretionary judgements" (ie. that the parties could be said to have contemplated, and agreed to being undertaken by the valuer, in reaching a final and binding rent determination), the rent determination might have been valid.
The case demonstrates that the court will look closely at whether the valuer complied with the procedure in the lease when determining the market rent payable. Second, where a valuer has failed to sufficiently comply with the criteria for rent determination in the lease, this would be considered an error by the valuer sufficient to render the determination void despite the determination being "final and binding" on the parties.
While the courts recognised that the rent determination process will necessarily involve discretionary judgements, if a valuer's determination detracts materially from the agreed criteria, the parties may be able to successfully dispute the valuer's determination.
For more information, or to discuss how the above decision could apply in your circumstances, please contact a member of our Real Estate & Projects team.
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