Commonwealth Custodial Services Ltd as Trustee for The Burwood Trust Fund; Trust Company of Australia Ltd v Valuer General

Land and Environment Court (NSW)|2012-08-16|Before: Mr J

Mr J Maston (Respondent) Solicitors Mark McDonald & Associates Lawyers (Applicants)

Crown Solicitors Office (Respondent) File Number(s): 30785 of 2010, 30187-88 of 2011

Judgment 1For the purposes of the Valuation of Land Act 1916 (the Act) Elizabeth Pty Limited (the first applicant) is the owner of lots 22 and 23 DP 270215 (the subject property). The lots are used as commercial premises and comprise the major part of the ground floor of the building, known as Elizabeth, located at 3 Harris Street Pyrmont. 2The first applicant has lodged an appeal under s 37 of the Act that the land value of the subject property, calculated (that word correctly reflects the process) by the Valuer General, under s 26A of the Act as at the base date of 1 July 2009, is too high. 3The owners of strata plans (SP) 62661 and 63595 (the second applicants) have also lodged appeals under the same section of the Act that the land value applicable to their two strata plans, calculated by the Valuer General, under s 26A of the Act, as at the base date of 1 July 2009, is too high.

Valuation of parcels that form part of the site of a building. (1)If the site of a building is subdivided into separate parcels of land solely by means of a subdivision to which this section applies, the value of each of those parcels is to be determined as follows: (a)first, the Valuer-General is to value all of those separate parcels as if they comprised a single parcel and that single parcel and all improvements on it were owned by a single owner, and (b)then, the Valuer-General is to apportion the value obtained under paragraph (a) between each of those separate parcels, on the basis of their respective rental values as a proportion of the sum of the rental values of each of those parcels. (2)This section applies to subdivision by any of the following means: (a)subdivision by the creation of 2 or more lots in a deposited plan, (b)subdivision by a deposited plan and one or more strata plans, (c)subdivision by 2 or more strata plans. (3)This section does not apply unless at least 2 or more of the parcels of land created by the subdivision are adjoined horizontally (that is, one is wholly or partly above the other). (4)The site of a building includes land consisting of space above or below the building. (5)In determining the rental value of a parcel of land, regard is to be had to any improvements on or appertaining to the parcel. (6)This section does not limit any power of the Valuer-General to include 2 or more parcels of land that are owned by the same person in one valuation. (7)In this section: building includes a building that is in the course of construction. parcel of land means a parcel (within the meaning of the Strata Schemes (Freehold Development) Act 1973 or the Strata Schemes (Leasehold Development) Act 1986) or the land comprised in a lot in a deposited plan. strata plan means a strata plan within the meaning of the Strata Schemes (Freehold Development) Act 1973 or the Strata Schemes (Leasehold Development) Act 1986.

Order 4At the commencement of the hearing I made an order, with the consent of the parties, that the three matters, 30785 of 2010, 30187 of 2011 and 30188 of 2011 "be heard together and the evidence in one or in each case be taken as evidence in the others".

The dispute 5The parties disagree as to the basis on which the subject property is to be rental valued and the rental valuation of same. There is no dispute as to the rental value of the premises comprising the two strata plans. As will have been seen the land values are dependent upon the rental values applicable to the subject property and the strata plans. The Court has already made an order as to the aggregate land value of the site in the sum of $20 million.

Description 6The subject property and the site of which it forms a part is located at the extreme northern end of Harris Street, Pyrmont. The subject property lacks direct frontage to Harris Street but a walkway (known as Waterfront East) provides pedestrian access which extends around Johnsons Bay. Vehicular access to the site and the subject property is from Mount Street Walk, which street is parallel to Harris Street.

