Lucky Eights Pty Ltd v Bevendale Pty Ltd [2021] HCATrans 99 (21 May 2021)

Last Updated: 26 May 2021

[2021] HCATrans 099

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M133 of 2020

B e t w e e n -

LUCKY EIGHTS PTY LTD ACN 056 500 022

Applicant

and

BEVENDALE PTY LTD ACN 006 392 267

Respondent

Application for special leave to appeal

KIEFEL CJ
GLEESON J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 21 MAY 2021, AT 10.59 AM

Copyright in the High Court of Australia

MR A.J. MYERS, QC: May it please the Court, I appear with MR B.K. HOLMES for the applicant. (instructed by Gilbert + Tobin)

MR S.R. MORRIS, QC: May it please the Court, I appear with my learned friend, MR S.G. HOPPER, for the respondent. (instructed by MinterEllison)

KIEFEL CJ: Thank you. Yes, Mr Myers.

MR MYERS: Thank you, your Honour. Our first contention, our principal contention, is that the majority of the Court of Appeal below misconstrued and misapplied section 37 of the Retail Leases Act (Vic). Would your Honours be good enough to look at the text of the Act quickly? The applicable statutory provisions, including section 37, are annexed to the amended application for special leave. Section 37(1) provides:

A retail premises lease that provides for a rent review to be made on the basis of the current market rent of the premises –

and it goes on, so it is dealing with a retail premises lease that provides for a rent review to be made on the basis of the current market rent. Then, in subsection (2):

The current market rent is taken to be the rent obtainable at the time of the review in a free and open market between a willing landlord and willing tenant in an arm’s length transaction having regard –

to certain matters, and I will come back to some of those four matters. Then, after setting out the four matters, the subsection provides:

but the current market rent is not to take into account the value of goodwill created by the tenant’s occupation –

and subsection (4) should also be noted:

The landlord must . . . supply the valuer with relevant information about leases for retail premises located in the same building or retail shopping centre to assist the valuer to determine the current market rent.

The premises, there were two separate leases, but they have been treated, as it were, as one, because one was the administration facility for the business conducted in the other ‑ ‑ ‑

KIEFEL CJ: Mr Myers, the special leave points are not really a question of statutory construction as much as how section 37 applies to the circumstances of the particular case.

MR MYERS: That is true, that is true. That does involve the question of – not to quibble ‑ ‑ ‑

KIEFEL CJ: Well, you have to apply the statute ‑ ‑ ‑

MR MYERS: ‑ ‑ ‑ but it does involve a question of construction, but it is the ‑ ‑ ‑

KIEFEL CJ: ‑ ‑ ‑ but there is no dispute about the meaning of the section, the words in the section.

MR MYERS: Well, except that what the majority of the Court of Appeal below did was to, in effect, substitute a rent, a hypothetical rent, for a market rent by a series of steps which, in the application of this provision, led to a result which was really at odds with the task of the valuer to determine the current market rent, which must mean, in the circumstances that exist ‑ ‑ ‑

GLEESON J: It is the current market rent which is taken to be rent determined in accordance with 37(2), is it not?

MR MYERS: Yes, it is. Having regard to certain matters, it is – subsection (2) does not set the limit of the task of the valuer, the valuer, in determining the current market rent as being:

the rent obtainable at the time of the review in a free and open market between a willing landlord and a willing tenant in an arm’s length transaction –

There is no problem with those words. There is no difference of view about the meaning or effect of those words.

KIEFEL CJ: Mr Myers, at paragraph 140 of the judgment of the Court of Appeal, which is at special leave book page 90, their Honours say that section 37(2) is drafted on the basis that there is a market rent for retail premises which is to be assessed and that there is a market in which there is a competition from at least one alternative tenant who is able to lease the premises. Do you have any difficulty with those - the underlying premises there?

MR MYERS: Yes. The notion that there is competition from at least one alternative tenant ‑ ‑ ‑

KIEFEL CJ: Well, the notion of a market bespeaks competition.

MR MYERS: Obviously the notion of a market means ‑ ‑ ‑

KIEFEL CJ: That means there has to be more than one person vying for the same thing.

MR MYERS: Well, if that is all it means then there is no problem, but if it means a tenant, alternative tenant that has all the characteristics of the sitting tenant, I do, because that is where the Court of Appeal got to.

KIEFEL CJ: Who is not prevented from carrying out the same business.

MR MYERS: But it is quite possible that in the market, in the real world, there might only be one person who is capable of carrying on the business and so, no doubt, there will be a rent that can be set, but it will not be set with reference to an alternative tenant that has all the characteristics of the sitting tenant. In this case those characteristics are the necessary conditions for carrying on a business of gaming.

