CORP CITY OF ADELAIDE v CITY OF PT ADEL ENFIELD No. SCGRG-99-1093 [2000] SASC 271

Supreme Court of SA|2000-08-14|Before: Bleby J

Judgment No. [2000] SASC 271

CORPORATION OF THE CITY OF ADELAIDE v CITY OF PORT ADELAIDE ENFIELD

2 The land in question covers some 94.2 hectares. It is owned by the appellant, another local government authority in South Australia. However, its status in these proceedings is simply that of a landowner.

3 The WWMC is a major centre for waste disposal in the Adelaide metropolitan area. It is located at Wingfield, a suburb north-west of Adelaide, within the respondent's council boundaries. It is a landfill facility, where domestic and industrial wastes both from the appellant's council area and from other council areas, and from various industries, are deposited and covered with soil.

4 On 13 July 1999 the respondent adopted a rateable value of $18,000,000 for the land on which the WWMC is situated. The valuation had been carried out by Mr Alex Smithson, a valuer engaged by the respondent. As a result, the amount payable by the appellant as rates for the land for the financial year ending 30 June 2000 was $148,350.60.

5 The rateable value as assessed for the 1999-2000 financial year represented a marked departure from the rateable value assessed by the respondent in the preceding few years. The rateable values for the preceding three years were as follows:

6 The Valuer-General has fixed the statutory valuation for the land at $3,255,000 for the site value and $6,000,000 for the capital value.

7 By virtue of s 170(1) of the Local Government Act 1934, the value of the land for rating purposes was its capital value. Section 5 of the Local Government Act defined this as meaning the capital value as defined in the Valuation of Land Act 1971. In that Act "capital value" is defined as follows:

"'capital value' of land means the capital amount that an unencumbered estate of fee simple in the land might reasonably be expected to realise upon sale, but if the value of the land has been enhanced by trees planted on the land (other than commercial plantations), or trees preserved on the land for the purpose of shelter or ornament, the capital value must be determined as if the value of the land had not been so enhanced"

8 It was common ground that the land was originally leased for a number of years by the appellant from the Commonwealth of Australia. The last such lease was executed on 3 April 1986 for a period of ten years commencing on 1 July 1984. The appellant purchased the land from the Commonwealth on 15 September 1986.

9 At all material times the appellant has operated the WWMC. It appears to have been operated by private contractors from 1974 to 1987, but since then has been operated directly by the appellant.

10 The land is subject to the following encumbrances:

1. Easement to the Pipelines Authority of South Australia (now known as EPIC Energy) for the purposes of a buried high pressure gas pipeline;

2. The benefit of an easement over adjoining land on the northern boundary of the subject land; and

3. Registered lease number 7894368 to EDL Operations (Wingfield) Pty Ltd ("EDL") from 9 October 1994 to 3 April 2016. The lease relates to portion of the subject land described in a GRO plan noted on the title. The lease is subject to a registered memorandum of mortgage to a Australia and New Zealand Banking Group Ltd.

11 Although it was not the subject of any formal agreed facts it was asserted in at least one of the valuations, and is therefore taken to have been admitted (Rule 77.1 Land and Valuation Rules and Rule 54.02 Supreme Court Rules), that on the leased portion of the land EDL operates an electricity generating station powered by methane gas collected from the subject land and from other waste depots. The methane is collected by EDL from the subject land pursuant to a gas recovery agreement between EDL and the appellant. It is collected through a series of wells from which pipes feed the gas to the electricity generating station. Further GRO plans noted on the title relate to the gas collection system used by EDL for the purpose of its power generation in accordance with the terms of the agreement. A licence fee, dependent in part on revenue received by EDL for electricity generated on the site, is payable by EDL to the appellant.

12 By virtue of s 5 of the Local Government Act 1934, "land" includes all buildings and structures on the land and all other improvements to the land. Rates may be assessed against any piece or section of the land subject to separate ownership or occupation (s 168(5) Local Government Act 1934). An owner of land is the owner of the fee simple and includes the holder of a leasehold estate, but only if the lessee is not in occupation of the land (s 5). An occupier is a person who, either jointly or alone, has possession of land to the substantial exclusion of others (s 5). Finally, a rate must be based on the value of the land subject to the rate (s 169(1)).

