Improvements on Chester Hill property
106I turn to the Chester Hill improvements value issue.
107To recap, the critical difference between the valuers was this. Mr Davis treated the improvements on the Chester Hill property as useless to the purchaser and therefore valueless and, consequently, added the cost of their demolition in his adjustments. This generated a rate in his valuation of $430 per square metre, which he applied to the Land. Mr Lunney, on the other hand, attributed the difference between that rate and the rates tendered for the back part ($220 - $230 per square metre) to the value of the improvements on the front part (see [82] above). He ascribed a value of $10,442,000 to the improvements and a value of $11,029,104 to the Land. He derived from the latter figure an applicable rate of $169 per square metre. In the event that the improvement were to be attributed a value, Mr Davis estimated their value at $793,500 (see above at [79]).
108It is necessary to determine whether either of those approaches to improvements value, or some other approach, should be adopted.
109Each party marshals a National Australia Bank (NAB) valuation in support of its respective valuer's position. The applicant sought mortgage finance from the NAB for the purchase of the Chester Hill property. The NAB commissioned the NAB valuation. The NAB valuation identified the highest and best use as a functioning educational property, with the benefit of a surplus land component (the back part), which could be subdivided off for a retirement village. That seems to do no more than describe the situation of the vendor. The NAB valuation estimated an "in use" market value of $21,550,000. That sum was apportioned as to land $10,440,000 and as to improvements $11,107,239 (rounded down to $11,107,000).
110In my view, the NAB valuation should be given little, if any, weight for several reasons. First, the absence of compliance with the rigorous safeguard provided for in the Uniform Civil Procedure Rules 2005 whereby an expert witness is required to comply with the Expert Witness Code of Conduct: r 31.23, Schedule 7. Secondly, the NAB valuer was not called to give sworn evidence. Thirdly, the NAB valuer has not participated in the joint expert witness conferencing or been tested through cross-examination and concurrent evidence. Consequently, the NAB valuer has not been subject to the methods of testing evidence usually employed in this Court.
111I take the same view of the Valuer-General's statutory valuation which often finds its way into evidence in resumption compensation cases. Generally, the only relevance of such valuations, in cases such as this where expert valuation witnesses are called, is that they may form part of the historical background and may contain admissions by a party or non contentious facts.
112Mr Mehio, a board member of the applicant, negotiated the purchase of the Chester Hill property. I accept his evidence. In his affidavit he said it was clear to him at the time that the room sizes and other features rendered the existing buildings unsuitable for the applicant's proposed school. As an experienced property developer, he considered that it would be more cost-effective to demolish the buildings rather than try to adapt them for the new school, and he factored the likely development cost into the $23 million offer.
113In cross-examination, Mr Mehio was referred to statements attributed to him in the NAB valuation which might be understood as indicating that the applicant intended to use the existing buildings. Mr Mehio said that he intended to indicate to the valuer that the applicant intended to sub-lease excess space for a year or two until the buildings were knocked down and replaced with new buildings. He said they bought the whole Chester Hill property because of its existing development consent for an educational use and that if they bought only the rear part that was put out to tender, they would have had an identical situation to the development consent for the Land, which he simply wanted to forget about. He said the intention was to start by occupying the Bob Hughes building with about 200 or so students for one year, by which time a town planner would have advised how buildings fitted in. The design plans the applicant had for a school on the Land would have to be looked at afresh because of the different circumstances at Chester Hill.
114Mr Mehio was also cross-examined as to whether the purchasers intended to continue with the existing residential room leases. This was in the context of evidence indicating that rental income from parts of the property leased out to third parties was between $800,000 and $1,000,000 per annum prior to the sale. That included from a communications lease to Telstra. The residential buildings were leased to students and to the Commonwealth government for the purpose of housing refugees. Mr Mehio was only interested in the residential improvements as a possible income stream from tenants until such a time as they were torn down to make way for development of the Islamic school. He denied seeking to persuade the NAB valuer that there would be a steady income stream to service the loan from leasing. They were in education not property development, and were a not for profit organisation.
