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Unhappy with your retail shop market rent review? How to challenge an expert rental determination - 23 February 2015

When a retail shop landlord and tenant cannot agree upon a new market rent, often an independent expert will be called in to give a report as to what should be the current market rent for the premises.

But what happens if you disagree and you wish to challenge the expert valuer’s determination?

In this Alert, Partner Meryl Snow and Associate Ben Ricketts discuss the processes involved in challenging an expert rental determination.

Under the Retail Shop Leases Act 1994 (Qld) (the Act), if a landlord and tenant cannot agree on the current market rent (eg when exercising an option, or renewing a lease) within one month after the review date, then the rent must be determined by a specialist retail valuer (valuer).  If the landlord and tenant cannot agree on the valuer, one will be nominated for them. The valuer must be independent, and each party must pay 50% of the valuer’s fee.

The basic procedure under the Act is as follows:

Each party may make submissions to the valuer as to what they think the current market rent should be and why, providing evidence and statistics to support their view.  Often commercial property managers will be engaged to prepare such submissions. Each party may respond to the other’s submissions. The valuer may request information from the Lessor, to be provided within 14 days, about other leases in the shopping centre.  After all of the above, the valuer will have one month to finalise their determination.

The criteria that the valuer must follow in determining the current market rent are strict.  Under section 29 of the Act there are essentially six criterion that the courts have determined are mandatory for the valuer to follow.  That does not however prevent the valuer from taking into consideration other matters in determining the current market rent, just as long as those six mandatory criterion have been followed.

Those criteria are broken down into three categories as follows.

In determining the current market rent, a valuer:

  1. must determine the rent:

    1. on the basis of the rent that would be reasonably expected to be paid for the retail shop if it were unoccupied and offered for leasing for use for which the shop may be used under the lease or a substantially similar use; and

    2. on the basis of gross rent less landlord’s outgoings payable by the tenant under the lease; and

    3. on an effective rent basis; and

  2. must not have regard to the value of the goodwill of the tenant’s business or the tenant’s fixtures and fittings in the retail shop; and

  3. must have regard to:

    1. the terms and conditions of the lease; and

    2. submissions from the landlord and tenant about the market rent of the shop; and

    3. the other matters prescribed by regulation.

Even though there are seven criterion in section 29 of the Act, the final criterion “the other matters prescribed by regulation” does not exist, effectively meaning there are only six relevant criterion.The important issues are that:

  1. the valuer must consider the shop as unoccupied and offered for a similar use; and must do so on an “effective rent basis”, which means making allowances for landlord incentives such as rent free periods; and

  2. must not consider goodwill – the intangible asset associated with a brand name or owner’s personality.

Section 31 of the Act, also requires the valuer’s determination to be in writing, identify the location of the premises, state the matters taken into consideration, give detailed reasons, and state whether the determined rent is inclusive of GST.

If the valuer’s determination does not comply with section 29 or 31 of the Act then it may be challenged by making an application before QCAT (the Queensland Civil and Administrative Tribunal).  QCAT is an independent tribunal designed for self representatives (although permission for legal representatives to appear may be given) to access quick and inexpensive dispute resolution.  QCAT is now the forum for what was previously the Retail Shop Leases Tribunal.

Importantly, QCAT cannot decide the amount of rent that is to be paid.  QCAT can only examine the valuer’s determination and consider whether or not the correct procedures under section 29 and 31 of the Act have been followed.  If not, QCAT can order that the valuer undertake the same valuation or order the appointment of a new valuer.

Determinations by valuers have been set aside in a number of circumstances including:

  1. failing to explain whether the determination was made on the basis of the premises being “unoccupied”;

  2. a lack of clarity surrounding the valuer’s calculations, and a failure to follow the methodology  used by the valuer;

  3. a component for goodwill, fixtures and fittings being included; and

  4. inappropriately using comparative analysis.  An example of this circumstance was where the rent for a gym located underneath a hospital was determined using rents applicable to medical suites.

Once an application seeking to challenge a rental determination has been filed with QCAT, the first step will be for the parties to attend a mediation. A mediation is not compulsory, however QCAT will attempt to see if the parties can resolve the matter before being put to the time and expense of a tribunal hearing.

Of course whilst all the above takes place, rent continues to be paid. However once any court proceedings are concluded, adjustments must be made and backdated for any over or underpayments of rent.

Regardless of whether you can agree on a new rent, or you disagree with an independent valuer’s rental determination, the Act sets out strict criteria to be followed. If not followed then the courts/QCAT can be asked to intervene.

Should you require our advice as to whether a valuer has followed the correct procedures in determining the current market rent for leased premises or you wish to challenge a valuer’s determination of current market rent, please do not hesitate to contact our Commercial Property or Litigation and Dispute Resolution teams.

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