AMP Henderson Global Investors v The Valuer General

LOWER COURT Land & Environment Court JURISDICTION : LOWER COURT LEC 31066/02; LEC 31069/02 FILE NUMBER(S) : LOWER COURT Cowdroy J JUDICIAL OFFICER :

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40179/04 LEC 31066/02

CA 40180/04 LEC 31069/02

MASON P GILES JA TOBIAS JA

Friday 6 August 2004 AMP HENDERSON GLOBAL INVESTORS LTD & ORS v THE VALUER GENERAL

AMP HENDERSON GLOBAL INVESTORS LTD v VALUER GENERAL On 1 July 2001 (the base date) the appellants were notified by the respondent, pursuant to the Valuation of Land Act 1916 (NSW) (the Act), of the determination of the land value of two parcels of land in the Sydney CBD. Pursuant to the Act the appellants applied to the Land and Environment Court disputing the valuations. There both parties adopted the comparable sales method of valuation. The appellant attempted to rely upon some post base date CBD sales of improved land, but this evidence was rejected upon a failure to establish that the sales were made in similar economic circumstances. This resulted in the only comparable sales being two sales of improved land (only relied upon by the appellant) and one sale of vacant land (relied upon by both). However, the primary judge rejected the use of the improved land due to the appellants' reliance upon a single depreciation rate for improvements. The primary judge accepted the respondent's submission that a reliable depreciation rate would need to consist of various depreciation rates taking account of all the separate components of an improvement. Further, the vacant land sale was also rejected purportedly upon the authority of Maurici v Chief Commissioner of State Revenue (2003) 212 CLR 111. An appeal was brought on the basis that the primary judge erred in law.

HELD (per Tobias JA with Mason P and Giles JA agreeing) allowing the appeals and dismissing the summonses of the respondent seeking leave to cross-appeal:

1. Both parties produced evidence to the effect that economic circumstances had not changed between the base date and each subsequent sale. The primary judge erred in law in finding otherwise. [38] - [39]

2. It is an error in valuation principle to state that a single depreciation rate for improvements can never be used to derive land value whether in respect of all buildings or even all high-rise buildings. Further, the primary judge erred in law by irrationally rejecting as wholly irrelevant (or wholly unreliable) sales which prima facie afforded some evidence of value. As such the appellants' evidence based upon a single depreciation rate (which would no doubt take the components of the improvements into account) ought not to have been rejected. [51]-[53], [57].

3. The primary judge erred in his understanding that Maurici was authority for the proposition that if there be only one comparable sale and it is a sale of scarce vacant land it is required to be disregarded and the comparable sales method of valuation rejected. Rather Maurici stands for the following propositions: firstly, that s 6A(1) of the Act does not require when utilising the comparable sales method of valuation, that only sales of vacant land should be considered; and secondly, that confining one's consideration to only sales of scarce vacant land and disregarding sales of improved land which would otherwise be as comparable as the vacant land sales in terms of timing, location, outlook and other relevant features, offends the principle that a reasonably representative group of comparable sales should be considered when applying that methodology. As such the primary judge erred in placing reliance upon his erroneous understanding of Maurici.

4. (Regarding the respondent's cross appeal with respect to costs) In the particular circumstances, the primary judge did not err in law by having regard to the preponderant weight of authority as being to the effect that costs would generally not be awarded in valuation appeals. However, in the future (unless warranted by the particular facts) it would no longer be appropriate to adopt such a position. Thus, his discretion did not miscarry in his determination that it was not fair and reasonable to make a costs order in favour of the respondent against the appellant in the facts and circumstances of the case. [80] - [81] **********

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40179/04 LEC 31066/02

CA 40180/04 LEC 31069/02

MASON P GILES JA TOBIAS JA

Friday 6 August 2004 AMP HENDERSON GLOBAL INVESTORS LTD & ORS v THE VALUER GENERAL

AMP HENDERSON GLOBAL INVESTORS LTD v VALUER GENERAL Judgment 1 MASON P: I agree with Tobias JA. 2 GILES JA: I agree with Tobias JA. 3 TOBIAS JA: The first, second and third appellants are the owners of land situated at 243-249 George Street Sydney within the Central Business District of the City of Sydney (the CBD) upon which is erected a multi-storey commercial office building known as National Australia Bank House (the NAB land). The first appellant is also the owner of land situated at 52-56 Martin Place, Sydney within the CBD upon which is erected a multi-story commercial office building over ground floor and basement retail shops and known as The Colonial Centre (the Colonial land). 4 The respondent issued notices to the appellants under s 29(1) of the Valuation of Land Act 1916 (the Act) notifying them of the determination of the land value of each of the subject sites as at 1 July 2001 (the base date). In respect of the NAB land, that value was determined to be $58 million. The Colonial land value was determined to be $70 million. Each of the respondent's valuations was made pursuant to s 6A of the Act. 5 Objection was taken to the determinations of the respondent pursuant to s 29(3A) of the Act on the basis that the value in each case was too high. The respondent disallowed those objections and the appellants appealed to the Land and Environment Court pursuant to s 37(1) of the Act. 6 The appeals were heard together in Class 3 of the Land and Environment Court's jurisdiction: s 19(b) of the Land and Environment Court Act 1979 (the Court Act). On 18 February 2004, the primary judge, Cowdroy J, dismissed the appeals. On 3 June 2004, his Honour made orders whereby each of the appellants and the respondent was left to pay their own costs. The appellants appeal to this Court from his Honour's orders asserting that his decision contained errors of law. In this respect, the appellants' right of appeal is confined to questions of law: s 57(1) of the Court Act. The respondent applied for leave to cross-appeal in relation to costs, asserting that his Honour's discretion miscarried.