The first applicant 7Mr Wilson, of Counsel, having referred to the phrase in subsection (5) of s 26A "regard is to be had to any improvements", continued (transcript 14 August 2012 p 11): "... Once you get the meaning, then what do you do with it? And that, of course the meaning is, well, you have regard to any improvements, but in having regard to any improvements, that doesn't mean that you add on, it doesn't mean that you necessarily do anything with it, it doesn't mean that you subtract from the rental, it means you have regard to them, and what you do when you have regard to them, in my submission, is what Mr Wotton has done. But you don't have regard to them by disregarding them, and you don't have regard to them by carrying out the exercise assuming that they were part of the calculation for the purpose of the gross rental, as Mr Hill and Mr Large have done." "And once one has an indication of what that bases is that is, when you take into account the improvements on number 3, [a reference to lot 23] and consider those improvements to be two things, one is improvements in fact and, secondly, improvements put their by the landlord, then what do you do with it, Mr Wotton has made an allowance for it. You just don't ignore it." "And one can't, under subsection (5), when one has regard to any improvements, ignore from whence those improvements came, and in this case they came from the landlord. So that if one is rhetorically asking oneself the question well what would I lease this for without the improvements, it would be, we would say, with respect, obvious that you'd pay less than the gross rental calculated by Mr Hill and Mr Large for that premises, in fact you'd pay the amount that Wotton determines is the rental value. There is the difference between the three valuers."

The second applicant 8Mr Hunt, authorised agent for the second and third applicants, focused on the differences in the two cost estimates of the fit out of the subject property. He made the following general submission in respect of the fit out (transcript 14 August 2012 p 17): "The residential properties of course- the purpose of 26A is to have a breakup of the total value of the property which includes lots 23, 24 and 25. The purpose of 26A is to break it up according to rental value. It's a way of making a comparison to get a reasonable price. We're talking about the premises being just a bare shell without any fit out, without toilets, without - well the residential apartments all have toilets, they have bathrooms they have kitchens, they have - you know they are fully fitted out. And so one would think that there's - to look at like for like you would quite happily look at the restaurant with toilets, with air conditioning, with the fit out"

The respondent 9Mr Maston, of Counsel, made the following written submissions: "In order of filing, the first proceeding is file no. 10/30785: Parties: Elizabeth & Associates Pty. Limited v Valuer-General V-G's Property Identification Nos: 2036952 and 3233171 Address: 3 Harris Street, Pyrmont Being: Lots 22 and 23/270215

The next proceeding is 11/30187: Parties: The Owners - Strata Plan No. 62661 v Valuer-General V-G's Property Identification No: 2036953 Address: "The Elizabeth", 2-10 Mount Street, Walk, Pyrmont Being: Lots 1-44 and common property in SP 62661

The third proceeding is 11/30188: Parties: The Owners - Strata Plan No. 63595 v Valuer-General V'G's Property Identification No: 2036998 Address: "The Rum Store", 2-10 Mount Street, Walk, Pyrmont Being: Lots 1-13 and common property in SP 63595

10The appeals in each case are based on the contention that the issued Land Values are too high. Together the land in the three valuations comprise the site of a composite building and consequently s 26A of the Valuation of Land Act 1916 ("VL Act") applies. 11The issued land value for base date 1/7/2009 of each parcel is as follows: Lots 22 and 23 $1,906,783 Strata Plan 62661 $20,256,565 Strata Plan 63595 $ 3,309,652

12The Court, by consent of the parties, has already ordered that as at the base date 1/7/2009, lot 72, DP 270215 (PID No. 3233171) and lot 23, DP 270215 (PID No. 2036952) are to be included in one valuation for the purposes of s.26 (1) of the VL Act. 13The Court has also ordered, by consent of the parties, that as at 1/7/2009:

