J Family Motel Group Pty Ltd v Baset Super Pty Ltd [2024] NSWSC 1251
Background
In May 2023, J Family Motel Group Pty Ltd (tenant) and Baset Super Pty Ltd (landlord) settled a dispute over a Tamworth motel through a Deed and a Contract, agreeing that the tenant would buy the motel based on the average of two valuations. Completion was set for six months after receiving the valuations.
The tenant now seeks to enforce the Contract, while the landlord argues it has been frustrated and seeks to uphold a termination notice and claim unpaid rent.
Expert evidence
In accordance with the Deed, the landlord nominated three licensed valuers, from whom the tenant chose Mr SR. The tenant nominated three licensed valuers, from whom the landlord chose Mr JS.
Mr SR and Mr JS were jointly appointed to determine the current market value of the motel. Their instructions clarified that the valuation would assume the property was leased under similar terms to the original lease but with modifications. They received documents and were also given background on the landlord-tenant relationship, noting that while the tenant disputed the new rent amount, both parties agreed the valuers could address it.
Mr SR provided a report valuing the land and improvements at $4.35 million, while Mr JS valued the property at $2.1 million in his report.
Both parties disputed the expert valuations. The landlord's solicitor rejected Mr JS' report, stating it did not follow instructions. The tenant's solicitor told Mr SR his valuation was inaccurate due to comparisons with wealthier towns. Despite this, the tenant proposed using the average of both valuations plus costs to proceed quickly.
The court held that an expert determination's binding nature depends on whether it adheres to the contract's terms. In Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314, the parties agreed to accept an expert's honest decision, even if made negligently, provided it aligns with the contract.[66]
In Kanivah Holdings Pty Ltd v Holdsworth Properties Pty Ltd (2002) NSWCA 180, it was held that expert valuation clauses aim to avoid disputes by binding parties to an impartial decision, even if flawed. However, if an expert misinterprets a contract, as in Strike Australia Pty Ltd v Data Base Corporate Pty Ltd (2019) [2019] NSWCA 205, the decision may not be binding.[67]-[68]
The court was confronted with the issue of whether the valuation by Mr JS is binding. The court said that the key question is whether Mr JS' valuation adhered to the Deed's terms. The court found that while Mr JS exercised standard valuation judgment, his deviation from the prescribed assumptions meant the valuation did not comply with the contract, rendering it non-binding on the parties.[76]-[82]
The landlord argued that the contract was frustrated due to Mr JS' failure to provide a valid valuation, making it impossible to determine the purchase price or complete the sale. However, the tenant disagreed, stating that the risk of dissatisfaction with the valuation was assumed by both parties when they agreed to have the price set by experts.[93]-[95]
The court held that frustration occurs when performance becomes radically different from what was agreed, but mere disappointment or delay isn't enough. The court found that the contract wasn't frustrated. Although the second valuation is still pending, the process set out in the Deed is ongoing, and the purchase price will eventually be determined. No frustration has occurred, as the necessary steps in the Deed have not yet been fully completed.[96]-[104]
Key takeaways:
- Expert valuers must ensure that their valuations strictly follow the instructions provided by the parties and the contract terms.
- Clear communication of the assumptions made and the methodology used in the valuation is essential.
- Expert valuers should explicitly state the basis for their figures and explain any discretionary decisions.
Read the full decision here.
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