The valuation evidence 7 Before the primary judge the appellants relied upon the valuation evidence of Mr Grant Jackson, a registered valuer with significant experience in valuing CBD property. The respondent relied upon the valuation evidence of Mr Derek Hill, a registered valuer who also was reasonably experienced in valuing such land. They agreed that the relevant area of the NAB land was 3,220 m2 and that National Australia Bank House had a floor space area (FSA) of 44,875.70 m2. The land area of the Colonial land was agreed at 3,558 m2 and the FSA of The Colonial Centre at 45,862.60 m2. 8 Each valuer adopted the comparable sales method of valuation. However, they diverged as to which sales were comparable. They agreed on only one common sale, namely, that of 232-248 Pitt Street and 161-167 Castlereagh Street which was an amalgamation of four sites sold in April 2001, June 2001, July 2001 and December 2001 for a total price of $54,350,000 with a total land area of 4,490 m2. Both valuers accepted this sale as being a vacant land sale. I shall refer to it in these reasons as 232-248 Pitt Street. 9 Mr Jackson also had regard to five sales of improved land, four of which were common to each site (233 Castlereagh Street which sold in December 2002; 25 Bligh Street which sold in January 2001; 14 Martin Place which sold in September 2001 and 23-25 O'Connell Street which sold in January 2001). In addition, he relied upon the improved sale in October 2001 of 92 Pitt Street in valuing the Colonial land and that of 200 George Street in September 2001 in valuing the NAB land. 10 To deduce the land value of the improved sales, Mr Jackson calculated the added value of the improvements in each sale by reference to available technical and other information about the improvements on a cost less depreciation basis. The depreciation rates selected by him were explained in the evidence as reflecting an assessment of the physical, functional and economic obsolescence of the improvements in each case. This amount was deducted from the sale price together with deductions reflecting the value of any income stream and loss of interest. He also compared the sale of 232-248 Pitt Street to that of 233 Castlereagh Street in order to determine whether purchasers of commercial land in the CBD at the base date paid a premium for vacant land. He determined that such a premium was paid which, in relation to the comparison referred to, he determined at 20%. 11 Based on the proposed development of 232-248 Pitt Street, Mr Jackson deduced a value per square metre of FSA of $970. His analysis of the improved sales upon which he relied to determine the value of the NAB land ranged from $824 to $1,091 per square metre of FSA. His analysis of the improved sales upon which he relied to determine the value of the Colonial land ranged from $815 to $1,089 per square metre of FSA. 12 For NAB House, Mr Jackson then adopted a value of $1,000 per square metre of FSA, which yielded a land value for the NAB land of $44,875,000 compared to the respondent's valuation of $58 million. 13 For the Colonial Centre, Mr Jackson adopted a value of $1,200 per square metre of FSA to reflect the premium location of that site compared to the comparable sales and other factors upon which he had relied as relevant to any adjustments required. This yielded a land value for the Colonial land of $55 million compared to the respondent's valuation of $70 million. 14 Apart from the sale of 232-248 Pitt Street, which was common to both valuers, Mr Hill relied upon seven sales in the CBD as comparable which took place between November 1995 and June 1997 (the historic land sales). Each of those sales was accepted as being a sale of vacant land in that subsequent to each sale the improvements on each were demolished. Mr Hill considered that sales of land with substantial improvements which were tenanted and which the purchaser did not plan to demolish in the short term were less reliable for the purpose of determining unimproved land value. He opined that the numerous adjustments required to deduce their unimproved value made them unreliable and, therefore, not comparable. 15 From sales relied upon by him, Mr Hill deduced a rate of $1,350 per square metre of FSA with respect to the NAB land which resulted in a land value of $60,582,195. As the site was excavated, Mr Hill considered that the excavation constituted a "land improvement" within the meaning of s 6A(1) of the Act which he valued at $1,616,560, giving a final land value of $62,200,000 compared to the respondent's valuation of $58 million. With respect to the Colonial land, Mr Hill adopted a rate of $1,650 per square metre of FSA which, when allowance for land improvements was added, resulted in a final land value of $76,750,000 compared to the respondent's valuation of $70 million. 16 As I have observed, Mr Hill rejected Mr Jackson's method of ascertaining the land value of the improved land sales relied upon by him as he considered that Mr Jackson's reliance on numerous adjustments and the significant number of variables or assumptions inherent in the exercise rendered his deduced land value for each sale unreliable. Particularly relevant for present purposes was Mr Jackson's adoption of a single depreciation rate in respect of the improvements on the land the subject of each sale, which Mr Hill criticised as being arbitrary, inaccurate and giving rise to significant differences in the deduced land value depending upon the rate adopted. 17 Each valuer gave evidence as to the economic and market conditions prevailing not only at the base date but also at the date of the comparable sales upon which each relied. Mr Jackson gave evidence, supported by a deal of economic data, that there was a fundamental difference in the CBD property market at the time of the historic land sales relied upon by Mr Hill compared to those prevailing at the base date and at the time of the sales upon which he relied. In particular, his evidence was that by early 2001 all of the new office space which resulted from the construction of office buildings upon the land the subject of the historic land sales had been absorbed which, when taken in conjunction with the very limited number of land sales in the CBD in 2001, demonstrated that the market had experienced a significant downturn by the base date. Accordingly, Mr Jackson considered that the economic and market conditions which prevailed between 1995 and 1997 when the historic land sales occurred were significantly different to that which prevailed at the base date and for the following two years. He therefore rejected those sales as lacking comparability. 18 On the other hand Mr Hill, relying to a significant degree upon the same economic data as Mr Jackson, concluded that based upon that data, including low interest rates and consumer price indexes, the commercial market for premium office space was stronger in 2001 than in previous years. He therefore considered that there was no significant difference between the economic and market conditions which prevailed at the time of the historic land sales and as at the base date. Accordingly, no adjustment to those sales was required.