115Emails from the underbidder for the whole Chester Hill property indicate that it offered to purchase with a delayed settlement in two to three years time. They also indicate that, if, in the meantime, the underbidder could have the "use" of 100 residential units, the (associated) restaurant and an educational building with a few classrooms, it would increase its offer by $1,000,000. The evidence does not establish that the underbidder had any interest in the residential buildings other than in the relatively short term, perhaps as an income source pending delayed settlement. I do not think that an interest in leasing out accommodation, other than temporarily, should be attributed to a school buyer. In my opinion, to the extent that the Islamic or private school market would view the buildings on the Chester Hill property as useless, no value should be attributed to them and their demolition cost may be taken into account when comparing the Chester Hill sale.
116This focus is on the market view rather than the subjective development intention or purpose of a particular purchaser or offeror. The subjective development intention or purpose of a purchaser or offeror is generally irrelevant except insofar as it evidences that there were special circumstances which affect the comparability of the sale. I considered this question in Taylor v Port Macquarie-Hastings Council [2010] NSWLEC 113 at [131] - [139]:
131 The many different forces in the market that bring parties to a sale are ordinarily brought to a state of equilibrium when the bargain is finally struck. When assessing comparability the subjective intentions of the parties are generally irrelevant and the valuer looks to fundamental objective particulars of the sale such as the price, date, area, location, zoning, land use (actual and potential), physical constraints, services and amenities. However, there may be special circumstances relating to the buyer or the seller which plainly affect the comparability of a sale by showing that it is in no sense comparable or that it requires adjustment to be a reliable yardstick. Special circumstances include those which establish that the seller or buyer was anxious or unwilling and thus outside the statutory test, or not at arms length. Special circumstances also include those showing that the buyer, to the knowledge of the seller, had a higher potential use in view, perhaps not permitted by the existing zoning, which commanded a price higher than the price commanded by a lower and less rewarding use (actual or potential) whereas the subject land has no such higher potential use. That is the present case: the Land and the applicants' comparable sales all had potential industrial use but, in my view, only the latter had potential residential use, neither use being permitted by the existing zoning. Where land has more than one potential use, the seller will gear his negotiating price to the knowledge (which the seller will almost inevitably acquire) that a buyer has a higher and more valuable use in view and will not confine the price to a range appropriate to a lower and less rewarding use. This analysis is supported, I think, by the authorities and texts cited below.
132 Rost and Collins, Land Valuation and Compensation In Australia (3rd ed 1993) at 86 state:
Valuations must be based on relevant sales evidence. It is most important for the valuer to obtain a detailed knowledge of all relevant sales within the area where the valuation is to be determined. Inspections and analyses of the sales will enable each one to be compared in detail with the others and with the property being valued so that a basis for determining the value can be established. The circumstances under which sales take place should be investigated by interviewing the parties concerned in each transaction. Such circumstances could affect the comparability between the sale properties and the subject property being valued.
133 Douglas Brown, Land Acquisition (6th ed 2009) at 229 states:
The purpose underlying the sale or purchase of a property may be relevant in determining whether a sale is comparable or not. The court may wish to know whether a sale was an ordinary businesslike transaction. If the sale was made by an aunt to her favourite nephew the sale might not be regarded as being made at arm's length. If the seller was bankrupt or in severe financial difficulties it may be asserted that the seller sold at a lower price than might be expected if the seller was not over-anxious to sell. A sale by a mortgagee may be rejected on the ground that there was no evidence to show that the mortgagor's interests were being fully preserved: Re Murray (1934) 13 LVR (NSW) 25. Sales by the sheriff or in bankruptcy do not come within the Spencer principle: March v Frankston (City [1969] VR 350 at 367. A sale of farming land to a large retail establishment may be rejected on the ground that it is not a sale to another farmer and therefore not comparable to sales of farming land: Blefari v Minister (1962) 8 LGRA 1. If the resumed land is expected to attract only a certain class or type of purchaser, the sale of otherwise comparable land to an unexpected and different class or type of purchaser, may result in it being regarded as non-comparable. A sale of land which resulted from compromised litigation needs to be viewed with caution, because many factors extraneous to value may enter into the compromise: Celtic Agencies Pty Ltd v South Australian Land Commission (1978) 20 SASR 176.
