Caruana v Port Macquarie-Hastings Council

Caruana v Port Macquarie-Hastings Council - [2007] NSWLEC 109 - NSWLEC 1994 case summary — Zoe

[39]

(2) Compensation is not payable under this section in respect of any change in the value of the land. MARKET VALUE 8 Valuation evidence was given for the applicant by a valuer Mr Owen Allsopp and a real estate agent Mr Robert Gates, and for the respondent by a valuer Mr Gabriel Longa. I viewed the site of the Ritz Arcade and most of the comparable properties referred to by the valuers. 9 The valuers' primary valuation method was capitalisation of rents. Their secondary check valuation method was the traditional comparison of sales so as to derive a rate per square metre. In relation to the capitalisation of rents method, in Sheath v Valuer General (1963) 10 LGRA 20 at 26 Hardie J said that the most relevant consideration is the rents in fact being paid for the subject area and other comparable areas in the same building. In Western Australian Planning Commission v Arcus Shopfitters Pty Ltd [2003] WASCA 295 at [71] - [72] McLure J (Anderson and Steytler JJ agreeing) said: "The formation of an opinion on value has been likened, correctly in my view, to the exercise of judicial discretion. Rules affecting weight must be sufficiently generalised to allow for different methodologies and circumstances… It is not a requirement that a valuer identify the most important comparable sale. There may be no such sale. Further, there can be no requirement that a valuer quantify adjustments affecting value. Mr Elliott property declined to quantify particular adjustments where he had not done so as part of his analysis because of the lack of sales or empirical evidence to support a specific figure. As I understand his methodology, he considers and mentally processes all of the variables affecting value and makes a judgment as to the relativities of the comparison sales in his basket with the subject land and may after the collective analysis make a judgment based upon adjustment to arrive at an opinion on value. However, as a matter of principle, a valuer using conventional approach should explain the steps in his reasoning and analysis from his basket of sales evidence to his opinion as to value. The correct principle is, in my view, that the valuer must reveal as far as possible the process of reasoning actually employed so as to enable the Court to evaluate the evidence and the expert's conclusions".

[46]

13 In relation to comparable rentals and sales, Mr Allsopp generally favoured those in the Ritz Arcade itself as well as some street-front locations. Mr Longa generally favoured transactions in other arcades in Port Macquarie. They were the Dulhunty Arcade - which he thought was the most comparable - and the Village Arcade, which are both on the western side of Horton Street, and the more upmarket, better situated Peachtree Walk Arcade and Colonial Arcade on the eastern side of Horton Street. In my view, there was nothing else in Port Macquarie quite like the Ritz Arcade which was excellently located in close proximity to the CBD with a bus stop at the door. It catered for a budget type tenancy or small business. From my inspection, the photographic evidence and descriptions of the Ritz Arcade (now demolished) which showed that it was wider than most arcades, well-lit, and well-ventilated, I consider that it was superior in location and would have been similar in presentation to the Dulhunty and Village arcades if about $28,000 had been spent in renovating it (for which Mr Allsopp allowed); and that it was inferior in presentation although comparable in location to the Peachtree and Colonial Arcades. Mr Longa considered that the Dulhunty and Village Arcades had an advantage in that they were walk-through arcades, whereas the Ritz Arcade was not. I agree with Mr Allsopp that this was not an advantage given the location of the Ritz Arcade and the type of tenants which it attracted. In that regard, I accept Mrs Ayton's evidence that business activity for a hairdresser is noticeably less at the Village Arcade and opposite the Port Building, located further west on Clarence Street, than it was in her shop 6 in the Ritz Arcade. I also accept her evidence that the location of her shop 6 at the rear of the Ritz Arcade was an attraction for a lot of the customers of her hairdressing salon compared with a streetfront location because they did not feel like they were in a goldfish bowl.

[49]