13 It was no doubt because EDL is a lessee in occupation of the leased part of the land that the land to be rated, and hence to be valued, excluded the land leased by EDL and the improvements erected on that portion of the land.

14 The landfill operation is conducted by the appellant. It collects all tipping charges. It employs a site supervisor and gatehouse operator. Contractors provide machinery, and their operators, including one or two bulldozers, a landfill compactor and water cart. The contractor also provides a traffic director and a labourer and any additional staff who may be required. The personnel on site are under the direction of the site supervisor employed by the appellant.

15 Improvements on the land include secure boundary fencing, three transportable style gatehouse buildings at the entrance to the site, a weighbridge and associated concrete paved entrance ramps, a small concrete amenities building, a transportable building used as the site manager's office and one other transportable lunchroom owned by the contractor. There is one further transportable building which serves as an education centre. There are associated car-parking areas and a steel-framed plant storage shed and workshop. There is a series of roadways throughout the landfill area which provide all-weather access to the disposal areas. There is also an extensive network of collection wells and piping associated with the landfill gas recovery system owned by EDL.

16 None of the improvements feature separately in any of the valuations, so it is not necessary to consider them further. However, it will be necessary to refer to the gas collection system in another context.

17 Following the enactment of the Waste Management Act 1987, the appellant was granted a licence to operate the WWMC in accordance with the provisions of that Act. That Act was repealed as from 1 May 1995 and was replaced by the Environment Protection Act 1993 ("the EP Act").

18 By virtue of the provisions of s 36 of the EP Act, a person must not undertake a prescribed activity of environmental significance except as authorised by environmental authorisation in the form of a licence under Part 6 of that Act. Prescribed activities of environmental significance are defined in Schedule 1 and include (Item 3(3)) "the conduct of a depot for the reception, storage, treatment or disposal of waste".

19 Because the appellant held a licence under the repealed Act, clause 5(1) of Schedule 2 of the EP Act required that the authority grant a licence to the appellant to carry on the activities lawfully carried on by it immediately before the commencement of the Act, without the usual notice provisions required by Part 6. The licence so granted was nevertheless a licence for the purposes of Part 6 of the EP Act. By s 49 of the EP Act it is a licence which can be transferred to a suitable person approved by the Environment Protection Authority. A licence may devolve to a person's executor on his or her death, for a period of six months (s 50), during which it can be transferred to an approved suitable person. The licence is subject to possible suspension, cancellation and surrender in accordance with the provisions of Division 6 of Part 6 of the EP Act.

20 It is clear that a licence under the EP Act is personal to the holder, and that there has never been any requirement that the holder of the licence under that Act or its predecessor be the owner of the fee simple of or have any interest in the land on which the activity of a waste depot is carried out. There is nothing in the legislation to suggest that a licence runs with any specified interest in the land. The licensee may be the owner of the fee simple or may be some other person.

21 For some time the appellant had been in dispute with the respondent as to the ultimate permitted height of the landfill deposited on the land. The appellant intended to continue the landfill to a height of 40 metres. The respondent had purported to restrict it to 15 metres. That had resulted in litigation in this Court. Parliament intervened, and on 1 April 1999 the Wingfield Waste Depot Closure Act 1999 ("the Closure Act") was assented to. It came into operation on 6 May 1999. Section 6 of the Closure Act provides that no licence is to be granted, renewed or varied under the EP Act so as to authorise the use, after 31 December 2000, of the WWMC as a depot for the reception or disposal of waste, unless the operator of the WWMC has prepared, and the Minister has adopted, before the first anniversary of the commencement of the Act, a Landfill Environmental Management Plan in relation to the WWMC. If that occurs, the Environment Protection Authority must, on application by the operator, grant or renew a licence authorising the use of the WWMC as a depot for the reception and disposal of waste, but the licence must not authorise the use after 31 December 2004 of the WWMC as a depot for the reception (except for recycling or waste transfer purposes) or disposal of waste.