134 In Maurici v Chief Commissioner of State Revenue [2003] HCA 8, 212 CLR 111 at [120] the High Court said:
How is the land in its notionally unimproved state to be valued? The traditional, and usually unexceptionable method is to seek out relatively contemporaneous sales of comparable properties between parties at arm's length, unaffected by special circumstances, such as, for example, a strong desire by a purchaser to buy an adjoining property, and to use those sales as a yardstick for the valuation of the relevant land.
135 In The Valuer General v Fenton Nominees Pty Ltd (1982) 150 CLR 160 the court took into account the intention of buyers when acquiring land in determining that the land was comparable with the subject land. The case concerned a valuation under South Australian valuation legislation which required the unimproved value of land to be assessed. The highest and best use of the subject land was as vacant land suitable for commercial development. The parties' competing valuations were based on sales of improved land which the purchasers had acquired for redevelopment with the intention of demolishing the existing buildings as a preliminary to redevelopment. The existing buildings had no value to the purchasers. The High Court held that the prices paid for the improved land should be converted so as to reflect their unimproved value by treating the prices and the cost of demolition and earthworks as together representing the cost to the developer of obtaining unimproved land suitable for redevelopment. This established the price which commercial developers were prepared to pay for suitable vacant land similar in kind to the subject land in its unimproved state. The High Court rejected Fenton's competing contention (which would have resulted in a lower valuation) that the price paid for the improved land should be converted so as to reflect unimproved value by subtracting the value of improvements from the sale price. The latter would have been a conventional method of arriving at unimproved value if the purchasers' subjective intentions had been ignored. The High Court at 166-167 agreed with the primary judge, Wells J, who said:
Speaking generally, where the subject matter of the sales, and the market in which they were concluded, reveal a sufficiently high degree of comparability with the notional sale of the land in question and the market in which it would be the subject of negotiation, the particular circumstances and considerations that induced the respective parties to come together at the several prices agreed upon are regarded as immaterial, unless, in a given case, they are such as plainly to take a sale out of the ordinary run of transactions that together constitute the relevant market. Where the circumstances and considerations have such an effect, valuers are wont to say that the alleged comparable sale must be excluded because it was affected by special circumstances.
136 In that case, the primary Judge, Wells J, said in Fenton Nominees Pty Ltd v Valuer-General (1981) 47 LGRA 71 at 79 before the passage quoted by the High Court: "it is fallacious to suppose that the owner of vacant land will not gear his negotiating price to the knowledge (which he will almost inevitably acquire) that the intending purchaser has a commercial use in view; and will not confine himself to asking prices within the range of those appropriate to some other lower and less rewarding use". Wells J also said at 79 immediately after the passage quoted by the High Court:
Put another way, one may assert that none of the many different forces in the market under consideration that bring the parties to a sale is ordinarily regarded as a special circumstance, because all such forces are brought to a state of equilibrium when the bargain is finally struck. Generally speaking, therefore, and given that the degree of comparability is sufficiently marked, what the valuer primarily looks to are the fundamental particulars of each sale - the price, the date, the location of the land, and its area.
137 In River Bank Pty Ltd v The Commonwealth (1974) 4 ALJR 483 at 487, a resumption compensation case, Stephen J rejected two sales of rural property with subdivision potential, Urila and Burra Downs, because the subject property had none. By inquiring into the intentions of the purchasers (Urila - "it was purchased with a view to later subdivision", Burra Downs - "it was bought as a subdivisional project") Stephen J was able to disregard the sales as comparables.
