Determining "current market rent" under the Retail Leases Act 1994 (NSW): what standards must a valuer meet?

The Supreme Court has provided the first guidance on the standard of review required of a valuer under the Retail Leases Act 1994 (NSW) (the RL Act), particularly the matters to which the valuer must have regard. The decision is significant for all retail landlords and tenants in NSW that have market rent review provisions in their leases (Hanave Pty Ltd v Nomad Sydney Pty Ltd (formerly Wine Nomad Pty Ltd) [2023] NSWSC 265).

Current market rent

"Current market rent" under the RL Act must be determined on an "effective rent basis", meaning the valuation of "current market rent" must consider the following factors that are set out in section 31(1)(a) of the RL Act:

• the terms and conditions of the lease itself;
• the rent that would reasonably be expected to be paid for the premises if it were unoccupied and rented out for substantially similar use;
• the gross rent, less the landlord's outgoings payable by the tenant; and
• any incentives frequently or generally offered to prospective tenants of unoccupied retail shops (eg. rent abatement).

Any such valuation must exclude the value of any goodwill attached to the tenant's occupation or any value of fixtures.

Often, an independent valuer is appointed to conduct such valuation.

Standard of review

In short, the Court determined that:

• the valuer needs to only consider the matters set out in section 31(1)(a) of the RL Act. Whether the valuer had "adequate" regard to those factors is not a legal test and the valuation will ultimately be considered as a "legitimate methodology" provided the valuation in substance considers the section 31(1)(a) factors; and
• the weight to be given to each of the section 31(1)(a) factors is a matter for the valuer to determine.

Providing reasons

Landlords and tenants should be aware that the Court has confirmed for a valuation to be valid under the RL Act (and thus legally binding) it must provide legally adequate reasons for its ultimate determination.

The valuation, under section 31(1)(e) of the RL Act, must be provided in writing and set out detailed reasons for the ultimate determination, including explaining how the consideration of the relevant section 31(1)(a) factor(s) influenced the ultimate current market rent determination. It is not sufficient that the report simply indicates the valuer was aware of the matters for consideration.

Importantly, the Court noted that where a matter has not been included in the valuation itself, then courts and tribunals will infer that it was not considered in the valuation. Therefore, valuers should expressly note and explain where a matter has been omitted to ensure the valuation is meets the standard of compliance which emerged from the Court's judgement.

Following this judgment, courts and tribunals are empowered to scrutinise valuations that do not explain in sufficient detail the reasons for that valuation's ultimate determination. Any entities which are currently undergoing a market rent review or are otherwise considering challenging a valuation report should be aware of this heightened judicial scrutiny.

Comparable leases

As noted above, it is open to the valuer to adopt whatever methodology of valuation provided that it, in substance, considers the section 31(1)(a) factors and explains the reasons for the determination with respect to such factors in sufficient detail. The Court has confirmed that whether the valuation needs to consider the provisions of comparable leases ultimately depends upon the selected methodology. For example, where a valuer adopts the direct comparison method, comparable leases will need to be considered to comply with section 31(1)(a)(i).

Rent incentives

When considering rent incentives in comparable properties, it is necessary for the valuer to explain any omissions. For example, as per the facts in this case, the Court ruled that a valuation which outlines the incentives present in three of five comparable properties but not the other two without explanation would not comply with the need to "have regard to" rent incentives as per section 31(1)(a)(iv). However, as noted above, where incentives are identified, the weight given to them is ultimately a matter for the valuer's discretion.