The evidence, and there is no dispute about this, as I believe, that there was only one person who could do that, that was the tenant, because in the circumstances the tenant had the premises approval which was necessary, the tenant was the holder of the premises approval and the holder of the premises approval could - it was a necessary condition that that person had that approval to carry on the business and that person could surrender the approval if that person wished to do so.

GLEESON J: In relation to proposed grounds 3 and 4, where do you identify the requirement to test whether the “hypothetical rent” is realistic in the market, having regard to market conditions?

MR MYERS: I am sorry, I missed what grounds your Honour referred to?

GLEESON J: Proposed grounds 3 and 4, I am looking at the end of your reply submissions, paragraph 10.

MR MYERS: Yes.

GLEESON J: Where do you identify a requirement in 37(2) to test whether the hypothetical rent is realistic in the market having regard to market conditions?

MR MYERS: Because it is - the basis of the rent review is found in the lease, as modified by section 37(2), and the lease provides that there should be a rent review made on the basis of the current market rent of the premises, and the current market rent of the premises is a reference, if it be to anything, to the market conditions existing at the time of the rent review.

What happened here is that the Court of Appeal, the majority, took paragraph (b) of subsection 2 to mean much more than and have a much greater effect than it actually has. It is something that the valuer must have regard to, but it is not the limit. It does not set the bounds of what the valuer may have regard to.

Furthermore, those paragraphs, (a) to (d), can point different ways. This lease provided, for example, that there should be taken into account the rent for comparable premises in the vicinity. That would necessarily, we say, include within the shopping centre of which this was part. But the Court of Appeal said no. They said no, this is only to take into account premises which have the uses to which this may be put. They narrowed that to mean gaming and then said we have to assume that the tenant – the hypothetical tenant – I will call him/her that – has all the characteristics which would enable that person to carry on a gaming business, but, in fact, in the circumstances, was no such person.

There could not be because there was a limit on the number of gaming machines within the vicinity. It was clear that that limit was never going to be changed. The premises approval was held by the sitting tenant and the sitting tenant could surrender it – at least, upon or after the expiration of the lease. So, that one had an hypothetical rent that was determined on grounds that did not reflect the market at all. To get to that – sorry, I may have interrupted.

KIEFEL CJ: Thank you.

MR MYERS: Your Honour, I think was going to speak ‑ ‑ ‑

KIEFEL CJ: I was going to ask you a question. Thank you, Mr Myers. Did the evidence go so far as to say that a venue operator’s licence and the necessary gaming machine entitlements could not have been obtained by a new lessee?

MR MYERS: I believe it establishes that. Yes, the valuer said – he made a finding as to that at page 59 of the valuation. This was not contested: “In my view, a hypothetical tenant could reasonably expect to achieve the gaming levels which have been consistently reported for the venue over the past several years. In this respect, I note that the demised premises is the only gaming venue operating within the Pacific Epping Shopping Complex and that no new gaming venue can be developed as a consequence of the Whittlesea planning scheme.”

KIEFEL CJ: But that is not to say that ‑ ‑ ‑

MR MYERS: It does not answer your Honour ‑ ‑ ‑

KIEFEL CJ: No, it does not quite ‑ ‑ ‑

MR MYERS: ‑ ‑ ‑ so it does not answer ‑ ‑ ‑

KIEFEL CJ: It is just to say that it is unlikely that further licences elsewhere would be extended. But it does not say that a new lessee could not obtain the same approvals with respect to the premises that were already approved.

MR MYERS: The new lessee could not obtain that approval for sure if the sitting tenant surrendered the premises approval and it was not contested that no new premises approvals were going to be given in the region. So, I think – and maybe my learned friend will contradict me – but I think it was not really contested that, in the factual matrix here, the only possible holder of – or person who can conduct a gaming business – was the existing sitting tenant.

Now, that is why there was a big debate which the Court of Appeal ducked – the majority ducked – if I can put it colloquially – about whether the premises approval could be surrendered or not because if the premises approval could not be surrendered then a new – or hypothetical tenant could have that premises approval.

KIEFEL CJ: Was there not a finding that they could be surrendered – that they were of a nature that could be ‑ ‑ ‑

MR MYERS: By the dissenting judge. The majority said they decided the case without having to do so.

KIEFEL CJ: Yes, yes, I see.

