In the recent case of Hanave Pty Ltd v Nomad Sydney Pty Ltd (formerly Wine Nomad Pty Ltd) [2023] NSWSC 265, the Supreme Court considered a dispute between a retail lease landlord and tenant concerning (among other issues) whether a market rent valuation was properly conducted by the valuer.

In its decision, the Supreme Court has affirmed both the standard of review imposed upon valuers under the Retail Leases Act 1994 (NSW) (RL Act), and the factors which must be considered by valuers when determining market rent for a retail lease. Notably, the Supreme Court held a valuation is not binding unless it has been conducted in accordance with the RL Act.

This case serves as a cautionary tale for retail lease landlords and tenants in NSW with market rent review provisions in their retail shop leases. It highlights the importance of ensuring that any market rent valuation complies with the RL Act to avoid the costs associated with court proceedings and the need for additional valuations that meet RL Act requirements.

Determination of ‘current market rent’ at law

If a retail shop lease provides for rent to be changed to ‘current market rent’ (typically upon the exercise of an option to renew the lease), the ‘current market’ rent must be determined in accordance with section 31 of the RL Act.

Unless the parties have mutually agreed on the ‘current market rent’, the valuation must be conducted by a specialist retail valuer as agreed between the parties. If the parties cannot agree on a valuer, one will be appointed by the Registrar of Retail Tenancy Disputes.

Section 31(a) sets out that ‘current market rent’ must be determined on an ‘effective rent’ basis having regard to the following matters:

(i) the provisions of the lease,

(ii)  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 to which the shop may be put under the lease,

(iii)  the gross rent, less the lessor’s outgoings payable by the lessee,

(iv)  rent concessions and other benefits that are frequently or generally offered to prospective lessees of unoccupied retail shops.

This determination of the ‘current market rent’ should not take into account the value of any goodwill created by the tenant’s occupation or the value of the tenant’s fixtures and fittings.

The valuer may, however, consider information about the lease terms and conditions such as rental fees, rent incentives (eg. rent-free periods), recent or proposed variations, and outgoings payable. This could include information on comparable leases for retail shops within the same building or a retail shopping centre, as a means of establishing market value.

The Court’s findings regarding the standard of review

In summary, the Court held:

1. Valuers must substantively consider each of the factors set out in section 31(1)(a) of the RL Act when determining ‘current market rent’. The weight given to each factor, however, lies within the valuer’s discretion.
2. For a valuation to be valid and binding under the RL Act, the specialist retail valuer must provide it in writing and offer comprehensive reasons for the ultimate determination, including detailed explanations of how each relevant factor influenced the decision. Mere acknowledgment of these factors is insufficient.
3. If a factor has not been referred to in the valuation, the courts will presume the factor was not considered by the valuer. Valuers must explicitly address any factors which have been omitted from their determination of ‘current market rent’ in order to meet compliance standards.

 Conclusion

In conclusion, the courts will scrutinise valuations which do not address all the relevant factors or otherwise lack sufficient detail in explaining the reasons behind their determinations. To ensure compliance, valuations must include detailed written justifications for the ultimate determination of current market rent, specifically referencing the factors provided in section 31 of the RL Act.

For a hassle-free experience, it is crucial to ensure that any retail lease with market rent review provisions aligns with the RL Act. If you have any questions or concerns about your retail lease, do not hesitate to reach out to our property team.