Lots 22 and lot 23, DP 270215, together with;
Lot 24, DP 270215 comprising lots 1 -44 and the common property in SP 62661; and
Lot 25, DP 270215 comprising lots 1-13 and the common property in SP 63595, for the purposes of s 26A (1) (a) of the VL Act had the combined value of $20 million. 14At the base date, the development on the land (respectively "the building" and "the site") was subdivided by two Strata Plans and lots 22 and 23 in DP 270215. The building on the site incorporates two original buildings which were amalgamated into one integrated building. The two original buildings are called the Rum Store and the Elizabeth Building The sub-divisional arrangements are of the kind referred to in s 26A (2) (b) of the VL Act, namely: Sub-division by a deposited plan and one or more strata plans. 15This set of circumstances engaged s 26A, sub-section (1) of which provides: 26A. (1) If the site of a building is sub-divided into separate parcels of land solely by means of a sub-division to which this section applies, the value of each of those parcels is to be determined as follows: (a) first, the Valuer-General is to value all of those separate parcels as if they comprise a single parcel and that single parcel and all improvements on it were owned by a single owner, and (b) then, the Valuer-General is to apportion the value obtained under paragraph (a) between each of those separate parcels, on the basis of their respective rental values as a proportion of the sum of the rental values of each of those parcels. 16The first step in this exercise (being (a) above) has been completed by the agreement of the parties and the order of the Court as to the aggregate Land Value of the site. Each of the three separate parcels is wholly or partly above another. 17The only remaining question is: What is the appropriate apportionment of the total land value of $20 million obtained under paragraph (a) of s 26A (1), between each of the separate parcels. This must be determined on the basis of their respective rental values expressed as a proportion of the sum of the rental values of each of the parcels. 18In this regard, sub-section 26A (6) allows the Valuer-General to include two or more parcels that are owned by the same person in one valuation. This, by agreement has occurred with respect to lots 22 and 23, DP 270215. "Ownership" is the same with respect to those parcels because Elizabeth & Associates Pty Limited is the registered proprietor of lot 23, DP 270215, and that same company is the lessee of the Crown of lot 22 DP 270215. The VL Act defines "owner" with respect to land, to mean "the person who, whether jointly or severally, is seised or possessed of or entitled to any estate or interest in land". Thus, Elizabeth & Associates Pty Limited is the "owner" of both lots 22 and 23. 19In order to undertake the apportionment required by s 26A (1) (b), the starting point is to determine the rental value of each of the parcels of land which comprise the site. For this purpose, regard is to be had to any improvements on or appertaining to the parcel: s 26A (5). 20Mr. Hill, the valuation consultant for the V-G, and Mr. Large, the valuation consultant for the Owners - SP 62661[& SP 63595] agree on the rental values of each parcel and on the proportion of each parcel's value to the sum of the rental values of each of the parcels. They agree as follows: Lots 22 and 23 have a gross rental value of $385,951 per annum. This is 11.38% of the sum of the rental values of each of the parcels ($3,392,219 per annum), adopting the common (adopted) gross rental value of the other two parcels as set out below. As a consequence of the apportionment, the agreed $20 million Land Value for the site means that the Land Value as at 1/7/2009 of each parcel is as follows: Lots 22 and 23 $2,275,507 Owners SP 62661 $14,555,075 Owners SP 63595 $3,169,418 $20,000,000

