Commonwealth Custodial Services Ltd v Valuer General

Adelaide Clinic Holdings Pty Ltd v Minister for Water Resources (1988) 65 LGRA 410 Broken Hill Pty Co Ltd v Municipal Council of Broken Hill (1925) 37 CLR 284 Commonwealth Custodial Services Ltd v Valuer-General of New South Wales [2006] NSWLEC 775 Commonwealth Custodial Services Ltd v Valuer General [2007] NSWCA 365, (2007) 156 LGERA 186 CASES CITED: Commonwealth Custodial Services Ltd as Trustee for the Burwood Trust Fund v Valuer General [2006] NSWLEC 400, (2006) 148 LGERA 38 Krisgay Pty Ltd v Valuer-General [2007] NSWLEC 600, (2007) 159 LGERA 29 Longreach Capital Pty Ltd v Valuer-General [2007] NSWLEC 721 Spencer v The Commonwealth [1907] HCA 82, (1907) 5 CLR 418 Trust Company of Australia Ltd v Valuer-General [2007] NSWCA 181, (2007) 154 LGERA 437

DATES OF HEARING: 29-31 October 2008, 5 November 2008

APPLICANT: Mr M Craig QC and Mr M Seymour SOLICITORS: Mallesons Stephen Jaques LEGAL REPRESENTATIVES: RESPONDENT: Mr J Maston SOLICITORS: Crown Solicitor's Office (NSW)

JUDGMENT: THE LAND AND ENVIRONMENT COURT OF NEW SOUTH WALES

COMMONWEALTH CUSTODIAL SERVICES LTD v VALUER GENERAL

COMMONWEALTH CUSTODIAL SERVICES LTD v VALUER GENERAL

JUDGMENT 1 HIS HONOUR: These are merit appeals against valuations of heritage restricted land by the Valuer General under the Valuation of Land Act 1916 as at 1 July 2005 and 1 July 2006. The applicant, Commonwealth Custodial Services Ltd, is the owner. Located on the corner of Martin Place and Pitt Street, Sydney, and known as 120 Pitt Street, the heritage restricted land is Lot 120 in DP 882436 within the Sydney central business district (the Land). The Land has an area of 3,347 m2. For many years there has been erected upon the Land a substantial building known as the Commonwealth Bank building. More colloquially, the building is known as "the Moneybox" because it is the building depicted on steel moneyboxes distributed by the Commonwealth Bank of Australia to children after 1922. 2 Each year, the Valuer General is required to ascertain the land value of each parcel of land in New South Wales (with some prescribed exceptions) as at 1 July: s 14A(1) and s 14B(1) Valuation of Land Act. The Valuer General is required to give prescribed rating and taxing authorities valuation lists relating to land within the authority's area and the authority is required to levy rates and taxes in accordance with the values in such lists: ss 48 and 62.

3 The Valuer General determined the value of the Land at 1 July 2005 in the sum of $42,000,000 and at 1 July 2006 in the sum of $46,200,000. Pursuant to s 29(3A), the applicant lodged with the Valuer General a written objection to each valuation upon the ground that the value assigned was too high. The Valuer General disallowed the 2005 valuation objection and amended the 2006 valuation to $44,500,000. The applicant now appeals on the merits to the Land and Environment Court pursuant to s 37(1) upon the ground that the valuations are too high. The Court's powers on appeal are to (a) confirm or revoke the decision to which the appeal relates; (b) make a decision in place of that decision; or (c) remit the matter to the Valuer General for determination in accordance with the Court's finding or decision: s 40(1). The applicant has the onus of proving its case: s 40(2).

4 Expert valuation evidence was given for the applicant by Mr Peter Dempsey and for the Valuer General by Mr Derek Hill. The valuers in their joint report contended for the following valuations as at the 2005 and 2006 valuation dates: 2005 2006 Applicant (Mr Dempsey) $32,000,000 $32,000,000 Valuer General (Mr Hill) $42,500,000 $44,500,000 The Moneybox 5 Originally constructed between 1913 and 1916 and extended or refurbished at various times thereafter, the Moneybox is a twelve storey commercial office building, including a ground floor retail banking chamber and mezzanine, with two basement levels. The Moneybox has a floor space ratio (FSR) of 9.44:1 providing a floor space area (FSA) of 31,586 m2. The net lettable area (NLA) of the Moneybox is 24,530.30 m2, representing a building design efficiency of 77.66 percent. Building design efficiency is the relationship between the FSA and the NLA. Earlier valuation proceedings 6 There were earlier valuation proceedings in relation to the Land. The Valuer General had determined the value of the Land as at each of the valuation dates of 1 July 2002, 1 July 2003 and 1 July 2004 in the sum of $40,000,000. The applicant objected and the Valuer General disallowed the objections. The applicant appealed to this Court. Talbot J upheld the appeals and determined the land value at each of those valuation dates in the sum of $37,525,000: Commonwealth Custodial Services Ltd v Valuer-General of New South Wales [2006] NSWLEC 775. Pursuant to s 57(1) of the Land and Environment Court Act 1979, the applicant appealed against his Honour's decision to the Court of Appeal. The appeal was dismissed: Commonwealth Custodial Services Ltd v Valuer General [2007] NSWCA 365, (2007) 156 LGERA 186.