22 The Closure Act also requires that the Landfill Environmental Management Plan must restrict the height of the solid waste landfill (including any capping material covering it) so that, after subsidence, it does not exceed 27 metres (Australian Height Datum). The Act provides for a timetable for the preparation of guidelines by the Environment Protection Authority for the Landfill Environment Management Plan, and for public consultation in relation to the plan submitted, response by the operator and an opportunity to amend the plan before formal adoption by the Minister.

23 The WWMC therefore has a limited life as a depot for the reception and disposal of waste. In accordance with the requirements of the Closure Act, the appellant has prepared a Landfill Environmental Management Plan, and the time for public comment had expired shortly before the hearing of this appeal. Thus, as at 13 July 1999 (the date of the valuation the subject of this appeal) the Closure Act had been passed but there was no certainty that the use of the land as a depot for the reception and disposal of waste would continue after 31 December 2000. However, there was a prospect that it would continue until 31 December 2004 if, within the required time, the Minister were to approve a Landfill Environmental Management Plan. The likely date of closure of the WWMC, as will be seen, has a significant effect on the value of the land.

24 None of the valuers engaged to value the land attempted to do so by way of an assessment of what might be said to be comparable sales of land used for similar purposes. There were no such sales which could be considered because of the unique nature of this facility and the influence upon the valuation of the Closure Act.

25 Mr Smithson, the valuer engaged by the respondent, considered that the appropriate method of valuation of the capital value of the land for rating purposes was on the basis of a discounted cash flow to the appellant as operator, assuming continued filling of the available air space until closure, and thereafter, use of the site for passive recreation, with portions used for recycling and possibly also as a waste transfer station. He assumed certain filling rates for the life of the depot to 31 December 2004 and estimated dumping charges per tonne for various types of fill. He took into account the likely operating, rehabilitation and post-closure monitoring costs. By that method he was able to calculate likely cash flows to the appellant for the remainder of the project which he capitalised at a discount rate to reflect the risk inherent in the cash flow. He therefore presumed that a purchaser would be buying the property as a cash flow proposition, and that the purchaser of the land would also acquire the licence.

26 By this method Mr Smithson's initial valuation was $18,000,000. It was on this basis that the valuation adopted by the respondent was arrived at.

27 By a subsequent valuation report made in contemplation of this appeal Mr Smithson revised his valuation, by the same method, to $12,000,000. In fairness to him, the substantial reduction came about because various assumptions which he had made initially, including assumptions as to fill rates, available air space, specific income, expenditure and future monitoring costs could only be estimated by him. It was only when he was provided with actual figures that he was able to revise his valuation accordingly.

28 Ms Andrea Carolan, a valuer instructed by the appellant also performed a discounted cash flow method of valuation on a similar basis. Her opinion, based on that method was that the capital value of the land was $7,500,000, although this was after checking her results by analysing sales in other places, making adjustments for residual life and other factors and calculating an amount per cubic metre of remaining air space.

29 However, at the commencement of the hearing of the appeal, the valuers having conferred and having been supplied with further information, they were agreed that if the discounted cash flow method of valuation was correct, the value of the land at the relevant time was $11,000,000.

30 The appellant had also engaged Mr Barry F Maloney to prepare a valuation. His method of valuation was somewhat different. He placed emphasis on the fact that the capital value, as defined in Valuation of Land Act 1971, was to be related to the unencumbered estate of fee simple in the land, and that the interest of the registered proprietor was separate and distinct from the party that was carrying out the landfill operations on the land. Although in this case those two interests were combined, he was concerned only to value the interest of the registered proprietor and not that of the notional operator. He accepted the highest and best use of the land was for the reception and disposal of waste, but that in addition to any residual value that the land might have, the value to the owner of an unencumbered estate in fee simple was represented by the present capital value of the income stream able to be obtained by the registered proprietor in its capacity as a landlord of the landfill operator tenant. That produced a rather different (and lower) result than that arrived at by Mr Smithson and Ms Carolan. His initial valuation was $2,530,000, but by the time of the hearing of the appeal he had adjusted this in the light of further information to $3,815,000.

31 Mr Smithson had also performed a valuation on the same basis, resulting in a figure of $8,000,000 which, by the time of the hearing, after making some further adjustments, became $6,800,000.