21Mr Wotton, the valuation consultant for Elizabeth & Associates Pty Limited contends that the gross rental which should be attributed to lots 22 and 23 is $200,000 per annum, that this represents only 6.24% of the total rent and that accordingly, the Land Value of lots 22 and 23 at the base date should have been $1,247,556. There is approximately a 100% difference between Mr Wotton and the other two valuers in this respect. 22The valuer's joint statement of evidence ("VJS") filed 26/6/2012 contains the following significant agreements: (1)All the valuers agree that the most appropriate method to ascertain the rental value of lots 22 and 23 is by the direct comparison method of valuation. On that basis, they examine comparable leasing transactions both of the subject land and comparable land. (2)Mr Hill and Mr Large consider that the best evidence of value is the leasing transactions referable to lots 22 and 23 which took place close to the base date. (3)Mr Hill and Mr Large agree as to the rental value of the other two parcels and Mr Wotton adopts their valuations for those parcels in his conclusion (see page 25 of the VJS). Mr Wotton acknowledges that he has not undertaken a rental valuation of the residential parcels within the site: see paragraph [11] and [13] of the VJS. (4)All valuers agree that the rental value of lots 22 and 23 should be assessed on a gross effective basis per annum, that the assessment should exclude goodwill, that at the base date the actual total base gross rental income from lots 22 and 23 was $352,699 gross per annum and that in addition, the tenants paid $33,252 for additional recoverable outgoings, giving $385,951 gross rent per annum inclusive of recoverable outgoings. (5)Mr Hill and Mr Wotton agree on the total internal area of the shops (designated as shop 1 and shop 2-3) at 408 sq m and that the external area of all shops total 302 sq m so that these areas total 710 sq m. Mr Large calculates that the figure is 708 sq m, which is a immaterial difference between the valuers. 23However, despite acknowledging that areas beyond the retail shops but within the building which are exclusively part of the tenancies of the shops and used for cool room, store room, toilet amenities and parking spaces is 87 sq m. Mr Wotton does not assign any rental value to the 87 sq m. 24All valuers acknowledge that there were two leases of lots 22 and 23 as at the base date: see especially [39] of the VJS, but Mr Wotton's calculations adopt the area of 408 sq m as the base area for calculation of rental, not the total area. This is only the internal area calculated in paragraph [33] of the VJS: see [37]. 25Mr Wotton (at [49] of the VJS) determines a rental value of $200,000 for the "retail parcel" comprising lots 22 and 23. Whilst this differs from his figure of $210,000 expressed in paragraph [97] of the VJS an issue arrises as to whether a single rental should be determined for the combined "retail" area of the two shops, as per Mr Wotton, or whether the rental for present purposes should reflect actual use as two separate tenancies as Mr Hill and Mr Large consider to be appropriate. 26There is a dispute between Mr Hill and Mr Large on the one hand and Mr Wotton on the other, as to whether the requirement under s 26A (5) to determine the rental value having regard to any improvements on or appertaining to the parcel, is limited to improvements which comprise fixtures on the land in the parcel, as distinct from chattels, equipment and the like. 27There is also a dispute as to whether the historic cost of the fitout of lots 22 and 23, being the fitout which was carried out on the sale of lot 23 in 2001, is relevant to the rental value of the subject shops as at 1/7/2009. Mr Wotton amortises the historic fitout and finishing costs and deducts the amortised amount from the annual rental determined from market evidence as at the base date. Neither Mr Large or Mr Hill agree that this is a correct methodology. Mr Hill's criticism of Mr Wotton's approach is set out in paragraphs [57] to [64] of the VJS." 28The valuers have differing views as to the most comparable market rental transactions. The sales listed in table 1 on page 15 of the VJS are Mr Wotton's comparable leases, those in table 2 on page 16 are Mr Large's and those in table 3 on page 17 are Mr Hill's preferred comparable transactions, although he also considers those referred to by the other valuers. Mr Hill's analysis and adjustment tables are set out in table 4 on page 18 of the VJS. Mr Large's equivalent exercise is on page 19. Mr Wotton does not provide an adjustment table, but rather raises an allegedly comparable lease transaction of 2006, renewed in late 2010 at [74] and following of the VJS. The newly introduced lease during joint conferencing had an area of 156 sq m internal and an additional 70 sq m covered external area. Mr Wotton made total adjustments of 30%. Mr Hill and Mr Large consider that the transaction relied upon by Mr Wotton at [74] is out of line with the market. See pages 22-23 of the VJS. 29The respondent will contend that the Court ought to accept the analysis and opinions of Mr Hill and the conclusion of Mr Large in preference to those of Mr Wotton, and that the correct apportionment is that set out in paragraph 14 above."