7 The valuation by this Court in relation to preceding years does not attract the principle of res judicata: Broken Hill Pty Co Ltd v Municipal Council of Broken Hill (1925) 37 CLR 284 at 289 (PC). The parties and their valuation witnesses gave no weight to the Court's valuations in relation to preceding years. They did not adopt the approach of making adjustments to those curial valuations for subsequent market conditions. The Valuer General went so far as to submit that would be a legally impermissible approach, but made no reference to authority precisely on point. If that is so, the Court's recent valuations, forged in the heat of adversarial contest and (in this case) confirmed on appeal, are of no continuing utility. For my part, in merit appeals such as this, I would have thought that the approach to which I have referred is permissible and has much to commend it in an appropriate case. In the present case, however, new and divergent valuation assumptions were advanced, which were not advanced in the earlier valuation proceedings, and which are inconsistent with the assumptions adopted by this Court and confirmed on appeal in those proceedings. Widely differing valuations were then propounded as a result of the application of the new assumptions to fresh analyses of comparable sales and rentals.

The statutory framework 8 The Land is heritage restricted within the meaning of s 14G(2) of the Valuation of Land Act. The critical provisions, for present purposes, are ss 6A(1), 14G(1) and (2) and the definition of "land improvements" in s 4: " 6A Land value

(1) The land value of land is the capital sum which the fee-simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona-fide seller would require, assuming that the improvements, if any, thereon or appertaining thereto, other than land improvements, and made or acquired by the owner or the owner's predecessor in title had not been made. (2) Notwithstanding anything in subsection (1), in determining the land value of any land it shall be assumed that: (a) the land may be used, or may continue to be used, for any purpose for which it was being used, or for which it could be used, at the date to which the valuation relates, and (b) such improvements may be continued or made on the land as may be required in order to enable the land to continue to be so used, but nothing in this subsection prevents regard being had, in determining that value, to any other purpose for which the land may be used on the assumption that the improvements, if any, other than land improvements, referred to in subsection (1) had not been made. ...

14G Valuation subject to heritage restrictions under EPI

(1) Land that is heritage restricted on the date by reference to which its land value is to be determined is to have its land value determined on the basis of the following assumptions: (a) that the land may be used only for the purpose, if any, for which it was used when the value is determined, (b) that all improvements on that land when the value is determined may be continued and maintained in order that the use of that land as referred to in paragraph (a) may be continued, (c) that no improvements, other than those referred to in paragraph (b), may be made to or on that land. (2) Land is heritage restricted as at a particular date if the Valuer-General has determined that it would be reasonable to make the assumptions referred to in subsection (1) in respect of the land as at that date because of any provision of a planning instrument concerned with the heritage significance or heritage value of the land or any building, work or other thing on or in the land. …

