A Morningside food services operator who received a market assessment proposing a 22% annual rent hike has urged the Supreme Court to rule that landlord’s April 2014 notice was void because its rent proposal was unreasonable.
Brisbane-based boutique asset manager, Sentinel, sent the notice as permitted under the lease in respect of a market review date in May.
The lease specified that the rent proposed in the landlord’s notice would apply from the review date unless the tenant gave the landlord its own assessment of rent within the following 30 days so as to activate an independent rent review process.
Sentinel’s notice proposed a new annual rental of $1.3 million ($185 per m2) in comparison to the pre-review rent of $132 per m2.
Packaged soups and salads supplier Primo left it until June respond, well outside the 30 day allowable window.
Faced with a $200k p.a. rent increase, it sought a declaration from the Supreme Court that the landlord’s notice was invalid because it did not contain any warning requiring the tenant to respond with its own assessment within 30 days.
The court was not convinced any such warning was necessary: “The notice was not required to refer specifically to the relevant lease clause or inform the recipient of the period within which it must act”.
Nor could it be argued that time was not “of the essence” in relation to the tenants response: “Once a contract expressly spells out the consequences of non-compliance with a time limit I cannot see how it can be argued that the time limit is non-essential”.
Sentinel’s assessment was in fact higher than that recommended by independent valuations it had commissioned. But having been performed by its own CEO Warren Ebert – an experienced property owner and qualified valuer – the court was not prepared to hold that it was in some way defective.
That Ebert expressed his rental figure as having been “grossed up” to accommodate the fact that land tax was non-recoverable – because the May 2009 lease did not benefit from the wind back of the prohibition on land tax recovery from July that year – did not affect his assessment’s validity .
More fundamentally however – given that the lease did not specifically require the landlord to act “reasonably” – there was no inherent duty on the part of the landlord to propose only a “reasonable” rent in its assessment notice to the tenant.
Rather, the lease contained its own mechanism for negotiation and it ought to be expected that “the first figure advance by landlord might be higher than a tenant expects or believes to be reasonable”.
Primo is stuck with the higher rent and must pay the landlord’ costs of its failed court application.