16 The evidence of the valuers, which I accept, is that in the Port Macquarie area the usual annual rent escalation clause in leases was either by reference to the CPI or 4 percent. Comparable Rentals 17 The applicants' valuer Mr Allsopp relied on the following comparable rentals (exclusive of GST): (i) Ritz Arcade shop 2, area 24m2: a 2004 offer by a Mr Holland to rent from Mr Caruana and Ms Simmons for $311 per week. Applying a 4 percent per annum increase equates to $323 per week in 2005. This supports Mr Allsopp's assessment of $311 per week for this shop. The offeror did not proceed because of the respondent's known intention to compulsorily acquire the property. Although only an offer and not a concluded contract, I consider that it should be taken into account as evidence of value for reasons which I explain below when considering the relevant case law. I consider that it should be accorded weight, although not as much as if it had been a concluded contract. (ii) Ritz Arcade shop 8, area 27m2: an offer by a Ms Pawlowsky in about March or April 2005 to rent from Mr Caruana and Ms Simmons for $277 per week. She did not proceed because of uncertainty associated with the pending acquisition. This is closer to Mr Allsopp's assessment of $305 per week for the same shop than to Mr Longa's $220 per week. However, on the evidence, I do not think that the discussions between Mr Caruana and Ms Pawlowsky rose to the status of an offer. Mr Caruana's evidence referred to "discussions". Ms Pawlowsky's evidence referred to "discussions" and to "seriously considering purchasing". (This is in contrast to Mr Holland's evidence in relation to shop 2 above where he referred to "offering".) It is understandable that the discussions did not rise to the status of an offer in circumstances where the putative offeror acquired knowledge during those discussions of the looming resumption. Nevertheless, I do not think account should be taken of discussions which never rose to the status of an offer. Discussions relating to the rental of shop 8 also occurred in 2005 between Mr Caruana and Mr Sinclair. Mr Caruana and Mr Sinclair both gave evidence that in early 2005 the latter "was willing to lease" shop 8 for $350 per week (with no demolition clause) but did not proceed when he became aware of the pending acquisition of the building by the council. I am not satisfied that the general, descriptive words "was willing to lease" evidence an offer. Accordingly, I do not take this evidence into account. (iii) Ritz Arcade shop 7, located towards the rear of the Ritz Arcade, area 42m2: rented in 1999 for $286 per week. The tenant vacated in August 2004. Adjusting for CPI of 20.5 percent, as advocated by Mr Allsopp, over the six years from September 1999 to September 2005 (when resumption occurred) the rent would be $345 per week. Mr Longa was critical of this comparable because it was quite old, but agreed that if it was to be adjusted for time then it was appropriate to apply the CPI. Although the 1999 rental is not proximate in time, I think that this is a fair comparable because it is in the Ritz Arcade itself and the tenant was still there in the latter half of 2004. It may be compared with Mr Allsopp's assessment of $330 per week for Mrs Ayton's shop 6 which was similar in area (38m2). (iv) 1/3 Murray Street, Port Macquarie, to which the barber who had occupied shop 3 in the Ritz Arcade relocated following resumption. It has an area of 41m2 (comparable with Mrs Ayton's shop 6 of 38m2). In December 2005 the rent was $300 per week. The location is secondary fringe retail, much inferior to the Ritz Arcade location. It is two streets further away from the CBD than the Ritz Arcade and well away from the bus stop. It has a street frontage and is close to a caravan park. This figure of $300 per week for an inferior location and 41m2 may be compared with Mr Allsopp's assessment of $330 per week for Mrs Ayton's similarly sized shop 6. (v) Ritz Centre, Clarence Street, shop 6, area 21m2, rental of $516 per week. The Ritz Centre is located within 50m of the Ritz Arcade and closer to Horton Street. This shop has a main street frontage which is superior in position to the applicants' shops. Mr Longa considered that as it has a street frontage and caters for a different type of tenancy to the applicants' shops, it is not comparable. Mr Allsopp agreed that the Ritz Arcade was "worse" than the Ritz Centre but pointed out it was only 50 metres away and that the extent of adjustment required to make it comparable was a matter for judgement. I think that this comparable should be treated cautiously because of its different characteristics. (vi) 2/24 Clarence Street, area 32m2, rented for $350 per week from 15 February 2006. The mobile phone retailer who had occupied the streetfront shop 1 in the Ritz Arcade relocated there consequent upon the resumption. The lease has a demolition clause which Mr Allsopp suggested, and I accept, was because the building was probably nearing a redevelopment situation. It has a main street frontage but is significantly further away from the centre of the CBD than the Ritz Arcade and is set back 2 metres from the street.