… (d1) without limiting paragraph (d), any excavation…of land (otherwise than for the purpose of irrigation or conservation) that is associated with: (i) the erection of any building or structure, or (ii) the carrying out of any work, or (iii) the operations of any mine or extractive industry," 9 Land not subject to heritage restrictions is valued under s 6A(1) of the Valuation of Land Act on the assumption that it may be developed for its highest and best use. The use of both adjectives "highest" and "best" may be tautological, but is hallowed by usage. The notion of highest and best use does not appear in the Act but is implicit in s 6A(1): Trust Company of Australia Ltd v Valuer-General [2007] NSWCA 181, (2007) 154 LGERA 437 at [32]. Highest and best use means the most advantageous purpose for which land can be used: Spencer v The Commonwealth [1907] HCA 82, (1907) 5 CLR 418 at 441-442; Adelaide Clinic Holdings Pty Ltd v Minister for Water Resources (1988) 65 LGRA 410 at 415. If there is some use of the property that is more beneficial than its present use, it is assumed that at least one potential purchaser in the market would be prepared to pay more for the land by reason of it being able to be used in that more beneficial way: Trust Company at [32]. 10 Land on which there is a building of heritage significance is generally subject to legislation or planning instruments which impede demolition and redevelopment. It would be unjust to value such land as though all its potentialities were free from heritage restrictions when, owing to heritage restrictions upon its use, the land is of lesser value. Recognising this, the NSW legislature has created a regime for valuing heritage restricted land. The regime appears in two statutes, according to the reason for the heritage restriction. First, valuation of land that is listed on the State Heritage Register is subject to the Heritage Act 1977 Part 6 Division 6 (s 123 - s 128), which requires the Valuer General to make or cause to be made a "heritage valuation" as defined in s 123. Secondly, valuation of land that is heritage restricted because of a provision of a planning instrument concerned with the heritage significance or heritage value of the land or any building or work on the land, is valued in accordance with s 14G of the Valuation of Land Act (if the Valuer General has determined that it would be reasonable to do so). The Land is in the latter category because the Central Sydney Local Environmental Plan 1996 and the Sydney Local Environmental Plan 2005 provide that land is heritage restricted if it is land that is identified on which there is a building which is listed on the heritage schedule. The Moneybox is listed on the heritage schedule. Although, curiously, the language of s 123 of the Heritage Act and the language of s 14G of the Valuation Act are not identical, they are to the same effect, as one would expect: Krisgay Pty Ltd v Valuer-General [2007] NSWLEC 600, (2007) 159 LGERA 29 at [36] (Biscoe J), quoted in Commonwealth Custodial Services Ltd v Valuer General [2007] NSWCA 365, (2007) 156 LGERA 186 at [109].

11 The difference between s 14G(1) and s 6A(2) was explained in Trust Company of Australia Ltd v Valuer-General [2007] NSWCA 181, (2007) 154 LGERA 437 at [58] per Campbell JA (Beazley and Ipp JJA agreeing): "Section 14G(1) is in some ways the converse of s 6A(2). Both of them provide a different method for valuation of land to that which is provided by s 6A(1). Section 6A(2) is concerned with ensuring that land is not undervalued when an existing use of the land is more valuable than any use to which the land could be put if the improvements on it had not been made, while s 14G(1) is concerned with ensuring that land is not overvalued when heritage restrictions on the land have the effect that continuing its existing use is less valuable than any use to which the land could be put if the improvements on it had not been made. I do not see why s 14G(1) being an exception to s 6A(1), in that sense, provides a reason why 'improvements' should be used with a different meaning in the two provisions." 12 As the Land is "heritage restricted" within the meaning of s 14G(2), the assumptions in s 14G(1) displace the assumptions in s 6A(2) which would apply if the Land were not heritage restricted: Commonwealth Custodial in the Court of Appeal at [108]. The s 14G assumptions, in my opinion, are to the effect that the use of the Land is its current use forever restricted to the use of the Moneybox and that no improvements other than the Moneybox may ever be made. See Commonwealth Custodial Services Ltd v Valuer General [2007] NSWCA 365, (2007) 156 LGERA 186 at [84], [87], [88], [116]; Trust Company of Australia Ltd v Valuer-General [2007] NSWCA 181, (2007) 154 LGERA 437 at [56] - [58], dismissing an appeal against the decision in Commonwealth Custodial Services Ltd as Trustee for the Burwood Trust Fund v Valuer General [2006] NSWLEC 400, (2006) 148 LGERA 38 (Biscoe J); and Krisgay Pty Ltd v Valuer-General [2007] NSWLEC 600, (2007) 159 LGERA 29 at [46] (Biscoe J).

13 The approach to land value for heritage restricted land to which s 14G applies was described by Tobias JA in Commonwealth Custodial Services Ltd v Valuer General [2007] NSWCA 365, (2007) 156 LGERA 186 at [111] and [116]: "111 In my opinion, two critical conclusions can be drawn from the authorities. First, that s 6A(2) or, in the case of heritage restricted land, s 14G(1), do not negative the assumption in s 6A(1) that the improvements upon the land to be valued 'had not been made'. It is a consequence of this proposition, as Campbell JA noted in the Trust Company case at [33], that it is only once the improvements are notionally removed from the land to be valued that the notional sale of that land as called for by s 6A(1) can occur. Second, as the assumptions in ss 6A(2) or 14G(1) do not replace the assumption in s 6A(1) for the purpose of determining the capital sum which the fee simple of the relevant land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona fide seller would require, the improvements upon that land are to be ignored as if they had never been made. It follows, as Jagot J noted in Longreach Capital Pty Ltd v Valuer-General [2007] NSWLEC 721 at [39], that the assumption in s 6A(2)(b) or the similar assumption in s 14G(1)(b) refers to the continuance of the improvements existing upon the land as at the date of valuation only for the purpose of enabling the land to be valued upon the basis, if it be the case, that its highest and best use is the continuation of its existing use as permitted by s 6A(2)(a) and as required by s 14G(1)(a).