32 Both valuers had used the same primary data, and the variation between their final figures on this method of valuation was narrowed to two points of difference only. Both were prepared to assume that the licence would be extended to 31 December 2004. Both accepted that the net gate price over that period would be $11,866,000 per annum. The first point of difference was that Mr Maloney considered that an appropriate royalty payable to a notional landlord was 11%, or $1,305,206 per annum. Mr Smithson, on the other hand, considered that an appropriate royalty was 14%, which he rounded to a total royalty of $1,672,000.

33 The second point of difference related to the appropriate capitalisation rate. Mr Maloney used a rate of 30%, resulting in a net present value (based on his assessment of the royalty) of $3,314,707. To that was to be added the present value of the residual interest in the land of $500,000, resulting in his valuation of $3,815,000. Mr Smithson, on the other hand, considered that the appropriate capitalisation discount rate on his annual royalty figure should be 14% resulting in a net present value of $6,308,823, to which must be added the agreed residual value of $500,000, resulting in his rounded figure of $6,800,000.

34 The issues for determination may therefore be summarised as follows:

1. Is the discounted cash flow method as I have described it the appropriate method to use? If so, the value is agreed at $11,000,000.

2. If the answer to question 1 is "No", and the royalty method is the correct method to use:

(a) Is the correct royalty 11% (Maloney) or 14% (Smithson) of the net gate price?

(b) Is the correct capitalisation rate 30% (Maloney) or 14% (Smithson)?

35 I should add that whilst Ms Carolan's valuation was placed before me, and whilst she agreed with the valuation of $11,000,000 based on the discounted cash flow method, she was not called to express any opinion as to the appropriate method, and I am called upon to resolve these three issues based on the competing opinions of Messrs Maloney and Smithson.

36 In the course of his opening for the respondent, Mr Besanko QC indicated that, in addition to calling Mr Smithson, it was possible that he might call one other witness, Mr Hocking, another valuer, but he wished to reserve his position until he had seen what was put to Mr Smithson in cross-examination.

37 At the conclusion of Mr Smithson's evidence Mr Besanko sought to call Mr Hocking to which Mr Hayes QC, for the appellant, objected.

38 Mr Besanko had not opened on Mr Hocking's evidence, but he then said that it was proposed that Mr Hocking should address each of the three issues in the case. He would support Mr Smithson's discounted cash flow method of determining the capital value. It was also proposed that he should give evidence as to the correct percentage of gate charges and that he would consider 14% to be the appropriate rate. Finally, he would give evidence that the appropriate capitalisation rate in the circumstances was 13.5%.

39 No previous report had been obtained from Mr Hocking as an expert. I was informed that a single page sheet had been provided on the previous day (the first day of the hearing of the appeal) to counsel for the appellant which provided a summary of what Mr Hocking's evidence would address.

40 It was never suggested during any of the directions hearings in preparation for the appeal that the respondent would be relying on any expert other than Mr Smithson. Orders for the delivery of valuation reports and formulation of a statement of agreed facts and issues in dispute proceeded on that footing.

41 Rule 5 of the Land and Valuation Rules 1978 provides, in effect, that the Supreme Court Rules and the procedure and practice of the Supreme Court will apply to all Land and Valuation Division matters so far as any relevant statutory provisions and the Land and Valuation Rules themselves do not make provision. By virtue of that rule, Rule 38.01 of the Supreme Court Rules applies. Sub-rules (1) and (2) provide for the delivery of expert reports in a party's possession or power. It was not suggested that Mr Hocking had provided any written report. The remainder of the rule, so far as is relevant, provided (sub-rule (3) has since been amended in an irrelevant respect):

"(3) A party shall obtain all expert reports which the party wishes to obtain for the purposes of the action and comply with Sub-Rules (1) and (2) above in respect of all such reports no later than 21 days before the date fixed by the Court or by the Rules for the Pre-Trial Conference, provided that the party may obtain supplementary reports from experts from whom previous reports have been obtained which are confined to matters upon which a report could not reasonably have been obtained within that time.