Rental valuation of residential component 30Even though Mr Wotton did not, as already noted, undertake "a rental valuation of the residential component of the total property" he ultimately agrees in the VJS that the rental value of the residential components is $2,468,700 for strata plan 62661 and $537,568 for strata plan 63595. This rental valuation was on the assumption that the residential units were fitted out with kitchens and bathrooms and not as a bare shell.

The basis of the rental valuation of lots 22 and 23 31Mr Wotton states "The premises have been assessed on the basis of a bare concrete shell with walls, doors and windows in place." Services are provided to the boundary of the premises. Those services mean and include water, sewer, electricity and air-conditioning (Ex G p 4). Mr Wotton accepts that basic fire protection services are necessary within "a bare concrete shell". 32Messrs Large and Hill prepared their rental valuations on the assumption that "fixtures associated with the subject retail premises as at the base date" were to include, in addition to those identified by Mr Wotton," suspended ceilings, plastered walls, electrical and plumbing services within the demised premises, basic lighting and power distribution throughout the area, dividing wall between the two shops, internal doors, air-conditioning, cool room, male and female amenities and full fire protection services." 33There is no dispute that chattels and equipment are to be ignored. The differing assumptions adopted by the valuers explain, to a very large degree, the difference in the rental valuations assigned.

The first applicant 34Mr Wilson referred at (transcript 16 August 2012 p 10) to the Judgment of the Court of Appeal in Trust Company of Australia Ltd v The Valuer General, [2007] NSWCA 181 (26 July 2007) at [73] "The broad policy that underlies this method of taxation can be seen to include the perceived inappropriateness of taxing a landholder of the value of land, to the extent to which that value has been contributed to by alterations that have been made to the land by the landowner or any predecessors in title of the landowner" 35Mr Wilson submissions can be summarised, in his own words, (transcript 16 August 2012 p 10): "You are able within subsection (5) to arrive at a land value having regard to those various elements, how they were put there, who put there, the extent to which they contribute to land value and therefore lead to a dissection of the rental as in this case Mr Wotton has done between a rental value of the shell, if I may use those terms here, and the value of the fixtures or component of the rent that is attributable to that element put there by the landlord" And further on the same transcript page ...... " I submit that you exclude those improvements which are truly improvements to the land which were put there by the landlord and which for that reason form a component of the rent reflected in the lease. In other words there has to be a proper analysis of the lease and a proper analysis of the facts and circumstances in each case to determine those elements of the lease from which you were able to dissect and identify, come to various conclusions. And that's exactly, in my respectful submission what Mr Wotton did in this case correctly in his approach" Later, (transcript 16 August 2012 p 39 and 40), referring to improvements within the subject premises, "You have regard to them. That is the mandate of the legislation. However, it does appear to me having regard to the submission my learned friend makes is that whereas that is Mr Masten's end point it is my starting point.... You don't automatically have regard to them as an add-on to value. Properly analysed, they may not be an add-on to value at all in the rent and as a consequence Mr Wotton has carried out the exercise he has in identifying those improvements attributable to landlords improvements and dealt with them in the way he has as submissions and the evidence have indicated".

The second applicant 36Mr Hunt make submissions in respect of the importance of the words "all improvements" and "regard is to be had to any improvements" in s 26A. He emphasised that Mr Wotton had been "advised" as to the cost of the fit out of the subject property at $1,500,000 and compared that with the figure of $1,187,267 extracted by the accountant from the company records of the first applicant. 37He emphasised the importance of "creating a situation of comparing like for like" and referred to the fact that the residential units were fitted out with kitchens and bathrooms while on Mr Wotton's view the subject property was to be treated as a "bare shell". 38He also pointed out that between 10 and 20% of the residential units were leased and information obtained, as to the rent being paid (via the strata managing agent) from the managing agents of the lessors. 39He made some comments about Mr Wotton's analysis of Cafe Moreso (to which I refer to later).