116 That is not to say that the particular improvements upon the property were to be ignored for all purposes. In the context of the present case it required the valuers to value the property as vacant land (other than for land improvements) upon the basis first, that it would only be used for the purpose for which it was being used at the date of valuation; and, second, that the only building in which that use could be continued was the existing building upon the land with all its perceived benefits as a heritage building on the one hand and its perceived deficiencies in terms of its design, internal layout etc., on the other." 14 However, Spigelman CJ expressed the following reservation at [17] (Santow JA agreeing at [20]): "Tobias JA also refers to the observations in the joint judgment of the High Court in Maurici at [16] and Campbell JA in this Court in Trust Company of Australia Ltd v Valuer-General (2007) 154 LGERA 437 at [33], to what is described as 'steps' to be taken under s 6A, specifically the reference to the fact that 'the second step is notionally to remove the improvements from the land'. I do not regard the references to 'steps' as requiring a sequence of events. It is a useful metaphor but should not be interpreted as laying down a rigid sequence. The method of valuation in issue in this appeal also 'notionally' removes the improvements from the land. That is the statutory requirement, not the sequence of reasoning." 15 In the present case, the parties' valuation witnesses followed a two stage general approach, consistently with that taken in the earlier valuation proceedings (but with different assumptions as described later in this judgment). First, consider the land value in accordance with s 6A(1) assuming that the Land was not heritage restricted; that is, with improvements notionally removed other than "land improvements" (as defined in s 4). Secondly, consider what adjustments then need to be made to allow for the s 14G assumptions. Section 6A(1) land value 16 There is a general relationship between the value of land and its net income potential. In considering the vacant land value under s 6A(1) where no heritage restrictions are taken into consideration, the highest and best use of the Land at each valuation date coincided with its existing use for the purpose of office accommodation, ground floor retail (or similar) and basement uses including parking - albeit in a new, modern building of the same height as the Moneybox (by reason of non-heritage planning restrictions) with a consequential floor space ratio of 9.5:1. That is typically the highest and best use of sites in the Sydney CBD. It is to be assumed that a developer would seek the largest amount of income producing NLA in a new, modern building, as this would produce the greatest capital value on completion of the building. It was agreed that the FSR achievable for a new, modern building on the Land was 9.5:1 producing an FSA of 31,796 m2 and an NLA of 27,663 m2 based on a building design efficiency of 87 percent.

17 In assessing the s 6A(1) land value, Mr Dempsey favoured the FSA rate, while Mr Hill favoured the NLA rate. While the adoption of either rate should lead to the same result, I prefer the NLA rate because it was adopted by the Court in the earlier valuation proceedings and it simplifies the s 14G adjustments.

18 Mr Dempsey in his report contended for a s 6A(1) land value of $1,900/m2 of FSA at both valuation dates. Mr Hill in his report contended for a s 6A(1) land value of $2,100/m2 at the 2005 valuation date and $2,200/m2 for the 2006 valuation date, an increase of 5 percent. In their subsequent joint report, the valuers agreed that as at the 2005 valuation date, land value under s 6A(1) was $1,875/m2 of FSA, which they agreed was equivalent to $2,155/m2 of NLA (the conversion calculation is FSA of a hypothetical new building of 31,796 m2 x $1,875 m2 = $59,617,500 ÷ 27,663 m2 of NLA = $2,155/m2 rounded of NLA). In their joint report, for the 2006 valuation date, Mr Dempsey's s 6A(1) land value was the same, but Mr Hill considered that it should be increased to $2,200/m2 of NLA.