(7) Other than with the leave of the Court, no party is to adduce expert evidence at a trial unless:

(iii) The following matters are set out in the report or reports delivered or disclosed in accordance with this Rule, or in particulars delivered in accordance with subrule (8):

(8) When the substance of the expert's evidence or any of the other matters referred to in Sub-Rule (7) is or are not fully set out in the report or reports delivered or disclosed under this Rule, particulars in writing (which may be furnished by letter from a party or the solicitor for that party) setting out those matters, or which when read together with any report or reports which have previously been disclosed, adequately canvass those matters, shall be delivered to all parties no later than the date upon which the report, or if more than one report, the last report, must be delivered pursuant to this Rule."

42 It follows from sub-rule (7) that neither party could lead additional expert evidence without leave of the Court. I refused leave to the respondent to call Mr Hocking for the reasons that follow.

43 Rule 38 sets out a scheme which has a number of obvious purposes. Principal among those is the timely delivery of expert reports, full and complete disclosure to each expert and to each party of the reports supplied to the other and, where there are no reports or where additional matters form part of the expert's evidence, to ensure disclosure of the matters likely to be the subject of an expert's evidence.

44 The need for such a regime in contemporary litigation is obvious. It is designed to ensure that all matters of expert opinion are clearly identified, that no-one is caught by surprise, and most importantly, that there can be full and frank exchanges of experts' opinions and clear identification of and proper consideration given to the factual bases upon which the opinions are formed. Particularly is this so under the Land and Valuation Rules, where the effect of Rule 77.1 is that the delivery of a valuation opinion has the effect of a notice to admit all objective facts (but not the opinions) contained in the valuation. Those facts will be deemed to be admitted unless an answering notice is filed within 14 days (Rule 54.02).

45 None of this has occurred in respect of Mr Hocking. It was not as though the subject matter of his evidence had arisen unexpectedly or late in the case or in its preparation for trial. No adequate reasons were advanced why, in the case of Mr Hocking, the requirements of the Rules had not been observed or why, otherwise, leave to call him should be given.

46 It was argued that Mr Hocking had been approached by both valuers for factual information concerning sales, ownership and other relevant material of a factual nature in the course of forming their opinions. He was therefore not a stranger to either side of the case. The short answer to that submission is that it is one thing for a valuer to make any number of factual inquiries in the course of forming an expert opinion as to the capital value of land. It is quite another thing for the person so consulted on factual matters to be asked himself to express an opinion on the three issues which govern the outcome of the case, even if qualified to do so.

47 The very course of the case might have been quite different if Mr Hocking had provided a timely expert's report, even if only on the discrete issues, without undertaking a full valuation. He would have been directed to confer with the other valuers. A conference of valuers was ordered in this case on 4 November 1999. That might or might not have caused one or more of them (including Mr Hocking) to modify their views. More importantly, however, the reasoning behind Mr Hocking's conclusions on the issues in question and the justification for the opinions he holds have been concealed from other experts who have been engaged to advise. The expert who was called by the appellant and one who was not, but who might have been, are now effectively denied an opportunity either to take his views into account or to express reasons why they might disagree with his opinion. Furthermore, the appellant's counsel would have been denied the opportunity, without a substantial adjournment, of obtaining adequate instructions to be able to cross-examine Mr Hocking.

48 It is not sufficient to say that the nature of the issues was well known, and that there could be no real prejudice. One could presume that Mr Hocking was to be called for a reason. The appellant was entitled to know in advance the basis on which he sought to justify his opinions. One cannot assume that that basis will necessarily coincide with the reasons of Mr Smithson merely because some of Mr Smithson's figures are the same as his.

49 The Rules of Court have long been fashioned to avoid trial by ambush. Litigants, their advisers and the experts whom they engage must also realise, so far as a professional expert is concerned, that the Rules have also been fashioned upon the footing that the expert is engaged to assist the court. The expert is not engaged to take the side of the party who happens to retain the expert. To allow the calling of an additional expert without warning, in the circumstances of this case, when the only apparent purpose could be as a very late bolster to the case of one party, is not only contrary to the letter of the Rules, but erodes their clear intent in a number of important respects.