The respondent. 40Mr Masten made a written submission in respect of the interpretation of s 26A which, in part, is as follows: ""18. There are three possibilities when one strikes a rental value for a parcel under s 26A: (i)all improvements on or appertaining to each parcel on the base date are fully taken into account in determining the apportionment of rental value under the second step in s26A (1): or, (ii)after identifying all improvements on or appertaining to each parcel on the base date, they are assumed not to exist and rental value of a "shell" within enclosing walls, ceiling and floor is taken as the subject of determination of rental value: or (iii)the extent of improvements on or appertaining to the land is determined not at the base date, but, in the completed building on the site before it was first occupied, and that is taken to be the position on the base date"" ""19. In determining which of these represents the proper construction of s 26A the following factors are relevant: (i)The apportionment should occur on the base date of valuation, otherwise there is no fixed datum; (ii)The apportionment should therefore have regard to improvements that actually existed on the base date; (iii)This is clear by the reference to "building" in the section (an "improvement" in this case). The definition indicates that if the building were only in the course of construction on the base date, that is the condition of the improvements that should be considered for s 26A(1) (b); (iv)The apportionment required is one which fairly and properly attributes value between parcels by reference to rental value. This requires that the treatment of improvements on parcels should be uniform as between parcels; (v)Thus, equal or common regard to improvements must be given when determining the rental value of each of the parcels and in the summation of rental values under s 26A (1)(b); (vi)There are two quite distinct steps under s 26A (1). Sub-paragraph (a) commences with the word "first", and (b) with the word "then". This indicates two distinct and separate steps; (vii)If the intention of the legislature was to continue the assumption in s 26A (1) that the improvements " had not been made", s 26A(5) would not have been included. (viii)If the intention was to ensure that the improvements on a parcel were to be taken into account and then excluded from the determination of the rental values it would have been easy to say so. (ix)It was critical to the second step in s 26A (1) to identify what state the parcel was to be taken to be in when determining the rental value of all the parcels. The legislature on the literal meaning of the section has elected for the actual condition on the base date."" "20. Accordingly, alternative 18 (i) is the only possible meaning."

Discussion and findings 41Subsection (1) of s 26A provides in (a) "...to value all those separate parcels as if they comprised a single parcel and that single parcel and all improvements on it were owned by a single owner". "Improvements" is not a defined term under the Act. 42However, Biscoe J in Commonwealth Custodial Services Ltd as Trustee for The Burwood Trust Fund; Trust Company of Australia Ltd v Valuer General [2006] NSW LEC 400 (7 July 2006) at [45] adopted the opinion of Griffith CJ, with whom the other member of the High Court agreed at [503] in Morrison v Federal Commissioner of Land Tax [1914] HCA 10; (1914) 17 CLR 498 "any operation of man on land which has the effect, of enhancing its value comes within the definition of improvement". 43In Trust Company of Australia Ltd v The Valuer General [2007] NSWCA (26 July 2007) the Court came to a similar conclusion: ""(1) For the purposes of section 6A (1) of the Valuation of Land Act 1916, "improvements" are any human operations on the land that have the effect, as at the date of valuation, of enhancing the land's value compared with its natural state."" 44The essential element in dispute in this case concerns the basis on which the rental value of the subject property is to be assessed. In my opinion the widely held meaning of "improvements", as enhancing land value, is equally applicable to the enhancement of rental value. If works carried out within or to a property enhances its rental value they must be classed as "improvements". 45Subsection (5) of s 26A qualifies subsection (1) (a) by requiring that " In determining the rental value of a parcel of land, regard is to be had to any improvements on or appertaining to the parcel". 46In Hans Pet Constructions Pty Ltd v Cassar [2009] NSWCA 230 (31 July 2009] reference is made to Commissioner of Police for New South Wales v Industrial Commission of New South Wales and Raymond Sewell [2009] NSWCA 198 at [41] "A statutory requirement to have regard to a specific matter requires the Court to give the matter weight as a fundamental element in the decision making process". and further , "An equivalent formulation is that the matter so identified must be the focal point of the decision-making process." 47In accordance with Hans Pet, supra, regard must be had to any works within the subject property which enhance its rental value and therefore can be classed as improvements. There will be circumstances in which certain works may not enhance the value of a particular property. If that is case, those works are not improvements and must be ignored. 48Having considered the submissions of Counsel and Mr Hunt and the judgments to which I have been referred I am satisfied that all of the works, identified, firstly, by Mr Wotton and, secondly, by Messrs Large and Hill, and in existence at the base date, are improvements to which regard must be had in assessing the rental value required under s 26A. 49My conclusion that those works are improvements is reinforced by the fact that, at the base date, the subject property was leased (under two leases) with the identified works being necessary to enable it to be fully utilised, partially as a restaurant and partially as a cafe, at rents substantially in excess of those that could have been obtained if the works had not been carried out. Mr Wotton's rental valuation on a bare shell basis confirms this. 50The logical extension of Mr Wotton's opinion that the subject property should be rental valued as a bare shell is that the residential units within the two strata plans should be valued on the same basis. All of these units were fitted out with kitchens and bathrooms. The valuers have agreed as to their rental value on this basis, (that is, as occupied) meaning that if Mr Wotton's valuation basis was accepted the rental value comparison made would not be on a "like with like" basis. 51Further, it is irrelevant, in my opinion, when the works, in situ at the base date, were constructed, who carried them out or paid for same. The only test is - are the works improvements? If the answer is in the affirmative regard must be had to same in determining the rental value of the subject property and the residential units within the two strata plans.