The primary judge's decision 19 The primary judge summarised the evidence of the two valuers on the issue of economic conditions in [43] to [53] of his judgment. In [54] he rejected Mr Hill's historic land sales in the following terms: "Despite the above economic evidence, the Court regards Mr Hill's remaining land sales as being too dated to constitute comparable sales. Adjustments would be necessary to Mr Hill's sales to reflect all of the economic factors between 1995-1997 and 2001 which might impact upon property values in the Sydney CBD. It is evident from the difference in land sales themselves (seven such sales between 1995-1997 and one land sale in 2001) that the market in 1995-1997 for properties in the CBD was different to that in 2001." 20 There are some difficulties with his Honour's reasoning in this passage. On the one hand, he seems to consider that Mr Hill's historic land sales were too remote in time from the base date to be comparable. He expresses this view "[d]espite the above economic evidence". This understanding of his Honour's reasons is supported by his observation in [55] that "[c]omprehensive evidence of real estate sales would be required before the Court could be satisfied that sales completed up to 6 years prior to the base date could be regarded as truly comparable." 21 On the other hand, his Honour seems to have accepted Mr Jackson's evidence that the market in 1995-1997 for properties in the CBD was different to that in 2001. If that is so, then the differential in time between the historic land sales relied upon by Mr Hill and the base date would not, of itself, be a basis for the rejection of those sales. However, there appears to be some inconsistency between this conclusion and that articulated by his Honour in [69] where he said: "The economic evidence summarised above indicates that the absorption rates for CBD office accommodation was increasing between 1995 and the base date. Such evidence suggests that developers would regard the purchase of new sites for future office accommodation as a viable investment as at the base date. The court cannot conclude that such market was declining as submitted by the applicant." 22 As far as Mr Jackson's post base date sales are concerned, the primary judge acknowledged that authority existed for the proposition that comparable sales after the base date need not be disregarded. However, he said (at [46]) that "evidence must exist to show that the economic circumstances and land values have not changed between the base date and the date of the subsequent sale." 23 The primary judge cited as authority for the above proposition the following passage from the judgment of Williams J in Daandine Pastoral Company Proprietary Limited v The Commissioner of Land Tax for the Commonwealth of Australia (1943) 7 The Valuer 299 at 304: "Values must be calculated in the light of circumstances which existed on the material date, in this 30th June, 1939, but subsequent events can be taken into account in order to determine the proper weight to attach to such circumstances. Subsequent sales are just as admissible in evidence as prior sales provided that in all the circumstances they are comparable. If between the material date and the date of the subsequent sale, supervening events occur which alter the conditions previously existing, the subsequent sales would not be comparable and would be useless. But if on the material date there was a tendency in a district to closer settlement and for prices to rise, subsequent sales of property in subdivision at rising prices would be evidence in support of the view that it was correct to value land in the district suitable for subdivision which was being applied for some other purpose in the light of this potential value. The whole tendency of the Courts is to admit evidence of any events prior to the date of trial which will throw any real light on the issues." 24 After reference to some other authorities, the primary judge concluded in these terms (at [57] and [58]): "…Accordingly subsequent sales are admissible to shed light on the correct valuation of the subject sales provided there is evidence to show that such sales are comparable and importantly that there are no supervening events after the base date which would alter the conditions existing as at 1 July 2001. 58. There has been no evidence adduced to establish that economic circumstances have not changed between the base date of 1 July 2001 and the date of each subsequent sale. In the absence of such evidence the Court does not know whether any subsequent sales are truly comparable. Accordingly sales relied upon by the applicants subsequent to the base date cannot be considered as constituting comparable sales." 25 The appellants challenge the accuracy of the first sentence of [58] recorded above. They submit that his Honour overlooked the detailed evidence of Mr Jackson with respect to the economic circumstances that prevailed between the base date and the date of the subsequent sales upon which he relied (of which all but one occurred in the following September/October). If he did, then his Honour erred in law in finding that there was no such evidence. 26 The primary judge's findings rejecting Mr Hill's historic land sales and Mr Jackson's post base date sales left two improved land sales relied upon by Mr Jackson which pre-dated the base date, namely, 15 Bligh Street and 23-25 O'Connell Street which both sold in January 2001. 27 Relevantly for present purposes, the essential difference between the two valuers was that they could not agree upon an appropriate rate of depreciation or the method of achieving a rate or rates of depreciation of the improvements in respect of those sales. Mr Jackson had given a lengthy and detailed explanation of the factors that he took into account in coming to his conclusion, which he accepted was a matter of judgment based on his experience, as to an appropriate depreciation rate in respect of each of those sales (as well as the rejected post base date sales). 28 Mr Hill applied three different methods to determine the underlying land value of the sales. One method was the application of a depreciation rate to the value of the improvements, if new, to ascertain the value of the existing improvements. This was also the method adopted by Mr Jackson. Mr Hill's adopted depreciation rate for each of the improved sales upon which Mr Jackson also relied (both pre and post base date), was higher than Mr Jackson's adopted rate, with the exception of 23-25 O'Connell Street. However, unlike Mr Jackson, Mr Hill did not, in either his written or oral evidence, give any indication as to how he arrived at the particular rate(s) that he adopted. 29 Furthermore, Mr Hill in his oral evidence had expressed the view that at least with respect to high-rise office development in the CBD, the adoption of a single depreciation rate without a consideration of the 40 or 50 components of such a building which would need to be depreciated at different rates, would be a highly unreliable exercise. 30 The primary judge considered that reliance could not be placed upon Mr Jackson's conclusions in respect of the derived FSA values for 25 Bligh Street and 23-25 O'Connell Street. His reasons were confined to the following (at [67]): "The Court finds that the adoption of a depreciation percentage is likely to lead to an unreliable assessment of the value of the improvements. The Court accepts Mr Hill's evidence that separate depreciation rates would need to be applied to numerous components of the building such as hydraulic services, lifts, air conditioning and finishes if an accurate assessment is to be derived. The adoption of a single rate is too simplistic." 31 The appellants submit that the first sentence of the above passage also reveals an error of law in that it could only be understood as a statement by his Honour of universal application to the effect that improved sales cannot be regarded as comparable for the purpose of determining unimproved land value. It was said that this was so for three reasons. First, the value of the improvements is required to be depreciated. Second, the adoption of a depreciation percentage is likely to lead to an unreliable assessment of value because, as Mr Hill contended, separate depreciation rates would need to be applied to the numerous components of the building if an accurate assessment was to be derived. Third, and following from the second, the consequence of the adoption of a single rate of depreciation is too simplistic and can give very different results depending on the rate adopted. 32 At this point the primary judge had rejected all but one of the sales relied upon by each valuer. The remaining sale was 232-248 Pitt Street which was common to both valuers. His Honour then rejected this sale upon the basis that the recent decision of the High Court in Maurici v Chief Commission of State Revenue (2003) 212 CLR 111 was authority for the proposition that (at [68]): "the use of one comparable sale is inadequate when adopting the comparable method of valuation."