50 It is the capital amount that an unencumbered estate of fee simple in the land might reasonably be expected to realise upon sale that is to be assessed. It is now trite, as Isaacs J said in Spencer v The Commonwealth [1907] HCA 82; (1907) 5 CLR 418 at 440 - 441, that:

"[T]he all important fact [on the date of valuation] is the opinion regarding the fair price of the land, which a hypothetical prudent purchaser would entertain, if he desired to purchase it for the most advantageous purpose for which it was adapted.... To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property."

51 See also Turner v Minister of Public Instruction [1956] HCA 7; (1956) 95 CLR 245 per Dixon CJ at 269.

52 Because of the lack of any comparable sales, the value of that capital amount, in this case, is to be assessed by a capitalization of the income that the land is capable of generating for the foreseeable future. There was effectively no dispute about that approach. Mr Smithson related that capitalization to the net income to be derived from the conduct of the business on the land, or the profits expected to be earned by the appellant in conducting the waste disposal undertaking. Mr Maloney, on the other hand, related the capitalization to the royalties or lease payments that a hypothetical purchaser would expect to earn from a tenant or licensee carrying on the same business.

53 In my opinion, one must look at the income that the land is capable of generating as an investment. One is not concerned with the combined income from that investment as well as from conducting the landfill operation. That activity involves personal exertion in the deployment of management, the promotion and the other skills necessary in attracting customers and in physically managing the landfill operation. The hypothetical purchaser is purchasing an unencumbered estate in fee simple in the land. That purchaser is not purchasing a business.

54 The value of what the hypothetical purchaser is purchasing reflects the potential or actual opportunity for someone to carry on the business of waste disposal. To that extent the nature of that business, which is the highest and best use of the land, is relevant.

55 In determining what will be paid for the land, the potential purchaser will have regard to the ability to be able to use the land as a waste disposal facility, and the income that that activity will generate for a landowner. But the asset the potential purchaser is buying is but one asset, albeit a substantial one, capable of being employed in the business. By itself, and without the application of substantial skill and labour and the employment of additional capital equipment, there can be no business and no income. What the hypothetical purchaser is purchasing is the ability to earn an income from that asset (the land), without having to engage in personal exertion to run a business.

56 Someone - it may be the owner or it may be a lessee or licensee - is also entitled to a reasonable return for the skills employed in the running of the business which generates the income. The right to carry on that business activity is, in itself, a valuable right. There is nothing in the definition of "capital value" in the Valuation of Land Act which requires the inclusion of a figure representing the capitalisation of the profit that such a person may receive on that account. Those profits will be derived after paying for the expenses of running the business, including rent or a licence fee for the use of the land.

57 One may value a commercial building based on the rental income it will produce to a landlord, but not on the income or cash flow generated by the occupant in carrying on a business in the building. That is not to say that the capital value of the building may not in some cases be governed by the nature of the tenant, the profitability of the tenant's business, or even the turnover of the tenant or licensee. Many leases or licences to occupy will have the amount of rent or licence fees payable to the owner calculated in whole or in part on the revenue generated by the tenant or licensee. Modern shopping centre leases commonly follow such a pattern. Quarrying and mining royalties are another striking example. When rent or licence fees are determined by such activities, that factor adds a degree of uncertainty to the calculation of the income which the landowner is likely to receive, and may well affect the valuer's assessment of the discount factor to be applied to a particular projected income figure. Generally speaking, the higher is the level of projection related to a form of business activity, the greater will be the risk factor in achieving that level. On the other hand, a fixed rent paid by a tenant of substance may well have applied to it a much lower discount factor.

58 Although it does not figure significantly in the calculation of the income of the appellant, there is, on this land, another enterprise carried on by EDL from which the appellant, as owner, derives royalties. It will continue to derive such royalties after closure of the WWMC. Those royalties relate to the collection and reticulation of methane gas. I exclude from consideration the activity of generating electricity on the leased land. Neither valuer attempted, properly in my view, to include in the capital value of the land the value to EDL of the gas collected, or the value of the business of gas recovery carried out by EDL on the land. However, it would be proper to take into account in valuing the land the royalty derived by the owner from that activity. I can only assume that that was not done in this case because of its relative insignificance. But the existence of that commercial activity illustrates the point that, in valuing the land, one is not required to value the business or businesses carried out on it, even though, as in this case, the principal business is carried on by the owner.

