Commonwealth Custodial Services Ltd v Valuer General

Commonwealth Custodial Services Ltd v Valuer General - [2008] NSWLEC 310 - NSWLEC 2008 case summary — Zoe

[19]

… (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].

[22]

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.

[25]

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.

[36]

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.

[39]

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.

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