The appellants challenge the correctness in law of this statement. 33 Having rejected all sales evidence, and there being no other alternative method of valuation relied upon by the appellants, the primary judge concluded (at [72]) that he was not satisfied that the respondent's valuations for the NAB land and the Colonial land were erroneous. In this respect, his Honour noted s 40(2) of the Act, which provides that the appellant has the onus of proving his case. Accordingly as, in his Honour's opinion, that onus had not been discharged, he dismissed the appeals.

The issues on the appeal 34 As already foreshadowed, the appellants submit that the primary judge erred in law in three respects. The first was his assertion in [58] of his judgment that no evidence had been adduced to establish that economic circumstances had not changed between the base date and the date of Mr Jackson's subsequent sales. The second was that his Honour erred in [67] of his judgment in propounding as a proposition of universal application that deducing the land value component of an improved sale by the adoption of a depreciation rate and, particularly, a single depreciation rate, was likely to lead to an unreliable assessment of the value of the improvements which could only be overcome if a separate depreciation rate was applied to each of the various components of the improvements, the cost of which it is sought to depreciate. The third was that Maurici stands for the proposition that if at the end of the day there is only one comparable sale, it must be disregarded and the comparable sales method of valuation rejected.

The first issue 35 The appellants submitted that there was ample evidence adduced by Mr Jackson to establish that economic circumstances had not changed in any significant respect between the base date and the date of the subsequent sales upon which he relied. To assert there was no evidence was an error of law. The respondent submitted that the first sentence of [58] of his Honour's judgment should be understood as asserting that there was no evidence which could support the conclusion that economic circumstances had not changed between those two dates with the consequence that the subsequent sales could not be accepted as comparable. 36 There are a number of problems with the respondent's submission. Firstly, it in effect requires a rewriting of the first sentence of [58]. The second is that that rewriting is unjustified in light of the second sentence of the paragraph which makes it clear that his Honour was not able to decide, in what he regarded as the absence of evidence of the economic circumstances between the base date and the date of each subsequent sale, whether those sales were in fact truly comparable. It is clear that his Honour considered that the onus lay upon the appellants to adduce evidence to justify comparability and that that evidence must establish the negative proposition that economic circumstances had not changed between base date and sale date. 37 It is true that there was no evidence of any supervening events after the base date which resulted in a material alteration to economic and market conditions between that date and the date of the sales. Although referred to in the evidence, it was not suggested that the tragedy of 11 September 2001 was such an event. In fact, such was specifically denied by Mr Hill. On one view of it, there being no evidence of such a supervening event, his Honour was required to accept that, in the absence of such evidence, there was no such event with the consequence that there was no relevant change in economic or market conditions between the base date and the sale dates as to render the latter lacking in comparability. However, in my opinion, the primary judge's finding of no evidence was simply wrong. 38 On the one hand, Mr Hill's evidence was that there was no such change: he considered that there was no material change in economic or market conditions between the date of the sales upon which he relied from 1995 to 1997 and the base date and that as at the base date and thereafter there was a continuing demand for office development sites. Mr Jackson's evidence on the other hand was that there was a change in the economic and market conditions that commenced from early 2001 when there was a dramatic downturn in the demand for such sites which was extant as at the base date and which continued for a further two years. Accordingly, in my opinion, his Honour erred in law in finding that there was no evidence adduced to establish that economic circumstances had not changed between the base date and the date of each subsequent sale. There clearly was such evidence from both Mr Jackson and Mr Hill. 39 In [21] above I have recorded the primary judge's observations in [69] of his judgment. There his Honour found that, contrary to the evidence of Mr Jackson, he could not conclude that the market for the purchase of new sites for future office accommodation was declining as at the base date. This, however, is indicative of the fact that there was evidence suggesting that there was no decline or change in the market as at the base date and for some period thereafter. It would thus appear that his Honour did consider that there was evidence to the effect that the market was declining as at the base date and thereafter but rejected it. If this is so, then it flies in the face of his Honour's earlier conclusion that there was no such evidence. In my opinion, therefore, the first challenge by the appellants to his Honour's decision should be acceded to.