[51]

19 Mr Longa relied on the following comparative rentals (exclusive of GST): (i) Dulhunty Arcade, a walk-through arcade in Horton Street: shops 4 and 5 with a combined area of 32.8m2, towards the end of the arcade, were rented to a masseuse for $165 per week. As discussed earlier at [13], Mr Longa regarded the location of Dulhunty Arcade as comparable to that of the Ritz Arcade and considered that the improvements of the Dulhunty arcade were superior to those of the Ritz Arcade. In my opinion, however, the location of the Dulhunty Arcade was inferior to that of the Ritz Arcade and the presentation of the Ritz Arcade would have been similar to the Dulhunty Arcade had the $28,000 for which Mr Allsopp made allowance been spent renovating and upgrading the arcade. A comparison of this rental with the rental of $286 per week in 1999 for shop 7 in the Ritz Arcade with a similar area of 42m2 (see above), suggests that the Ritz Arcade commanded very much higher rentals than Dulhunty Arcade. (iii) Village Arcade, a walk-through arcade in Horton Street: shop 3, area 59m2, rented for $200 per week. Mr Longa regarded the Village Arcade location as inferior to the Ritz Arcade, but considered that it had superior improvements and was superior in that it was a walk-through arcade. I agree that its location was inferior but I consider that its presentation would have been similar had the expenditure on the Ritz Arcade to which I have referred been made. Further, as I have said earlier, I do not think that a walk-through arcade in the location of the Village Arcade had advantages over a dead-end arcade in the location of the Ritz Centre for the type of tenant that it attracted. Mr Longa acknowledged that the Ritz Arcade was more valuable and that this comparable rental therefore required an upwards adjustment. (iv) Village Arcade, shop 4, area 38m2, rented for $156 per week. The same comments apply as for (iii). (v) Garrison Building in Clarence Street, a shop with an area of 51m2 rented for $400 per week. There was a five percent annual increase provision in the lease which meant that the rent in October 2005 (one month after resumption of the applicants' properties) would move to $420 per week. The Garrison Building is located about a block further away from the CBD than the Ritz Arcade. It has a street-front location alongside the entrance to the Port Central Shopping Centre. Mr Allsopp, in oral evidence, conceded that this was a reasonable comparison with the Ayton shops, which had the same total area, whilst pointing out that it is located in a corner on a part of Hay Street that has been blocked off in a u-shaped area and is about 100 metres from a bus stop. Although the area of this shop is about the same as Mrs Ayton's subject lot, Mr Allsopp considered, and I accept (contrary to Mr Longa's views), that the use by Mrs Ayton of her lot as two shops was its highest and best use and that the total rent should be higher than if it was let as one shop. This conclusion tends to weigh against Mr Longa's valuation of Mrs Ayton's lot of $365 per week. On the other hand, the rental also does not support Mr Allsopp's valuation of the lot at $525 per week. (vi) Peachtree Arcade, a shop with an area of 60m2 rented from March 2004 at $420 per week. Applying a 4 percent annual increase, the rent as at the resumption date of the Ritz Arcade was about $438 per week. Mr Longa considered, and I agree, that Peachtree Arcade is a highly superior arcade. He also considered that it was an advantage that it was a walk-through arcade, a view with which Mr Allsopp disagreed. I am unconvinced that the fact that the Ritz Arcade was a dead end made a significant difference given the types of shops in the Ritz Arcade and its location. (vii) Port Pacific building, shop 7, area 61m2, rented for $385 per week. Mr Longa considered, and I agree, that this was in an inferior commercial fringe location although it had a highly superior streetfront positioning.

[58]

26 Goold concerned compensation claims under the Lands Acquisition Act 1989 (Cth). A pre-acquisition declaration was made under s 22 that the Minister was considering the acquisition by an acquiring authority of an interest in two parcels of land. Two and a half months later, an offer was made to purchase each property for $500,000. The question then arose whether that offer could be taken into consideration in determining the market value of the acquired properties. The prospective purchaser gave evidence that at the time of making the offer, he was not aware of the pending acquisition. Wilcox J undertook a detailed examination of the previous authorities concerning the admissibility of offers, including McDonald. His Honour noted three Australian cases in which evidence of an offer to purchase the land in question had been admitted: Blefari v The Minister (1962) 8 LGRA 1 at 5, Hustlers Pty Ltd v Valuer General (1967) 14 LGRA 269 at 277 and Phillipou v Housing Commission (1969) 18 LGRA 254. In none of those cases, however, was the offer used as direct evidence of the value of the land. His Honour observed (at 59) how the evidence of the offer was treated in each of those cases: In none of these cases was the offer treated as direct evidence of value. In Blefari Else-Mitchell J pronounced himself conscious that evidence of such a character may not be properly admissible in determining the market value of land . But he thought that, under some circumstances, an offer may have probative value; although it had very little in the case then under consideration. In Hustlers Else-Mitchell J used evidence of earlier offers as a basis for finding that later sales were not forced sales. In Phillipou an adjoining owner, a Church, had twice offered to acquire the subject land - first at a price of $25,000, later at $25,800. Barber J held that the Land Valuation Board of Review had rightly refused to treat those offers as evidence of the value of the land, but that it had correctly taken them into account; the offer demonstrated the existence of a person, the Church, who might pay more than ordinary market price. His Honour summarised the position, at 259, in this way: The board rightly took into account the potentiality of the land, the likelihood of the Church authorities buying it, and being willing to pay something more than the market value because of its position, but just how much additional value should be allowed for this factor was a question of fact for the board. The contention that the value must necessarily be $25,800 because of the offers made to the Church was rightly rejected. As Barber J demonstrated, his conclusion flows inexorably from the reasoning adopted in two fundamental valuation cases: Inland Revenue Commissioners v Clay [1914] 3 KB 466 and Raja Vyricherla v Vizagapatam Revenue Divisional Officer [1939] AC 302 (a decision of the Judicial Committee of the Privy Council).

