BP Australia Pty Ltd v Roads and Traffic Authority of NSW

BP Australia Pty Ltd v Roads and Traffic Authority of NSW - [2006] NSWLEC 147 - NSWLEC 2006 case summary — Zoe

[35]

21 I accept the evidence of Mr Paris, with which Mr Coad agreed, that the factors to be taken into account, and which they did take into account, in determining the capitalisation rate, are as follows: a) Covenant of tenant - generally, the stronger the covenant the lower the capitalisation rate; b) Length of lease - generally, the longer the lease the lower the capitalisation rate. A lower capitalisation rate is generally reflected in a longer term lease, for example 10 years and beyond, whilst a higher capitalisation rate would apply to short term leases, for example five years; c) Condition of improvements - generally, the more modern the facilities and the better the condition of improvements the lower the capitalisation rate. Where the property is in poor condition and requiring capital expenditure a higher capitalisation rate is required; d) Layout of improvements - generally, the more convenient or advantageous the layout the lower the capitalisation rate. The layout of the forecourt and size of convenience store have direct impact on level of custom which can be serviced. This is reflected in a higher capitalisation rate for poor forecourt layout and small shops, whilst more advantageous forecourt layout and larger shop will be reflected in lower capitalisation rates; e) Rental - generally, the higher the rental is above market the greater the risk that the rental will not be sustained and therefore the higher the capitalisation rate. Rental is crucial to the capitalisation rate when comparing and analysing investment sales of services stations. Generally speaking, the higher the rental is considered above market, the greater the risk in this rental not being sustained beyond the terms of the existing lease and therefore a higher capitalisation rate would be used (the greater the risk the greater the return which needs to be earned); f) Zoning of site - The zoning can have a direct impact on the capitalisation rate due to the implied future potential for redevelopment of a site. The greater the redevelopment potential the lower the capitalisation rate. With restricted redevelopment potential a higher capitalisation rate will apply; g) Access - the greater the ease of ingress and egress to a site, the lower the capitalisation rate.

[37]

23 I accept the analysis by Mr Paris, with which Mr Coad agreed, regarding the application of those factors to the acquired property, to the following effect: Factors Analysis Regarding Applicant's Property (a) Covenant of tenant BP, the assumed tenant provides a strong covenant. BP provides security of tenure because of the tenant's ability to pay the rent plus outgoings and to maintain the improvements over the term of the lease. This strong covenant decreases the capitalisation rate required. (b) Length of lease Mr Coad and Mr Paris agreed on a 10 year lease with options for the subject property. They agreed that this term of lease is considered average for service stations. It has a neutral effect on the capitalisation rate required. (c) Condition of improvements The site was rebuilt about 4 years ago in the new BP Connect image. The good condition suggests a lower capitalisation rate. (d) Layout of Improvements The property had an adequately sized convenience store; however, the offset forecourt in starting gate formation with restricted pump access and limited on site parking was detrimental to the fuel throughput and shop sales at this site. This should be reflected in a higher capitalisation rate for poor forecourt layout. (e) Rental The property rent is considered to be market rent, therefore having a neutral effect on capitalisation rate. (f) Zoning of site The property is zoned Residential 2(a) under the Blacktown Local Environmental Plan 1988. The fact that the site has "existing use rights" could be considered beneficial in any future development of the site as it increases development opportunities for alternative uses without restriction to those uses permitted in the Residential 2(a) zone. The Residential 2(a) zoning it is not as advantageous as a General Business zoning and as such is reflected in a higher capitalisation rate. (g) Existing service station competition in surrounding area The site was affected by competing service stations in Sunnyholt Road, Vardys Road, Quakers Hill Parkway, Richmond Road, Third Avenue, Reservoir Road, Flushcombe Road, Blacktown Road, Bungarribee Road and Windsor Road. This high level of competition creates a requirement for a higher capitalisation rate. (h) Access Sunnyholt Road carries a large volume of traffic and with the existing bus lane there are difficulties of ingress and egress to the site. This increases the capitalisation rate required.

[47]

33 The respondent submitted, and I accept, that the exercise is to determine value "not by a strict adherence to precise arithmetical calculations, but by a commonsense endeavour, after consideration of all the material before the Court, to fix a sum satisfactory to the mind of the Court as representing the value contained in the land on [the relevant date]": The Commonwealth v Milledge (1953) 90 CLR 157 at 162. The respondent referred to Brown, Land Acquisition (5th ed, Lexis Nexis Butterworths, Australia 2004) at 134-135: In practice the courts do not resolve a dispute in this manner. The "liberal estimate" principle does not imply that all doubts must, on the balance of possibilities, be resolved in favour of the claimant. It is submitted that the principle has limited scope and application. The duty of the court is to arrive at a figure that reflects the fair value of the land. The valuations are tendered to assist the court in determining that value. The valuations are not tendered on the basis that the highest figure must be accepted. The valuations are tendered to provide the court with the primary facts and the inferences that the expert valuer has drawn from those facts. Where the arguments are finely balanced in the mind of the judge, it may be that the judge will rely on the Executor Trustee principle. The application of the principle does not require the court to be unfair to the resuming authority. Faced with four different valuations, it may be the quality of the research and the reasoning that primarily influences the court in determining the market value of the resumed land. 34 The respondent submitted, and I accept, that a process of averaging the prices of comparable sales would be fallacious, and referred to the following passage in The Commonwealth v Milledge (1953) 90 CLR 157 at 161: Indeed [the trial judge] expressed the view, although he does not seem to have acted upon it, that the true basis for computation is not that to be found in one comparable sale, but in the average of a number, the larger the number the more acceptable the result. "Such a statistical average", he added, "will tend to eliminate the effect of the individual peculiarities (if any) of those in the transactions". We do not find it possible to give countenance to this view. Perhaps it would be safer to work from an average of several prices than from one price if the sales were substantially contemporaneous sales of parcels of land which were identical in all material respects, but it must be rarely, if ever, that a process of averaging sale prices can be anything but fallacious.

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