MR MYERS: But, really, it is clear. Section 3.3.15 of the Gaming Regulation Act which deals with the surrender says that:

The holder of a –

premises approval:

may surrender –

it. It also says, in the next subsection or paragraph, that there can only be one premises approval for a single premises.

GLEESON J: The highest the fact finding went in the Court of Appeal was Justice Niall’s finding at paragraph 332 that:

the risk that LE would surrender the Premises Approval is real.

MR MYERS: Yes, but before I just answer your Honour Justice Gleeson’s question, we say that the real error is in paragraph 141. It is the next paragraph, the one that your Honour referred me to. Then I want to quickly - if your Honours will just cast an eye over that, it says:

In order for s 37(2) of the RLA to be effective3, the valuer must –

et cetera. We say that is not so. It just simply does not take account of the opening words of the ‑ ‑ ‑

KIEFEL CJ: But if one takes the hypothetical situation there posited, it would be referable to the position of your client as a tenant and therefore reflect the proper market rent, would it not? You might call it a hypothetical, but in reality it would reflect your client’s position – a person having all these approvals.

MR MYERS: Your Honour, yes, but that is my client’s business. It is not the rental value of the premises and the effect of applying this profits method which was a consequence of this reasoning was to increase four‑fold and it was to base the rental on a share of the profits. You do not pay for the demised premises. You get a certain percentage of the profits. Can I just go to the steps of reasoning to answer your Honour’s question by which the court got to it?

They said in order to conduct the business you need a premises approval, you need a venue operator’s licence, a VOL, and you need 100 GMEs, gaming machine entitlements. Now, why they said 100 I do not know, because the use could have been undertaken with one gaming machine entitlement or 10, but they stuck with 100 and they said they assume that if my client, Lucky Eight, vacated the premises there would not be a surrender of the premises approval, at paragraph 165. They assumed that. They went on to say that if Lucky Eights could surrender, which they assumed without deciding, there was no logical reason to do so. Well, Justice Niall deals with that in his evidence and that is a finding of fact. There was no such finding by the valuer or the Tribunal.

GLEESON J: What their submissions tend to illustrate is that the issues in this case arise from the special characteristics of your client’s use of the premises.

MR MYERS: With respect, no. Of course, the issues in this case do arise from that, that goes without saying. But this legislation is found in a same or similar form, if I can adopt the words of the majority, in all States and Territories and although there are differences in gaming regulations and all sorts of other regulations affecting the use of retail premises, these problems can arise in other contexts where the question is what attributes do you give to the hypothetical tenant?

Then if you say, having given all sorts of attributes to the hypothetical tenant, the hypothetical rent thus derived is the market rent, which is another slip. If you say that, then you have substituted a hypothetical rent determined in circumstances that are artificial and at odds with, we say, the facts of the case for finding a market rent. It is a really important matter of generality.

GLEESON J: Is it just the characteristics of the willing tenant or is it also the characteristics of the free and open market?

MR MYERS: It is a characteristic of neither. A willing tenant – it is a willing offeree, actually, not a willing tenant, I think.

GLEESON J: I am looking at the chapeau to section 37(2).

MR MYERS: Yes, the willing tenant. Yes, it is, a willing tenant. Someone who is willing to be a tenant. But you do not have to assume that the willing tenant has characteristics which do not or are unlikely to exist in the marketplace. You do not have to make any assumption about that, in fact. You just say, well, how many people would be seeking to rent the premises.

The last thing I want to say about the surrender – if Lucky Eights could surrender, even if it could surrender the premises approval, the court said the valuer is required to assume that it will not do so, at paragraph 167. There is no warrant for that in the provision of the section, and to require that the valuer has to make all sorts of assumptions that are contrary to the facts is to distort the whole process and you do not find a market rent, you find a hypothetical rent, and here it was found on the basis of a share of the profit and that has its problems too.

One of them, even in the words of the section, is that if you are setting a rent with reference to a profit of the business, you are taking into account the goodwill. You cannot get the profit without somehow taking
into account goodwill. So that on that basis also we say that there is an important issue of general application in Australia that is raised by this decision. In short substance, we say that the reasoning of Justice of Appeal Niall was correct, and the majority was flawed. If the Court pleases.

KIEFEL CJ: Thank you, Mr Myers. Mr Morris, we need not trouble you.

In our view, the proposed appeal involves the question as to how market rent is to be assessed under section 37 of the Retail Leases Act 2003 (Vic), having regard to the circumstances of the lessee in this case. No question of statutory construction or principle arises which might warrant the grant of special leave. Special leave is refused with costs.

MR MYERS: If it please the Court.

AT 11.20 AM THE MATTER WAS CONCLUDED