138 In Blefari v The Minister (1962) 8 LGRA 1 the plaintiff contended that resumed land should be valued on the basis that as of the date of resumption there was a strong possibility of it being released from the "green belt" in the near future. In support of that contention he sought to rely on a sale of nearby land for a drive-in theatre. Else-Mitchell J rejected the sale, not because of the characteristics of the land but because it was purchased for the purpose of a drive-in theatre by an adjoining landowner (at 3):
...it was common ground that the land was acquired for the purpose of a drive-in theatre by a company which already had some adjoining land and was in the course of applying for a licence to conduct such a theatre. It was obvious that available sites in the Sydney metropolis, of a size sufficient to enable such a project to be established, must be limited in number, and for this reason at least, it was probable that a purchase for such a special purpose would not evidence any general market value for land of the character of having the situation of the land resumed from the plaintiff.
139 In a number of compulsory acquisition compensation cases in this Court evidence as to the purpose of the purchase of allegedly comparable sales has been considered: Chaudry v Liverpool City Council [2008] NSWLEC 251 at [29]; Cassidy v Sydney Water Corporation [2008] NSWLEC 223 at [100], [106]; Penrith City Council v Sydney Water Corporation [2009] NSWLEC 2 at [8].
117As Mr Davis' adjustment of the Chester Hill property is so significant, Mr Lunney considered that that sale should be considered with caution.
118Mr Lunney made the following criticisms of the reliability of the rate of $430 per square metre derived by Mr Davis from the Chester Hill sale:
(a)the back part of the Chester Hill property offered for sale by private tender - a site comprising about 27,096 square metres with development consent for a 133 unit aged care development - only attracted market interest up to a value of $230 per square metre. The three highest tenders were between $220 and $230 per square metre, with the second and third highest tenderers proposing to develop it as a private school. Thus, there is a significant disparity between the actual rate the market was prepared to pay for the vacant part of the Chester Hill site (up to $230 per square metre) and Mr Davis' analysis of the whole of the Chester Hill property ($430 per square metre);
(b)Mr Davis' analysis of the Chester Hill rate of $430 per square metre is out of line with all the other comparable market evidence. In this regard, there was a difference of nearly $5 million between Mr Davis' alternative valuation of $15,080,000 based exclusively on the Chester Hill property and $10,325,000 based upon comparison with other school sites throughout the metropolitan region;
(c)If the applicant did pay an equivalent price of $430 per square metre for the Chester Hill property, Mr Lunney would place no weight on it because, on an objective view, it is well out of line with all of the other market evidence, particularly:
(i)the marketing of the back part of the Chester Hill property (with the three highest tenderers in the range of $220 - $230 per square metre);
(ii)the sale of the Villawood property suitable for a school at around the same time at $94 per square metre; and
(iii)the sale of the Land in 2006 to the applicant for $146 per square metre.
119The significant improvements on the Chester Hill property and each valuer's depreciated values (which are strikingly far apart) for those improvements are as follows:
Lunney Davis
$ $
(1)The Gate House (residence) 64,000 8,000
(2)Lecture Block 940,000 468,750
(3)Library 840,000 Nil
(4)Administration 1,575,000 Nil
(5)Armstrong House (residence) 1,575,000 Nil
(6)Dining Hall/kitchen 1,520,000 Nil
(7)Bob Hughes Christian School 780,000 114,750
(8)Lancaster House (residence) 400,000 Nil
(9)Squash court 60,000 6,000
(10)Houston Chapel/Kitchen 1,140,000 Nil
(11)The Cottage (residence) 128,000 16,000
(12)Houston House (residence) 360,000 Nil
(13)Bitumen paving 720,000 105,000
(14)Covered walkways 90,000 Nil
(15)Other 250,000 75,000
10,442,000 793,000