The second issue 40 The appellants submitted that there were three possible interpretations of [67] of his Honour's judgment. The first was that his Honour was asserting, especially in the first sentence, that the adoption of any depreciation rate or percentage was always likely to lead to an unreliable assessment of the value of improvements. If this is the correct understanding of what his Honour was saying, it was an error in valuation principle and, therefore, an error of law. The second possible interpretation was that his Honour was asserting that the adoption of a single depreciation rate or percentage was likely to lead to an unreliable assessment. Again, it was submitted that this was contrary to valuation principle and, therefore, an error of law. The third interpretation suggested was that the primary judge was saying that on the facts of the present case Mr Jackson's use of a single depreciation rate was likely to lead to unreliability. This was the interpretation contended for by the respondent. But the appellants contended that on this understanding of what his Honour was saying, his rejection of Mr Johnson's improved sales on this basis, in the circumstances, would not be rational. 41 There is no doubt that at one point in his cross-examination Mr Hill accepted that a valuer commonly undertakes the task of striking a depreciation rate for an improvement in order to deduce the land value of a sale but he denied that that was a task commonly undertaken by valuers in respect of specialised high rise commercial office buildings within the CBD. It was in the context of that type of building that Mr Hill asserted that the valuer would need to break the building up into 40 or 50 components, look at the life expectancy of each and then run what he referred to as a "residual URL" on the remaining life of each component. He rejected, at least in the present case, what was referred to as the more broad brush or global basis of determining the appropriate depreciation rate as being inaccurate given the significant difference in land value that even a 5% difference in the adopted depreciation rate on a $55 million sale could give rise to. 42 However, earlier in his evidence, Mr Hill said that valuers were not sufficiently expert to make the assumptions necessary to depreciate multi-storey commercial buildings in the CBD and that it would be necessary to have access to a series of specialists to provide professional advice as to the determination of a depreciation rate. It was in this context that he seemed to be saying that it was only where there were other sales evidence or an alternative method of valuation that improved sales should be rejected as insufficiently reliable. Thus he said that although he recognised Mr Johnson's method of valuation, "I believe there is evidence, enough sales evidence within the City of Sydney again to determine the land value for the subject properties."

The sales evidence to which he was referring was the historic land sales which his Honour rejected as lacking comparability. 43 That this was the thrust of Mr Hill's evidence was further illustrated in the following exchange in his evidence in chief: "Q. I understand your primary contention is that when there are other methods of valuation, to apply the depreciation rate method that's been done you disagree with? A. Correct." 44 The appellants submitted, and his Honour acknowledged (at [63]), that Mr Jackson adopted the method prescribed for the depreciation of improvements in the standard valuation text, Rost & Collins, "Land Valuation & Compensation in Australia" 3rd Ed at pp 122-125. It was acknowledged that Rost & Collins is a well-known and highly regarded valuation text. 45 It is clear from the part of Rost & Collins referred to that the depreciation of improvements is one of the skills that a qualified valuer is required to bring to bear in an appropriate case in the valuation exercise. In terms of that exercise, the learned authors state that depreciation "may be measured by the difference between the value which a building or other improvement adds to the land at the time of valuation and the amount it would cost to replace it (new) at that time". 46 Physical deterioration, functional and economic obsolescence must all be taken into account. At page 125 the authors make this statement: "In assessing loss as a value due to physical, functional or economic depreciation, the objective is to ascertain the market value of the improvement. If market transactions do not provide evidence of such value, the valuer must rely largely on his own judgment and experience supported by such tests as may be practicable and taking into account wear and tear, standard of maintenance and degree of obsolescence of each improvement." 47 Nowhere do the learned authors suggest or comment upon the wisdom or otherwise of adopting a single depreciation rate or as to whether there are differences between depreciating the value of buildings of different types. In particular, they do not suggest that it is outside a valuer's expertise and/or unreliable to adopt a single depreciation rate in respect of a high-rise commercial office building. Although the third and latest edition of the text was prepared in 1984, albeit that it has gone through a number of reprints since, nevertheless high rise commercial office buildings in CBDs were well known and understood at that time. 48 In Maurici, the High Court observed (at 121 [19]) that improved sales of land were used daily for the purpose of statutory valuations under provisions similar to s 6A(1) of the Act by subtracting the added value of the improvements from their sale prices to derive unimproved land values. One can accept that in determining the added value of the improvements to land, their Honours would have understood that a depreciation rate in respect of the existing improvements would need to be adopted. But the Court in Maurici was dealing with dwelling houses in Hunters Hill in respect of which the determination of a single depreciation rate would in all probability present little difficulty to an experienced valuer. So much seems to have been acknowledged by Mr Hill. The Court was not, however, dealing with high-rise commercial office buildings of significant complexity in terms of their components when compared to a dwelling house including what their Honours referred to as the "many mansions" in an area such as Hunters Hill. 49 However, the manner in which the primary judge dealt with the question of depreciation in [67] of his judgment leads me to the conclusion that he was propounding a principle of general application. It is true that his Honour says that he accepts Mr Hill's evidence that separate depreciation rates would need to be applied to the components of the building if an accurate land value assessment is to be derived. It is also true that Mr Hill's evidence, at least on one view of it, related his requirement for separate depreciation rates to the various components of high-rise commercial office buildings. But then it also related his rejection of Mr Johnson's method of depreciation to the availability, as he saw it, of other and better sales evidence, namely, the historic land sales. 50 It is apparent that his Honour does not make it clear that it was only a particular type of building he was referring to when he opined that the adoption of a single depreciation rate was too simplistic, assuming that was his intention. In any event, it is tolerably clear that, in accepting Mr Hill's evidence, his Honour was at least propounding a principle of general application for high-rise commercial office buildings. 51 If my understanding of [67] is correct, then the primary judge has made an error in valuation principle. It cannot be correct that a single depreciation rate for improvements can never be used to derive land value whether in respect of all buildings or even all high-rise buildings. 52 However, I prefer to base my rejection of his Honour's finding on what I regard as a more solid basis. For that purpose I shall assume that the third interpretation of [67] of the judgment referred to in [40] above is correct. It is well-established that it is an error of law for a court to reject as wholly irrelevant, for grounds which are not rational, a sale or sales which, prima facie, afford some evidence of value: Melwood Units Pty Ltd v Commissioner of Main Roads [1979] AC 426 at 432; Leichhardt Municipal Council v Seatainer Terminals Pty Ltd (1981) 48 LGRA 409 at 434; Maurici at 116 [8]. 53 There can be no doubt that Mr Jackson's improved sales prima facie afforded some evidence of value. They were rejected by the primary judge as unreliable (which I do not distinguish from irrelevant) on the basis that, for high rise office buildings, the adoption of a single depreciation rate for the improvements was too simplistic and would not enable an "accurate assessment" of the unimproved land value to be derived. The effect of this rejection was that given his rejection of the historic land sales, his Honour was left with only one sale for comparison purposes, namely, 232-248 Pitt Street. 54 As a matter of valuation practice, and as Rost & Collins make clear, the assessment by a valuer of an appropriate depreciation rate is a matter of judgment based on his or her experience and supported by such tests as may be practicable. As Stein JA, with whom Priestley JA and Sheppard A-JA agreed, observed in Hornsby Shire Council v Roads & Traffic Authority of New South Wales (1998) 100 LGERA 105 at 108-9, the judicial valuer and, for that matter any valuer, is required to make inferences and apply experience and judgment in order to determine what are really hypothetical questions. These questions may involve subjective judgments and must inevitably leave room for differences of opinion. 55 In the present case, there was no doubt as to Mr Jackson's experience in valuing improved and unimproved CBD land. It may well be that, theoretically at least, Mr Hill was correct when he said, and the primary judge accepted, that for an accurate assessment to be made, separate depreciation rates should be applied to the 40 or 50 components of a high rise office building. But such an approach would be a counsel of perfection. It would not, in the type of valuation exercise Mr Jackson was required to undertake, be practicable in the sense in which Rost & Collins employ that term. 56 It is trite to say that valuing property is not an exact science. Obviously, the valuer must attempt to be as accurate as is practicable. In determining a single depreciation rate for a high-rise building, the valuer would no doubt take into account that the building does comprise many components whose residual life will differ. There is nothing in the evidence to which our attention was drawn to suggest that Mr Jackson did not, in adopting his depreciation rate for the improvements in each sale, take that factor into account. 57 In these circumstances, and particularly given the scarcity of comparable vacant land sales (there was only one found by his Honour to be comparable), it was in my respectful opinion both contrary to valuation principle and irrational for the primary judge to reject Mr Jackson's improved sales upon the ground that the adoption by him of a single depreciation rate was too simplistic to enable those sales to be regarded as "some evidence of value". 58 Furthermore, having rejected the historic land sales, his Honour undermined what I regard as the essential foundation upon which Mr Hill rejected Mr Jackson's adoption of a single depreciation rate for his improved sales, namely, that there were other and more reliable sales upon which to rely. In accepting Mr Hill's evidence identified by him in [67] of his judgment, his Honour misunderstood at least one of the bases upon which Mr Hill had rejected Mr Jackson's valuation approach. On my understanding of his Honour's acceptance of Mr Hill, he treated him as saying that a valuer can never apply a simple depreciation rate to the cost of improvements to derive land value when Mr Hill did not say that. If he did, it would be wrong as a matter of established valuation principle when analysing improved sales. For the foregoing reasons I therefore consider that his Honour erred in law in rejecting outright Mr Jackson's approach to the depreciation of the improvements upon the land the subject of the sales upon which he relied.