19 Mr Dempsey considered that rising building costs between the 2005 and 2006 valuation dates were likely to offset Mr Hill's increase. Mr Dempsey referred to Rider Hunt's Digest (a compendium of cost information and related data on the construction industry), which shows an increase in building costs of 6.2 percent between June 2005 and June 2006. Mr Hill did not dispute that rising building costs should be taken into account but made two points. First, the quantum of rising building costs was lower than that estimated by Mr Dempsey when regard was had to Rawlinson's Australian Construction Handbook, which shows increases in commercial building costs within the Sydney CBD for buildings between seven and 20 storeys, of 3.2 percent to 4.6 percent. I accept that Rawlinson is a preferable guide in the present case because it addresses the Sydney CBD. Second, other factors, such as capital value increases in commercial buildings and decreasing vacancy rates, indicated strengthening market conditions which, he said, justified his NLA value increase from 2005 to 2006. Capital value increases between July 2005 and July 2006 are borne out by a well sourced table entitled "Property Indicators for the Sydney CBD" set out in Mr Hill's report. Mr Dempsey conceded that such matters were valid considerations but pointed out that the majority of his comparable sales evidence, upon which he relied to arrive at his FSA values for 2005 and 2006, occurred in 2006 but he made no downward adjustment for 2005. That is correct as far as it goes but such evidence was limited. 20 On balance, I consider that the totality of considerations identified by Mr Hill justify his increase between the 2005 and 2006 valuation dates. Accordingly, in my opinion, the s 6A(1) land value should be assessed at $2,155/m2 of NLA for the 2005 valuation date and $2,200/m2 of NLA for the 2006 valuation date. 21 The s 6A(1) land values assigned ignore land improvements as defined in s 4(1)(d1), being the site excavation, which has been agreed at $2,175,550.

Section 14G rental differential adjustment 22 The valuers calculated the net rental differential, expressed as a percentage, per square metre of NLA for a new, modern building on the Land and for the Moneybox. This differential was then deducted from the s 6A(1) rate of NLA. This is consistent, subject to one qualification, with the judgment of Talbot J, in the earlier valuation proceedings [2006] NSWLEC 775 at [46]: "The best indication of the effect heritage restrictions exactly corresponding to the improvements on the site is to look at the actual effect those very improvements have on the value of the property. This effect can be quantified by a comparison of the rental return actually achieved on the site with a hypothetical return that could be achieved if the site were not heritage restricted. Using this logic Mr Hill derives a discount of 17% to be applied to the s 6A land value of the subject land for the heritage restrictions to be taken into account under s 14G. I find this to be an reasonable approach and accordingly I adopt Mr Hill's methodology."

23 The qualification to which I have referred concerns Talbot J's comparison of the rental "actually achieved" for the Moneybox. The Moneybox is subject to two leases, apparently between related entities, which together encompass the whole building. In the present proceedings neither Mr Hill nor Mr Dempsey relied on the rentals actually achieved because, they indicated, those leases, which are not in evidence, contained unusual provisions and the rentals actually achieved were significantly in excess of their market rental valuations. Accordingly, the rental actually achieved for the Moneybox is of no assistance. The uselessness of the rental actually achieved was apparently not identified and communicated to the Court in the earlier valuation proceedings.

24 The valuers produced alternative calculations for net rental income on a net effective rental basis and on a face rental basis. I consider that it is preferable to make the comparison on the basis of net effective rentals, which are intended to reflect the market rental value of premises. Face rentals do not take into account rental and other incentives, are capable of manipulation by both lessor and lessee to take into account their particular circumstances, and may not be a fair indicator of market value.

25 The valuers expressed their opinions as to the net effective rent for each floor, the basement areas and carpark in the Moneybox at the respective valuation dates. They derived the average net effective rental per square metre of NLA by dividing the total net effective rental of the Moneybox by its total NLA. In this way, they allowed for the impact of heritage restrictions on the rental value of any affected parts of the Moneybox.

26 For the purposes of a net effective rental comparison, the valuers adopted divergent positions as to what was to be compared.

27 Mr Dempsey's position was that the comparison should be between (a) the rent (estimated as at the valuation date) for a hypothetical new, modern building on the Land three or four years after the valuation date, on the reasoning that this was the time required to obtain development approval for, construct and have ready for occupation a new building; and (b) the rent at the valuation date for the Moneybox in its actual condition at that date. Assumption (a) is novel and produces a rent which is higher than the rent for a new, modern building completed and ready for occupation at the valuation date. Consequently, it produces a larger rental differential, a larger reduction to the s 6A(1) land value, and a lower s 14G heritage valuation of the Land.

28 Mr Hill's position was that the comparison should be between (a) the rent at the valuation date for a hypothetical new, modern building assuming that it was completed and ready for occupation at that date; and (b) the rent at the valuation date for a hypothetical Moneybox assuming it was in new, pristine condition at that date. Assumption (b) is novel and produces a rent which is higher than the rent for the Moneybox in its actual condition. Consequently, it produces a smaller rental differential, a smaller reduction to the s 6A(1) land value, and a higher s 14G heritage valuation for the Land.