The meaning of rental value 52Subsections (1) (a) and (b) of s 26A requires the "rental values" of the component parts of the "building" or buildings on "the site" to be assessed and then used as part of the land value calculation. 53In Eureka Funds Management Ltd and anor v Freehills Services Pty Ltd [2008] VSCA 156 (26 August 2008) Cavanagh J at [56] held: ""The examination required to establish "rental value" is more complex than that required to establish "rental". The essence of determining "rental value" is finding the true rent. Distorting factors, including what has influenced the terms of a lease such as incentives and special concessions like rent holidays (i.e. rent-free periods) and contributions to fit out expenses, are to be taken into account in determining this value. This is the effective rent for the purposes of determining market rental value."" 54Mr Wotton considered that the definition of rental value for retail premises in s19 (1) (a) of the Retail Leases Act 1994 should be adopted. I disagree. 55The rent that would be determined if that definition was followed would result in the rental value being determined as a net rent as opposed to a gross rent. The agreed rental values of the residential components of the two buildings on the site are gross rents. For this reason any comparison required under subsection (1) (b) of s 26A must be made, in the factual circumstances of this case, on a gross rent basis, otherwise the underlying principle that calculations be undertaken on a "like with like" basis would be offended.

The rental value of the subject property 56The land on which the subject property is located is zoned "Residential - Business" under the Sydney Local Environmental Plan 2005. Under this zoning restaurants and cafes are permitted. As already noted, two leases were current at the base date under which the permitted use of shop 1 is "cafe" and of shops 2 and 3 "restaurant and cafe". I am satisfied that the use of the subject property for those purposes represents the highest and best use to which it can be put. 57The evidence was that the rental paid under the two leases totalled $352,699 per annum. In addition, outgoings amounting to $33,252 were also payable by the lessees. The gross rental was $385,951 per annum excluding GST. 58By reference to lettings of premises, considered to be comparable, Mr Hill and Mr Large satisfied themselves that the gross rent payable under the leases was in line with market evidence and as a consequence represented rental value. I accept their conclusions. 59Mr Wotton considered that the rental value of the subject property was either $340,238 or $311,000 per annum gross based on the assumptions regarding the extent of improvements made by Messrs Hill and Large. Mr Wotton's approach was to add to his opinion of the rental value of the subject property, on a bare shell basis of $200,00 per annum, the value of the fit out after allowing for amortisation and depreciation, based on the initial cost of $1,500,000, and in the alternative, $1,187,267. 60The gross rental payable under the two leases provides the best evidence of the rental value of the subject property at the base date. I assess the rental value at $385,951 per annum excluding GST.