[67]

36 Mr Longa referred to the following seven sales, which were also analysed in reply by Mr Allsopp whose analysis I substantially accept: (i) Peachtree Arcade, a bridal shop with an area of 60m2 was sold by contract dated 21 December 2004 for a price equivalent to $4,333/m2. The Ritz Arcade location is equal but its quality is inferior to that of the Peachtree Arcade. The area of this shop is substantially larger than the subject shops. (ii) Ritz Arcade, Caruana lots 2 (24m2) and 8 (27m2) sold on 24 March 2004 for $98,000 each, that is, $4,083/m2 for lot 2 and $3,630/m2 for lot 8. These sales, as Mr Allsopp pointed out, occurred with knowledge of the council's intended acquisition. I therefore do not give them significant weight. (iii) Colonial Arcade, a gift shop, area 44m2 (excluding the car space), sold on 4 March 2005 for a price equivalent to $5,568/m2 excluding the car space. This figure was predicated on the basis that the car space contributed $10,000 to the sale price, a figure which was eventually agreed by the valuers. This is the only one of the non-Ritz Arcade sales which is comparable in area to the resumed shops in the Ritz Arcade. This is significant because the valuers agreed, and I accept, that for smaller shops, the purchase price and the rent per square metre is proportionately higher than for larger shops. This is illustrated by the fact that the square metre value of this Colonial Arcade shop with an area of 44m2 was 28 percent higher than for sale (i) with an area of 60m2. This sale provides a reasonable check on the values of the subject shops derived by the capitalisation of rents approach. It tends to support Mr Allsopp's valuation of the similarly sized Ayton shop 6 (38m2). (iv) Colonial Arcade, a shop of 84m2 was sold on 9 November 2004 for a price equivalent to $4,167/m2, excluding two car spaces in respect of which the valuers agreed that $20,000 of the sale price should be attributed. It may be noted that sale (iii) with a smaller area of 44m2 commanded a rate per square metre which was 33.6 percent higher.

[70]

(vii) Peachtree Arcade, a shop with an area of 64m2 was sold on 3 March 2005 for a price equivalent to $4,687/m2. This is comparable with sale (i) above. 37 The valuers and Mr Gates agreed that as the area of the shop becomes smaller, the rate per square metre paid to purchase or rent it becomes proportionately higher than for larger shops. There is therefore difficulty, if not danger (as Mr Allsopp said), in comparing the rates per square metre achieved on sales of shops with substantially larger areas. This point was illustrated by Mr Allsopp by reference to the sales evidence in this case. Mr Longa's sales (i) and (iv) above had areas of, respectively, 60m2 and 84m2 and achieved similar rates per square metre of respectively $4,333 and $4,167. But sale (iii) with a substantially smaller area of 44m2 - much closer to the area of the subject lots - achieved a much higher rate per square metre of $5,568. Consequently, I consider that the sales comparisons in the present case are very much a secondary or subsidiary method compared with the capitalisation of rents method. Mr Allsopp considered that the above sales tended to indicate that his assessments were reasonable. After putting aside Mr Longa's sale (ii) which occurred with knowledge of the pending acquisition and after taking into account that higher rentals per square metre are commanded for smaller shops such as in the Ritz Arcade, I tend to agree. Conclusion 38 In my view, the most comparable rental evidence is that relied upon by Mr Allsopp to the extent to which I have indicated that I will take it into account, together with that of the Garrison building shop. I consider that the Village Arcade, and, to a lesser extent, the Dulhunty Arcade are inferior to the Ritz Arcade and that Mr Longa's reliance upon them (albeit qualified) has led him to valuations which are too low. On the other hand, I consider that Mr Allsopp did not give sufficient weight to the comparable Garrison building shop with an area of 51m2. This, together with my rejection of his comparable rental evidence in respect of shop 8 in the Ritz Arcade, suggests that some discount to his valuations is appropriate. I consider that the comparable sales discussed earlier are of significantly less assistance than the comparable rentals and do not diminish the weight which otherwise should be given to Mr Allsopp's comparable rental assessments, after discounting. Accordingly, I propose to adopt Mr Allsopp's valuations and weekly rentals set out earlier, but to discount them by 10 percent. This produces the following results:

[84]

47 However, lost rents prior to compulsory acquisition and other pre-acquisition costs were disallowed under s 59(f) by Talbot J in N Stephenson Pty Ltd v Roads and Traffic Authority of New South Wales (1994) 83 LGERA 248. That case was decided a few months after Fitzgerald. In Stephenson at 260 Talbot J said of s 59(f): "The use of the expression "a direct and natural consequence" suggests a temporal as well as a causal link to the acquisition. "Consequence", when used in the ordinary sense, is generally to be regarded as a result of something that has already occurred. Part of the applicant's claim for disturbance relates to costs incurred before the date of acquisition". His Honour said at 264: "It was not necessary to rely on s 59(f) in Fitzgerald, although its meaning was fully argued and discussed" (in fact, reliance was placed on s 59(f) in Fitzgerald as appears from the above quotation from that case). His Honour continued at 264: "As a general rule, costs incurred prior to acquisition are not compensable… Section 59(f) assumes that the act has already occurred. All the pre-acquisition costs were incurred by the respondent [sic applicant] as a consequence of the delay in implementing the acquisition and the uncertainty brought about by the unspecified nature of the proposed works. They are not financial costs that would have been incurred as a direct and natural consequence of the acquisition if the applicant had deferred incurring them until after the date of acquisition. The claim for compensation under s 59(f) in respect of costs incurred prior to the acquisition is disallowed". In Walker Corporation Pty Ltd v Sydney Harbour Foreshore Authority (2004) 136 LGERA 164 at [37] Talbot J commented that "in Stephenson there were special circumstances that deprived the applicant of the right to recover the financial costs claimed but nevertheless the effect of s 59(f) was clearly recognised, namely, that although costs incurred prior to acquisition are not compensable as a general rule it is not imperative that costs be deferred until acquisition occurs".

[85]

48 An illuminating and different guide, which I propose to follow, concerning the application of a provision similar to s 55(f) to pre-acquisition costs, is provided by Lord Nicholls' judgment for the majority of the Privy Council in Director of Buildings and Lands v Shun Fung Ironworks Ltd [1995] 2 AC 111. Talbot J in his earlier decision in Stephenson did not have the benefit of Lord Nicholls' judgment. Shun Fung was concerned with the interpretation of s 10(1) of the Crown Lands Resumption Ordinance of Hong Kong, which provided: "The tribunal shall determine the amount of compensation (if any) payable in respect of a claim submitted to it… on the basis of the loss or damage suffered by the claimant due to the resumption of the land specified in the claim". Lord Nicholls, in essence, explained that to be compensable a loss must be (a) caused by the resumption, (b) not too remote and (c) reasonably incurred: at 126. As to the third condition his Lordship said at 126: "The law expects those who claim recompense to behave reasonably. If a reasonable person in the position of the claimant would have taken steps to eliminate or reduce the loss, and the claimant failed to do so, he cannot fairly expect to be compensated for the loss or the unreasonable part of it. Likewise if a reasonable person in the position of the claimant would not have incurred, or would not incur, the expenditure being claimed, fairness does not require that the authority should be responsible for such expenditure. Expressed in other words, losses or expenditure incurred unreasonably cannot sensibly be said to be caused by, or be the consequence of, or be due to the resumption". Lord Nicholls held at 135 - 138: This claim raises the question whether a loss occurring before resumption can be regarded, for compensation purposes, as a loss caused by the resumption. At first sight the question seems to admit of only one answer. Cause must precede effect. That is a truism. A loss which precedes resumption cannot be caused by it. Hence, it is said with seemingly ineluctable logic, a pre-resumption loss cannot be the subject of compensation. The difficulty with this approach is that it leads to practical results from which one instinctively recoils… if business losses arising in the period post-inception of the scheme and pre-resumption are to be left out of account, a claimant will not receive compensation for those losses although they are attributable to the scheme. If the threat of resumption drives away customers who need long term assurance of supply, on resumption no compensation would be payable for this loss of profits. Future losses of profits would be recoverable, but not the losses already incurred…

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