29 These assumptions are novel in that they are inconsistent with the approach advanced by Mr Hill and adopted by the Court in the earlier valuation proceedings, and confirmed by the Court of Appeal. That approach was to assess the rental differential by comparing (a) the rent for a hypothetical new, modern building on the Land at the valuation date with (b) the rent for the Moneybox in its actual condition at the valuation date.

30 The Valuer General submits that it would be an error of law for the Court not to adopt Mr Hill's novel approach in these proceedings. If the correct approach is a matter of law, then I would be bound to follow the different approach confirmed by the Court of Appeal in the earlier valuation proceedings. It is unnecessary to consider this question of stare decisis further because, as explained below, I am of the opinion that the approach adopted in the earlier valuation proceedings was correct and that both novel assumptions should be rejected. My reasons are as follows.

31 In my opinion, in order to make a meaningful comparison of rent for a hypothetical new, modern building and rent for the Moneybox, it is necessary to do so as at the same date. The relevant date under the Valuation of Land Act is the prescribed valuation date. Fastening on that date as the common date has the consequential advantage of avoiding the uncertainty that is inherent in an estimate, as at the valuation date, of rentals years in the future. Mr Dempsey's comparison is between rents at different dates. His projected rent three or four years after the valuation date for the hypothetical new, modern building was based on estimates by estate agents and purchasers of comparable land where it was intended to build new, modern buildings. The logical starting point for any estimate of rent years in the future is the estimated current rent at the valuation date. The estimate would then take into account factors such as rental trends and risks to arrive at the future estimated rent.

32 The applicant submits that Mr Dempsey's novel assumption utilised the method explained by Talbot J in the earlier valuation proceedings in the passage quoted at [22] above. I do not accept the submission. Talbot J assessed the rental value of a hypothetical new, modern building on the Land existing and ready for occupation at the valuation date. That is also the date adopted by Mr Hill for his rental valuations. I propose to adopt it. 33 Mr Hill's novel assumption was that a hypothetical Moneybox in new, pristine condition should be rental valued as at each valuation date. The Valuer General submits that this should be accepted because the Moneybox in its actual condition is only relevant to determining the highest and best use of the Land. Thus, the argument goes, its actual condition is irrelevant when making a rental comparison for present purposes. The Valuer General says that is clear from the assumption in s 14G(1)(b) that the Moneybox may be continued and maintained in order that "the use of that land as referred to in paragraph (a) may be continued". The Valuer General submits that that limited relevance of the actual condition of the Moneybox was confirmed in the leading judgment of Tobias JA in the Court of Appeal in the earlier proceedings at [111]: "[T]he…assumption in s 14G(1)(b) refers to the continuance of the improvements existing upon the land as at the date of valuation only for the purpose of calling the land to be valued upon the basis, if it be the case, that the highest and best use is the continuation of its existing use…as required by s 14G(1)(a)." and in the judgment of Jagot J in Longreach Capital Pty Ltd v Valuer-General [2007] NSWLEC 721 at [40(9)]: "In the context of sub para (b) of the definition of heritage valuation, 'continued and maintained' should be understood as a composite phrase conveying the meaning that the improvements on the land at the relevant date may remain there and be maintained by the owner so that the use may be continued." 34 I do not accept the Valuer General's submission. In the first place, I do not think it follows from the reference to "use" in s 14G(1)(b) that, for present purposes, the rental value of a hypothetical new, pristine Moneybox should be assessed. Secondly, the dicta of Tobias JA focused on the assumption in s 14G(1)(b) and the dicta of Jagot J focused on the equivalent assumption in paragraph (b) of the definition of "heritage valuation" in s 123 of the Heritage Act. Section 14G(1) contains three assumptions, not two. The first two assumptions, in s 14G(1)(a) and (b), are expressly concerned with the "use" of heritage restricted land. The third assumption, in s 14G(1)(c), does not refer to use: "that no improvements, other than those referred to in paragraph (b), may be made to or on that land". The third assumption - as well as the second assumption - requires regard to be had to the Moneybox in its actual condition. There is no suggestion in the third assumption - nor in the second assumption - that regard should be had to improvements on heritage restricted land on the further assumption that they were in new, pristine condition at the valuation date. Thirdly, the statutory definition in s 14G(2) requires regard to be had to the very building that attracts the heritage restriction; that is, to the Moneybox as it is - not to a hypothetical Moneybox in new, pristine condition. That is because the Land is "heritage restricted" within the meaning of the definition in s 14G(2) - and thus s 14G(1) is attracted - because of a provision in the Central Sydney Local Environmental Plan 1996 and the Sydney Local Environmental Plan 2005 that land is heritage restricted if it is land that is identified on which there is a building which is listed in the heritage schedule. The Moneybox is listed in the heritage schedule. Finally, the relevance of the actual condition of the Moneybox, with all its perceived benefits and deficiencies, was acknowledged in the earlier valuation proceedings in the Court of Appeal by Tobias JA (with whom Spigelman CJ and Santow JA agreed in this respect) at [116]. 35 In support of Mr Hill's assumption of a hypothetical Moneybox in new, pristine condition, the Valuer General cites Longreach (above) at [32] where Jagot J held that the cost of placing a building in a condition where it may be used for the purpose of its existing use or maintaining the building in that condition is irrelevant. The case is distinguishable. There the land was valued under the Heritage Act. The definition of "heritage valuation" in s 123 contains the same assumptions as appear in s 14G(1) of the Valuation Act. The land had formerly been used as a mental hospital. Jagot J rejected the approach of the applicant's valuer which allowed for the expenditure of a very large amount of money in order that the land might once again be used for that obsolete purpose. That was not the use of the land at the valuation date and was therefore irrelevant.