Determination of land values as at 1 July 2009 Property. Gross Rental P.A. % to Total Land Value Lots 22 & 23 $385,951 11.38 $2,276,000 SP 62661 $2,468,700 72.78 $14,556,000 SP 63595 $537,568 15.84 $3,168,000 Totals $3,392,219 100.00 $20,000,000

In the alternative 61For the benefit of the parties I set out my opinion as to the rental value of the subject property, on a bare shell basis. 62Mr Wotton introduced two leases of Cafe Moreso, lots 21 and 117, Jones Bay Wharf, 26 - 32 Pirrama Road, Pyrmont to arrive at the rental value of that part of the subject property being lot 23 . 63It was first leased on 19 October 2006 and released to a different party on 19 October 2010 at almost the same rental ($109,824 cf $109,644 gross per annum). The lease includes a car parking space which Mr Wotton considered had a rental value of $5000 per annum. For comparison purposes I have adopted a rental of $104,644 per annum as at 1 July 2009. A common feature of Cafe Moreso, and lot 23 is that they both have outside usable space, immediately adjacent to their internal areas, included as part of the demised premises. 64Cafe Moreso comprised an internal area of 156 m² and an external covered area of 70 m². Of the 156 m², 27 m² was located at a mezzanine level on which were located toilets and a cool room. The rent paid, related only to the internal area, is the equivalent of $671 per square metre. 65For comparison with the subject property I consider that three adjustments need to be made; a downward adjustment of 10% for size, a further downward adjustment of 5% to reflect that the Cafe Moreso lease includes toilets and a cool room which must be excluded on a bare shell basis and, finally, an upward adjustment of 10% for what I consider to be the superior location of the subject property. The net effect is a downward adjustment of 5% producing a rental applicable to the subject property of $637 per square metre; applied to the internal area of the subject property of 408 m² produces $259,896 gross per annum for the whole of the subject premises on a bare shell basis. 66Mr Wotton noted that a fit out contribution of $500,000 was allowed in respect of the Ripples Restaurant located at Lot 106, Sydney Wharf, 56 Pirrama Road, Pyrmont as at September 2008. Mr Large calculates this to be the equivalent of $2358 per square metre. Applied to the area of lot 23 of 408 m², a figure of $962,064 is obtained. 67As a check I have had regard to what would be the fit out cost of the subject premises of $962,064 and made a deduction from its rental value, as fitted out at the base date, for depreciation in value to 25% of its original cost over an assumed 10 year lease period. At 8% this is the equivalent of $107,351 per annum indicating a bare shell rental value of $278,420 per annum ($385,951 less $107,531). 68Of the two methods I prefer the direct comparison approach and adopt a gross rental value, on a bare shell basis, of the subject premises of $260,000 per annum. 69To enable the land values to be properly calculated in respect of strata plans 62661 and 63595 it will be necessary, in my opinion, to arrive at the rental value of the residential units within those plans on a bare shell basis. No evidence was adduced in respect of same. Accordingly, I am unable to complete the s 26A land value calculations on a bare shell basis.

Orders 70The orders of the Court are as follows: (1)The land values first issued by the respondent are revoked. (2)The land values, as at 1 July 2009, under section 26A of the Act are determined at: Lots 22 & 23$2,276,000 SP 62661$14,556,000 SP 63595$3,168,000. (3)The respondent is to amend the Register of Land Values to reflect the land values determined. The exhibits may be returned. E Craig Miller Acting Commissioner of the Court DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 24 October 2012

At a glance

Court

Decision date

Before

Source

Judgment (26 paragraphs)

Parties

Cases Cited (6)