59 In this case there is nothing to prevent the sale of the fee simple of the land to a purchaser without reference to the Environment Protection Authority. Such a sale would not jeopardise the licence to undertake the waste disposal activity unless the sale prevents further waste dumping activity on the land. Similarly, the licence held by the appellant can be transferred to another without the sale of the land.

60 A number of instances were given in evidence where the activity of waste disposal is carried on by an entity separate from the landowner. That was done in respect of this land prior to the purchase of the land by the appellant. It is currently done at a number of waste disposal sites in South Australia, although in only a few of such cases was evidence available as to the royalty fee payable to the landowner. Nevertheless, the fact remains that it is a reasonably common practice for the landowners and the waste disposal operators to be separate, if sometimes related, entities.

61 There was evidence given of some sales of waste disposal sites in Victoria which sales may well have been to operators, although the evidence of the identity of the operators was far from certain.

62 The fact is that the legislation governing the activity of waste disposal contemplates the existence to separate land ownership from the ownership of the business carried out on the land. It might be different if the grant of a licence under the EP Act were conditional upon the licensee also being the owner of the estate of fee simple in the land but that is not the case.

63 For these reasons I reject Mr Smithson's basis of valuation calculated on the discounted cash flow expected to be received by the appellant as operator. Although he made the point in evidence that a passive investor would not be prepared to pay as much for the land as an operator would, that begs the question as to what is being sold. If the appellant were to sell the land and the licence, it would obviously attract a higher price than if it sold the land but retained the licence. In this regard I prefer the evidence of Mr Maloney that the correct approach is to value the royalties likely to be received by a hypothetical purchaser and to apply an appropriate discount factor to arrive at the net present capital value of that sum. To that must be added, as both valuers agree, the present residual value of the land once the waste disposal activity ceases.

64 I should add that in my opinion this approach is entirely consistent with that taken by the High Court in Turner v Minister of Public Instruction [1956] HCA 7; (1956) 95 CLR 245. In that case the Court had to assess, for the purpose of compulsory acquisition, the value of unimproved land which was ripe for subdivision and sale in allotments. In valuing the land upon a hypothetical subdivision, there was to be deducted from the gross sale price an amount both for risk of realisation and the amount of profit which a purchaser would expect to make by buying the land as one block and reselling it in subdivision. In refusing an allowance for the subdivider's profit Dixon CJ (at 266) adopted the reasoning of the joint judgment of the Full Court of the Supreme Court of New South Wales (1955) 55 SR (NSW) at 321 as follows:

"'....The subdivider's profit cannot be allowed to the owner because he in fact does not undertake the enterprise, and in our opinion no special damage or special value to the owner is shown in the circumstances of this case. As is pointed out in Pastoral Finance Association Ltd. v. The Minister [1914] UKPC 77; (1914) AC 1083, at 1088, an owner is not entitled to receive compensation for the profits which he expected to make from the use of the land. He is entitled only to receive the value of the land to him, and that value, in the circumstances of this case, can only be ascertained as being what he would have received on selling it to a hypothetical purchaser at the date of resumption. He is not entitled also to receive an estimated profit which he might have made had he undertaken a course of dealing with the land which he did not undertake in fact.' (1955) 55 SR (NSW), at p.321; 72 WN, at p.202."

65 In my opinion the same reasoning is applicable to valuation of land for rating purposes where some profitable activity is carried out on the land. What is to be valued is the land on sale to the hypothetical purchaser, not the capital value of the business carried out on the land. That approach is also consistent with the view taken by Wells J in a slightly different context in Harry v Valuer-General and State of SA (1975) 36 LGRA 319.

66 Neither valuer proceeded on the basis that the income to the landowner should be a fixed rate or rent. Both proceeded upon the footing that the landowner's income should be a royalty related to the net gate price for dumping, namely the total charges levied by the operator less the per tonne EP Act levy. Both valuers acknowledged the paucity of primary evidence on which to make an accurate assessment of the appropriate royalty rate.