36 Accordingly, in my opinion, as at each valuation date, the rental comparison is between the current market rental value for a hypothetical new, modern building assuming that it was completed and ready for occupation on the Land at the valuation date, and for the Moneybox in its actual condition. 37 Ultimately, in the present proceedings, the valuers assessed the net effective rentals per square metre of NLA for a hypothetical new building on the Land and for the Moneybox as at each valuation date, as follows:

Dempsey 2005 Hill 2005 Dempsey 2006 Hill 2006 New modern building $520 $475 $520 $500 (projected 3 - 4 years) (at valuation date) (projected 3 - 4 years) (at valuation date) Moneybox $300 $340 $300 $358 (actual condition) (new condition) (actual condition) (new condition) Differential 42.31% 28.42% 42.31% 28.40%

38 For both valuation dates, I adopt Mr Hill's rate of $475/m2 for a hypothetical new, modern building, and Mr Dempsey's rate of $300/m2 for the Moneybox in its actual condition. That represents a differential of 36.84 percent for the both valuation dates. My reasons are as follows. New, modern building 39 Mr Dempsey's opinion of the rental value of a hypothetical new, modern building three of four years after the valuation date was $650/m2 net face rent, which he converted to $520/m2 net effective rent (after allowing 20 percent for rental incentives). His rental value for a new building on the Land was based mainly on rentals which purchasers of vacant CBD land or their estate agents projected would be received in three or four years time, after development approval had been obtained and a building constructed. None of the projections were based on actual lease transactions: they were estimates as to the future by purchasers or their estate agents. Mr Dempsey adjusted all these estimated future rentals to arrive at his estimated future rent for the hypothetical new, modern building in three to four years. That estimate was, I think, justified by his rental analysis of other properties, particularly the property at 416 George Street. The properties to which Mr Dempsey had regard, which had no leases or agreements to lease in place, were as follows (rents referred to are net face rents): (a) 12 Chifley Square (Goodsell Building). The estimated future rent was $900. At the sale date of 1 January 2006 the only building on the land was an old building to be demolished. The proposed building on the land was not the subject of a development consent, nor had there been a design prepared for the future building. (b) 51-63 Sussex Street. The estimated future rent was $500. This land was purchased in November 2004 for the purpose of erecting an electricity sub-station on it. There was no prospective commercial office building in view. (c) 416 George Street. The estimated future rent was $650. The sale of this property on 1 March 2006 was for a redevelopment site to replace retail shops on the land. (d) 61-79 Quay Street. The estimated future rent was $410. This site was vacant at the date of its sale on 1/6/2007. There was no development application and no design of any commercial office building. Mr Dempsey estimate $410/m 2 for a new building on the site. (e) 26 Hickson Road. The estimated future rent was $475. This sale occurred on 1 March 2006. This figure was adjusted upward for location by 40% to suggest a rental for the subject property. This is so large as to make a rental adjustment difficult. (f) 430-450 Pitt Street. The estimated future rent was $450. This sale occurred on 1 February 2007. It was a car park on the date of sale. It was purchased for the purpose of erecting an electricity sub-station on the land. No development approval existed for the land. I do not think that this transaction affords a helpful basis for the estimate of the rents in a new commercial office building on the Land. 40 Mr Hill's assessment of $475m2 net effective rent of NLA for a new, modern building on the Land at the 2005 valuation date was based on a rental analysis of a substantial number of specific leasing transactions for Sydney CBD buildings where binding leases had been entered into. I consider that this assessment is reliable. I adopt it. I have earlier held that the rental value of a hypothetical new, modern building should be assessed as at the valuation date and not years in the future.

