In brief
A valuer may not be able to do a market rent review of licenced premises based on turnover figures, if none are provided.
What you need to know
- We have not seen any lease of licenced premises that requires tenants to provide turnover figures to a landlord, or valuer.
- If no such figures are provided, can the valuer use reconstructed figures?
- In our view, there are significant dangers in determining a rent based on turnover, where the valuer does not have the actual turnover figures.
Background
Many valuers of hotels use a trading profits methodology to determine the rent for the hotel. You will be aware that this methodology was held not to contravene the Retail Leases Act 2003 (Vic) in the recent decision of Epping Hotels Pty Ltd v Serene Hotels Pty Ltd (2015). So, if a valuer is provided with turnover figures, the valuer can use those figures to determine the rent for a hotel.
However, there are inherent problems within this, including the following:
- how can the valuer rely upon the figures provided by the tenant? A tenant is likely to understate the turnover figures, to assist in the determination of a lower rent. This would naturally disadvantage the landlord;
- leases generally do not provide that a tenant is required to provide turnover figures, so there is no contractual obligation on the tenant. If no figures are provided, what is a valuer to do? and
- there is no legal principle of which we are aware, that requires a tenant to provide turnover figures to a landlord, or a valuer.
Currently, we are acting for a tenant and there is a market review to be determined by an independent valuer. The tenant has refused to provide turnover figures and the landlord has had an accountant visit the leased premises in an attempt to reconstruct the turnover the tenant would achieve. Presumably, this is based upon the leased floor area and terms of the liquor licence.
Can a valuer rely on such reconstructed turnover figures? In our view, a valuer is exposing him or herself to the danger of having a valuation set aside, where a valuer is relying upon reconstructed figures. In the recent decision of Higgins Nine Group Pty Ltd v Ladro Greville St Pty Ltd [2016] VSC 244, VCAT was critical of the valuer who stated in his report that the turnover should be over $500,000.00 higher, without adequately explaining how such a conclusion was reached. If a valuer relies on reconstructed figures, the valuer would need to be very careful to explain in great detail as to how the turnover figures could be achieved and what comparable evidence exists to justify such figures.
Conclusion
If the valuer believes that it cannot undertake a market rent valuation without the tenant’s turnover figures, the valuer can either:
- refuse to undertake the valuation; or
- institute proceedings against the tenant to compel the provision of turnover figures.
The cost of any such application would need to be paid by the landlord (assuming it required the figures) noting that VCAT costs are not recoverable. There is no certainty that VCAT would compel a tenant to disclose confidential information, in the absence of a lease clause compelling the tenant to do so.
In drafting leases, we strongly recommend that if turnover figures are important to a landlord, and important for undertaking a market review, a clause be included in the lease compelling the tenant to provide such figures.
In our view, turnover figures should only be resorted to where comparable evidence is not available and we very much doubt VCAT would compel a tenant to disclose turnover figures, if there was comparable evidence.