The third issue 59 This issue concerns the primary judge's rejection of the one common vacant land sale, namely, 232-248 Pitt Street as a comparable sale which could be utilised for the purpose of determining the unimproved land value of the subject sites. In [59] of his judgment, the primary judge said with respect to this sale that "the High Court in Maurici made it clear that one sale of vacant land will not provide a reliable value of the subject sites due to the scarcity factor."

The scarcity factor to which he referred was the premium that would be paid for a scarce vacant parcel of land which was improved and which, if redevelopment were desired, would involve the cost of demolition of the existing improvements. 60 In [68] of his judgment the primary judge stated "that Maurici confirms that the use of one comparable sale is inadequate when adopting the comparable method of valuation."

The appellants submit that Maurici (at 121 [18]) does not support such a proposition. 61 The respondent submitted that Maurici stood for the proposition that the comparable sale method of valuation could only be adopted where there was "a reasonably representative group of comparable sales"

and that "a group of comparable sales cannot be representative if it does not go beyond sales of scarce vacant land." 62 Maurici was a case where the Commissioner of State Revenue fixed the unimproved value of an improved parcel of waterfront land in Hunters Hill exclusively on the basis of four sales (including a resale) of vacant or substantially vacant land. It was accepted by the parties that vacant land in Hunters Hill was scarce, if not very scarce. The Commissioner acted as he did upon the basis that he considered that s 6A of the Act required him to disregard sales of improved lands. 63 The High Court, in a joint judgment, held that s 6A(1) did not so require. The Court rejected the method adopted by the respondent in that case as "unduly selective". It considered that the vacant land sales relied upon (at 120 [17]) "were not representative of sales in Hunters Hill. That must be so, because, as both sides accept, vacant land in Hunters Hill is scarce, if not to say, very scarce. The approach of the respondent, taken to its ultimate conclusion would mean that if there were one only (reasonably comparable, in location, outlook and other relevant features) vacant parcel of land left in a district, the likely or actual recent sale price of that parcel would effectively set the value for each and every improved parcel of land in that district. The respondent accepted that the valuer called on his side, not only valued the subject land as if its improvements had been shorn from it, but also as if it, now, a notionally unimproved and therefore vacant site, was as scarce as the vacant sites the subject of the sales to which he said he had primary, but to which he effectively had exclusive regard. No attempt, it may be observed, was made by the respondent, to resolve the inherent paradox that as every improved parcel of land would be required to be treated in an equivalent way, the consequence would be that all parcels were notionally vacant and that there would no longer be any scarcity of vacant land." 64 The Court considered (at 121 [18]) that the Commissioner's valuer "did not proceed rationally, in that he was unreasonably selective in ultimately confining himself to two sales of scarce vacant land for the purposes of the comparison. The respondent could not and did not suggest that he [the Commissioner] would be performing his statutory duty if he made other than a fair estimate of the value of the subject land. A fair estimate could only be made here on the basis of a fair, that is to say, a reasonably representative group of comparable sales. A group of comparable sales cannot be representative if it does not go beyond sales of scarce vacant land. That is not to say that sales of comparable vacant land may not provide useful evidence of value. But as JFN Murray observes in Principles of Practice of Valuation … 'sale evidence [ must be ] relevant and sufficient in volume ' (emphasis added). So too, sales relied on, such as of scarce vacant land, are likely to be to a special and different class of buyer from buyers of improved land." 65 Accordingly, the Court considered (at 121 [19]) that the Commissioner should have had regard to improved sales and was not entitled to " ignore reasonably contemporaneous sales of comparable improved land . Such sales, particularly in the case of a scarcity of vacant land cannot be disregarded. The contrary approach is required by the Act." 66 In my opinion, Maurici stands for the following propositions only:

(a) Section 6A(1) of the Act does not require when utilising the comparable sales method of valuation, that only sales of vacant land should be considered;

(b) Confining one's consideration to only sales of scarce vacant land and disregarding sales of improved land which would otherwise be as comparable as the vacant land sales in terms of timing, location, outlook and other relevant features, offends the principle that a reasonably representative group of comparable sales should be considered when applying that methodology. 67 In my opinion, Maurici does not stand for the proposition that if the only comparable sales are those of albeit scarce vacant land, they must be rejected because they are too few in number to constitute a "representative group of comparable sales". Maurici proceeded upon the assumption, and also the fact, that there were many sales of improved land in the vicinity of the land to be valued which could have been established as comparable and the fact that those sales were of improved land would not detract from their comparability. It is true that it would be necessary to subtract the added value of the improvements to the land the subject of those sales in order to derive unimproved values. But as the Court acknowledged, that was a common task undertaken by experienced and skilled valuers. At least that was the case with respect to dwelling house sales. If the position were otherwise and the only comparable sale was a sale of the land to be valued within months or weeks of the base date, then notwithstanding that the sale of the very land to be valued is the most comparable of sales, it would, on the respondent's argument, need to be disregarded. 68 Accordingly, in my opinion the primary judge erred in his understanding of Maurici. That case is not authority for the proposition that if there be only one comparable sale and it is a sale of scarce vacant land, it is required to be disregarded and the comparable sales method of valuation rejected. Obviously, adjustments will need to be made to the sale to eliminate its scarcity factor. But there is nothing new in sales having to be adjusted in order to render them comparable. Thus, in Seatainer Terminals at 434, Hope JA said: "Theoretically a comparable sale may be of the very land to be valued, as where, for example, a contract for its sale was entered into on the very day upon which it was to be valued. This would be a most unusual situation, but often evidence is available of sales of very similar land close in point of time to the date of valuation. However, probably more often, the lands the subject of the sales relied upon are in some way different from the land to be valued, giving the latter land a higher or lower value than that to be deduced from the sales. The times of the sales in relation to the date of valuation may also have to be considered in the light of general movements in land prices. The need to make adjustments to values deduced from sales in order to arrive at the true valuation of the land to be valued does not preclude the court which has the task of valuing the land from relying upon the sales as comparable in the relevant sense, nor from the making by the court or by valuers of adjustments which may be nothing more than the best guess that can be made." 69 Accordingly, in my opinion the primary judge erred in rejecting as inadequate the sale of 232-248 Pitt Street.

