The Advanced Valuation - Assignment Example

Advanced Valuation Section1 Briefly discuss if rent incentives, for comparable leased premises which have been relied on in a rent review determination, should or should not be taken into account by the determining valuer (Ropart Pty ltd v Kern corporation ors [1991) The rent review determination as a ‘part’ of a contractual agreement for the lease of premises has been examined by the Australian courts in case SAS Trustee Corporation v State of New South Wales Matter. The details of the particular case are being presented in the following sections: Citation The specific case is cited as follows: SAS Trustee Corporation v State of New South Wales Matter No CA 40778/97 [1998] NSWSC 164 (24 April 1998) Key issues The main issues examined in the specific case are: a) the criteria that should be ‘adopted by the parties and nominated valuers in relation to the rent review of a lease’ (par. 1). In the above context, a series of similar issues are also examined like the role of notices and the good faith in the development of the relevant procedure and the completion of the task delegated to valuers. The issue of the use of two valuers is also presented in this case. Facts of the case The facts of the particular case could be described as follows: The lease ‘commenced in 1994 and created a term of twelve years commencing on 1 January 1995 (with three successive options for renewal for further terms of five years) covering twenty five floors and a secure area in the Governor Macquarie Tower, Sydney’ (par. 2). On the other hand, the agreement regarding the payment of the lease has been as follows: ‘he rent reserved, referred to in the lease as the minimum rent, was $13,224,7891 per annum and in the original term there were to be five rent review dates occurring two-yearly, the first being 1 January 1997; At or about the commencement of the lease the lessor made an incentive payment to the lessee of $68 million’. It should be noticed that the procedure referred to certain requirements like the ‘negotiation in good faith’ and the ‘appointment of valuers’ however, the relevant guidelines did not precisely followed. The main issue under examination in the particular trial has been the article 2.11(b) of the relevant contractual agreement. In order to identify the meaning of the above article the parties called experts. The decision At a first level the creation of a completed assumption by the court has been a challenging task because of the existence of many ‘contradictory’ terms in the relevant contractual agreement. For this reason it was supported by the court that “the parties to the Lease took the view that the benefit of the incentives would be amortised over the first ten years of the Lease; it is submitted that cl 2.14 shows that the parties intended that for the first ten years of the Lease the lessor was to have the benefit of having the rental calculated by reference to the rental of comparable premises where incentives were provided to tenants to enter into the Lease, whilst in the last two years an adjustment to arrive at what is described in cl 2.11(b)4 of the Lease as "effective rental" is to be made”. However, in accordance with the empirical evidence presented before the court, the judge held that ‘he should interpret the Lease according to his understanding of the ordinary usage of words having regard to the context in Pt II and the Lease; neither partys case was, in his view, assisted by any finding based on the evidence of the valuers’ (par. 2.14). Moreover, it has been stated by the court (Hodgson A) that “one contention of the appellant was that the commercial basis of the clause was the intention to amortise the incentive payment of $68 million over the first ten years of the Lease; however, accepting that commercial purpose, it seems to me that both the rival contentions, to some extent or other, further that commercial purpose; the only difference is a matter of degree to which that commercial purpose is furthered, and in my opinion one cannot choose between those two contentions on that ground’ Relevance of the case to valuers The particular case is of significant importance for the identification of the use of valuers in the cases where the value of the rent cannot be estimated using the common methods of the market. On the other hand, the use of valuers by both parties has been proved to create additional constraints when having to decide on the exact level of the rent applied on a particular lease. (words: 738) Section 2 Briefly discuss the distinction between a “speaking” a “non-speaking” valuation in the context of a rent review determination In order to make clear the distinction between a ‘speaking’ and a ‘non-speaking’ valuation, we should primarily refer to the content of the ‘rent review determination’. In this context, it has been stated by Crosby et al. (1997) that “a review is a one-to-one situation where neither party can walk away and a third party will determined the rent in the absence of an agreement; the rent is the only element to be considered therefore it is only agreed after a detailed examination of the lease; this may be the complete reverse of the open market letting but the rent sought is the same rent as would be agreed upon new letting”. Moreover, it is noticed by O’Roarty et al. (1997, 309) that “rents at review are commonly assessed by making comparisons with properties similar to the subject premises under assessment; subjective adjustments are made where the location, physical and lease term characteristics of subject and comparable properties differ”. The above issues are used in the market in order to decide the level of the rent both in residential and commercial leases. At a next level, the issue of ‘speaking’ and ‘non-speaking valuation has been examined thoroughly by the courts in cases where the methods of evaluation of the rent used by the parties are not in accordance with the relevant agreement. In this case the court has to decide on the appropriate method of rent valuation taking into account the will of the parties as it can be derived by the agreement signed by them (in case that such an agreement does not exist, then the will of the parties is going to be assumed through the use of the case law referring to similar disputes). A characteristic case regarding the valuation of the rent review determination, is the ‘Kanivah Holdings Pty Ltd v Holdworth Properties Pty Ltd’in which the court decided that the parties have the right to agree to use an expert valuer who should decided on the valuation of the rent review determination. However, in this case it has been accepted by the court that the expert’s view would be binding for all parties and that this agreement would be valid regardless the will of the parties afterwards. More specifically, in the above case the judge, Palmer J, stated that the provision for the use of an expert valuer in the valuation of the rent review determination is “is not unfamiliar in a lease of this character and duration. Its purpose clearly is to avoid lengthy and expensive litigation in which the parties deploy troops of competing valuers to argue what is, in the end, a matter of opinion founded upon professional experience and judgment” (par. 113). For this reason the court held that “the determination is valid and binding on Kanivah for the purposes of the Lease” (par. 120) It should be noticed that the issue of ‘speaking’ and ‘non-speaking’ valuation is developed in this case by Sheahan J who referred to the case of Legal & General Life of Australia Limited v. A. Hudson Pty Ltd where the judge held that (p. 178) that “In the instant case the valuation of Mr Wolfs is a `speaking valuation in the sense that it is one which, on its face, discloses the method of valuation used, namely replacement costs less depreciation”. It is also noticed by the judge that “If a `speaking valuation can be impeached for mistake then I would regard it as sensible to hold that the mistake must appear from a reading of the valuation and not from cross-examination of the valuer and answers elicited therein”. The above decision referred to the examination of the case in the Supreme Court. In the Court of Appeal the whole issue was examined again (in 2002) and the court held that (Mason P) “Palmer Js decision was correct; there is no vitiating error to be found; once Mr Norris had found the highest and best use as a retail/commercial site, he was not obliged to carry out a detailed feasibility study” (par. 51). In other words, at both levels the court recognized the valuation of the expert as valid and binding for all the parties involved. The will of the parties as it has been expressed in the contractual agreement signed by them has been ‘fulfilled’ in terms that an expert has been decided on the value of the rent and his view (which is a professional ‘verdict’) should be respected by both parties. (words: 748) References Crosby, N., Murdoch, S. (1997) The influence of procedure on rent determination in the commercial property market of England and Wales (University of Reading, available at http://www.rics.org/Property/Commercialproperty/Commerciallandlordandtenant/influence_of_procedure_19970101.html O’ Roarty B., McGreal S., Adair A., Patterson D. (1997) Case-based reasoning and retail rent determination. Journal of Property Research, 14(4): 309-328 Cases Kanivah Holdings Pty Ltd v Holdworth Properties Pty Ltd (2001) NSW ConvR Kaniva Holdings Pty Ltd v Holdworth Properties Pty Ltd (2002) NSW ConvR SAS Trustee Corporation v State of New South Wales Matter No CA 40778/97 [1998] NSWSC 164 (24 April 1998) Read More