41 In support of his increased rental for a new building from 2005 to 2006, Mr Hill provided in his report a table of property indicators for the Sydney CBD, which showed rental increases for A grade buildings between 2005 and 2006. However, Mr Hill's rental analysis referred to in the previous paragraph does not indicate any such increase and I consider that analysis to be a preferable guide because of its particularity. On balance, I am of the opinion that the same rental value of $475/m2 should be adopted for both valuation dates.

Moneybox 42 In his report Mr Hill adopted a rental value as at the 2005 valuation date of $425/m2 net effective as the average rental value of a hypothetical Moneybox on the Land, that is, subject to the heritage restrictions but in new, pristine condition. I have earlier rejected his new, pristine condition assumption and have held that the Moneybox should be valued in its actual condition. During the hearing, Mr Hill produced an analysis of net effective rent for each floor of the Moneybox in its actual condition, which yielded a net effective rent average of $340/m2 for 2005 and $358/m2 for 2006. However, it is not supported by the evidence of comparable lettings.

43 By comparison, Mr Dempsey assessed the net rental return for the Moneybox in its actual condition at $376/m2 net face rental, which converts to $300/m2 net effective rental. This is reliable because it was based on evidence of comparable lettings. I adopt it. His net face rental figure was derived from an analysis of actual net face rentals from four heritage office buildings in the Sydney CBD:

341 George St $336 39 Hunter St $361 66 Hunter St $335 53 Martin Pl $385 Mr Dempsey's building efficiency adjustment 44 The difference in building design efficiency between a new modern building and the Moneybox is 10.73 percent (being the percentage reduction from 87 percent for the former and 77.66 percent for the Moneybox). Mr Dempsey made an adjustment deduction of 10.73 percent from the s 6A(1) land value to allow for the Moneybox's lower design efficiency.

45 That deduction would be appropriate if one started with the s 6A(1) land value rate based on FSA. However, if the s 6A(1) dollar rate/m2 of NLA ($2,155) is adopted as the starting point, Mr Hill considered that this downward adjustment of 10.73 percent should not be made. Mr Dempsey disagreed. In my opinion, on consideration, Mr Hill is correct. If one starts with the NLA basis, there is no reason to adjust further for building efficiency. The NLA already has building efficiency factored in. If, as I propose to do, the s 6A(1) rate of $2,155/m2 of NLA for 2005 and $2,200/m2 of NLA for 2006 is multiplied by the NLA of the Moneybox of 24,530.3 m2, the actual lettable area of the Moneybox is valued.

Mr Hill's adjustment for differing lettable areas of Moneybox 46 Mr Hill in his written report made a further adjustment for the s 14G assumption that the only improvements that may be made on the Land are those actually present on it at the valuation date. He identified lettable areas of the Moneybox which would not attract the same commercial rentals as other parts of the Moneybox due to s 14G heritage restrictions, by applying various discounts to various parts of the Moneybox. This adjustment reduced the s 6A(1) rate of $2,155/m2 NLA to $1935/m2 for 2005 and to $2,029/m2 for 2006. However, Mr Hill conceded during the hearing that if each part of the building is rental valued and therefore account is taken of the heritage restrictions (as he advocated and I accept), then this adjustment should not be made. In light of that evidence, which was uncontested, I propose to disregard this adjustment.

Conclusion 47 I acknowledge the assistance of Acting Commissioner Miller. 48 For the above reasons, in my opinion the land value under s 14G at 1 July 2005 was as follows:

s 6A(1) land value $2,155/m 2 of NLA Less rental differential 36.84% $1,361.10/m 2 of NLA x NLA of Moneybox 24,530.3 m 2 $33,388,191 Plus s 4(1)(d1) land improvements $2,175,550 $35,563,741 Say $35,563,000

49 In my opinion, the land value under s 14G at 1 July 2006 was as follows:

s 6A(1) land value $2,200/m 2 of NLA Less rental differential 36.84% $1,389.52 m 2 of NLA x NLA of Moneybox 24,530.3 m 2 $34,085,342 Plus s 4(1)(d1) land improvements $2,175,550 $36,260,892 Say $36,260,000 50 The orders of the Court will be as follows:

(1) The appeals are allowed. (2) The land value in accordance with s 14G of the Valuation of Land Act 1916 is determined as $35,563,000 at 1 July 2005 and $36,260,000 at 1 July 2006. (3) The exhibits may be returned.

17/11/2009 - At [34] delete "Plans of 1996 and" and substitute "Plan 1996 and the Sydney Local Environmental Plan" - Paragraph(s) 34

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