Summons for leave to cross appeal 70 In dismissing the appeals in his judgment of 18 February 2004, the primary judge noted that in the exercise of the Land and Environment Court's discretion pursuant to s 69 of the Court Act, costs are usually awarded in favour of the successful party. His Honour considered the usual rule should apply and that an order should be made that the appellants pay the respondent's costs of both appeals. However, as the matter had not been argued, he reserved liberty to the parties to make application to vary that order within a specified time limit. 71 The appellants took advantage of the leave granted and made submissions to his Honour that the order made by him on 18 February 2004 should be vacated and in lieu thereof each party should pay its own costs. In his judgment of 3 June 2004 (the costs judgment) his Honour acceded to that application, vacated the provisional order that he had made on 18 February 2004 and, in effect, ordered that each party should pay its own costs of each appeal. By summonses filed on 2 July 2004, the respondent seeks leave to cross-appeal in respect of those orders. 72 In view of the fact that, in my opinion, the substantive appeal should be allowed with the consequence that the orders made by his Honour both on 18 February 2004 and 3 June 2004 should be set aside, the respondent's cross-appeal becomes academic. However, it is appropriate, given that the matter is to be remitted to the Land and Environment Court, and that it is still possible that the appeals to that court will be dismissed, to deal shortly with the respective contentions of the parties. 73 Up until 2001, the Land and Environment Court's Practice Direction No. 10A (the practice direction) provided as follows: "The practice of the Court is that no order for costs is made in valuation appeals…in class 3 of the Court's jurisdiction, unless the circumstances are exceptional." 74 In Maurici in the Court of Appeal (2001) 51 NSWLR 673, Handley JA, with whom Beazley and Giles JJA agreed, held that the practice direction was, in effect, inappropriate as it purported to impose a rigid fetter on the judicial discretion as to costs conferred by s 69(2) of the Court Act and should, therefore, not be given effect. Accordingly, on 19 December 2003 the Land and Environment Court Rules were amended as and from 2 February 2004 so that rule 4 of Part 16 Division 2 of the Rules provided as follows: "4 Costs in certain proceedings. (1) This rule applies to the following proceedings in Classes 1, 2 and 3 of the Court's jurisdiction … (c) Proceedings under s 37 of the Valuation of Land Act 1916 … (2) No order for the payment of costs will be made in proceedings to which this Rule applies unless the Court considers that the making of a costs order is, in the circumstances of the particular case, fair and reasonable." 75 Before the primary judge the appellants acknowledged that his Honour was bound to apply the provisions of rule 4. However, they submitted that he should find that it was not fair and reasonable to order them to pay the costs of the respondent. 76 The primary judge accepted in [12] of the costs judgment that rule 4 applied to the determination of the Court's discretion to award costs with respect to the appeals. His Honour considered (at [13]) that the issues in the appeals raised intricate questions of mixed fact and law and concerned not only divergent expert opinion but conflicting submissions concerning the application of the evidence which demonstrated that it was an administrative appeal of complexity. He referred (in [14]) to the decision of Lloyd J in Maurici v Chief Commissioner of State Revenue (No. 5) (2001) 119 LGERA 395 where his Honour reconsidered the principles relating to the exercise of the court's discretion as to costs in valuation appeals at a time which was subsequent to this Court's decision in Maurici which rejected the practice direction as fettering the court's discretion but before the introduction of rule 4. 77 His Honour (at [15]) then set out the following passage from the judgment of Lloyd J in Maurici (No. 5) at 401: "In my opinion, in the exercise of the court's unfettered discretion under s 69(2) of the Land and Environment Court Act and having regard to: (1) the fact that the proceeding is to be regarded as an administrative appeal; (2) that the preponderant weight of authority in this Court (pre-dating cl 10A of the Land and Environment Court Practice Direction 1996) is that costs are not generally awarded in such administrative appeals; (3) that the ordering of costs would present prospective applicants with the unpalatable prospect of not only meeting their own costs but also the costs of the respondent if they were unsuccessful; and (4) the particular facts and circumstances of the present case … I am inclined to the view that there should be no order as to costs." 78 The primary judge then stated his conclusions in the following terms: "16. It is apparent that the Court has now to consider only one question, namely, is it fair and reasonable that an order for costs should be made against the applicants. Each of the issues identified by Lloyd J are matters to be considered by the Court in the exercise of its discretion. 17. Complex legal issues were raised by each of the parties, as evidenced by the fact that both parties sought this hearing to be heard by a judge of the Court. It could not be said that this appeal comprised proceedings of an uncomplicated nature nor " devoid of complex legal principles " as envisaged by Stein J in Murray Publishers . The Court could have treated these proceedings as being no different to normal adversarial proceedings wherein the Court would find that a costs order in favour of the successful party is fair and reasonable: see Gee v Port Stephens Council (2003) 131 LGERA 325. 18. However circumstances exist which warrant the Court declining to make a final costs order in favour of the respondent. These proceedings were conducted before the enactment of Pt 16 Div 2 r 4 of the Rules. The Court accepts therefore that the applicants instituted the appeal and conducted it on the basis that there existed a strong prospect that the Court would make no order for costs in the event that the appeals were dismissed, particularly given the considerations discussed by Lloyd J in Maurici (No. 5) set out above. 19. Accordingly the court will set aside the provisional order made in the Court's judgment dated 18 February 2004 and instead will make no order for the costs of these proceedings . " 79 The essence of the respondent's submissions in support of a grant of leave to cross-appeal was that the primary judge's discretion miscarried in taking into consideration the four considerations identified by Lloyd J in Maurici (No. 5) which, so it was submitted, were inconsistent with the terms of rule 4 and which, in effect, resurrected the practice direction which this Court in Maurici had held to be an inadmissible fetter on the court's general discretion to award costs pursuant to s 69 of the Court Act. 80 There is no doubt that the primary judge asked himself the right question, namely, whether it was fair and reasonable that an order for costs should be made in favour of the respondent against the appellants. Although he said (in [16]) that the issues identified by Lloyd J in Maurici (No. 5) were matters to be considered by him in the exercise of his discretion, it is not apparent from [17] and [18] of the costs judgment that he did other than take into account the second and fourth matters referred to by Lloyd J, namely, the pre-practice direction position and the particular facts and circumstances of the case. There could be no objection to him doing so. His Honour, in my opinion, correctly referred to the fact that the proceedings had been conducted prior to the gazettal of rule 4, the hearing before him having concluded on 8 December 2003 at a time when, disregarding the practice direction, the preponderant weight of authority in the Court, as identified by Lloyd J in Maurici (No. 5), was that costs would not generally be awarded in valuation appeals. 81 In my opinion, it was open to the primary judge to have regard to the second of the matters referred to by Lloyd J in Maurici (No. 5) although I do not consider that that would be so in the future. But, in the present case the parties conducted themselves, so his Honour found, upon the basis of the court's practice which predated the practice direction. It was not suggested by the respondent that it was not open to his Honour to have adopted that view. Accordingly, in the particular circumstances of the present case I see no error in his Honour having had regard to the four considerations referred to by Lloyd J Maurici (No. 5) although, as I have said, I do not consider that it would be appropriate in the future to take into account the second of those matters unless the particular facts warranted it. 82 In the foregoing circumstances, in my opinion the respondent has not demonstrated that the primary judge's discretion has miscarried in any of the respects referred to by the High Court in House v The King (1936) 55 CLR 499 at 504-505. Accordingly, even if it had not been academic, I would have refused the respondent leave to cross-appeal.

Conclusion 83 In my opinion, the following orders should be made:

(b) Set aside the orders made by Cowdroy J on 18 February 2004 and 3 June 2004

(c) Order that the appeals be remitted to the Land and Environment Court for determination by that court in accordance with the decision of this Court

(d) The summonses of the respondent for leave to cross-appeal be dismissed

(e) Order that the respondent pay the appellants' costs of the appeals and of the summonses for leave to cross-appeal.

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