67 In his written report dated 7 April 2000, Mr Maloney stated that his investigations had shown that rates in the range of 9% - 14% of the net gate price are sometimes charged. In his oral evidence he said that a range of 9% to 11% had been quoted from a source which he respected in Victoria. He was aware of the rate per tonne paid at three facilities. Hartley, in South Australia, was a small dump where the rate paid was $1.12 per tonne. Garden Island was near the subject land, but about half the size, where the rate was $1.00 per tonne. He was aware of a rate of $2.20 per tonne in Brooklyn, Victoria. Both in his report dated 7 April and in his oral evidence he considered the appropriate rate to be 11%. This was in fact higher than any of the rates paid in South Australia, but he was prepared to accept what he considered to be the upper end of the range because of the economies of scale available on the subject land.

68 Mr Smithson, in his report of 28 February 2000, relying on a Victorian source, expressed the view that rates "may be in the order of up to 14% of gate receipts". He noted the current gate price of $27.50 per tonne and said:

"If a royalty rate of $2.25 per tonne, and an average fill rate of 880,000 tonnes (assuming a compaction ratio of 1:1) were adopted, a royalty of $1,980,000 per annum would be generated. This would represent 13.56% of the current budgetted [sic] gross gate income. In light of the available evidence, current gate prices and other factors, we consider this is a reasonable royalty amount."

69 What was lacking in his report was any justification for the starting point of $2.25 per tonne. In his oral evidence he acknowledged that 14% was an arbitrary figure, but one which seemed to give a reasonable rate of return to an owner, and to preserve a reasonable profit margin to the operator.

70 In the circumstances I adopt, as a guide, the figure of 11% suggested by Mr Maloney. That was at the upper end of the range of the actual figures of which he was aware. While it represents a greater return than the per tonne rate applicable in the two South Australian facilities, there was evidence to suggest that by virtue of its size and its location, the appellant's operation could attract a higher dumping rate until its closure and still remain competitive with more distant facilities which were subject to greater transportation costs. In that respect the higher rate that he proposes has some justification. It is difficult to see any objective justification for the rate of 14%. However, both valuers acknowledged that there was little satisfactory objective evidence on which to fix a rate for this facility. Because there is some lack of certainty associated with the fixing of the rate, if I were to choose the higher rate proposed by Mr Smithson, that might also require a higher discount rate, which would reflect the risk of not being able to achieve that higher level of royalty. The rate I have selected as a guide will therefore have some influence on that capitalisation rate.

71 Both valuers based their calculations on a continuation of the income stream from the WWMC to 31 December 2004, or approximately 5.5 years of further operation from the date of valuation. For the purposes of arriving at the capital value of the land, they were required to capitalise the net income expected to be derived from the WWMC over that period.

72 In an exercise such as this, the appropriate capitalisation rate will need to reflect the level of risk associated with deriving the proposed income when compared with that of a supposedly risk-free investment, such as investment in government bonds. The long term bond rate at the relevant time was 6.15%. The greater the risks associated with the investment, the higher will be the capitalisation rate above 6.15%.

73 There was a wide difference of opinion between the valuers as to the appropriate capitalisation rate in this case.

74 In his report of 26 November 1999, Mr Maloney fixed on what he described as a "conservative" figure of 35%. This acknowledged the risks associated first, with the continued ability of the operator to pay a royalty rate through to the end of the operations. In other words, the gate price might have to be reduced in order to continue to attract customers to a declining operation. Secondly, as at the date of valuation there were risks as to the period for which the royalty rate would be payable, dependent upon the final closure date under the Closure Act. He was later, in evidence, to describe this as a "huge" issue. The third area of risk was associated with the ability to maintain a throughput of materials at the same rate until the end of December 2004 due to the need to accommodate the final form and profile of the landfill. In his report of 7 April 1999 he had modified his opinion, although still reflecting the same reasons, to a capitalisation rate of 30%, a rate which he continued to support during the course of his oral evidence. As I understood his evidence, the biggest single risk factor was the uncertainty, as at 13 July 1999, of the WWMC being able to continue beyond 31 December 2000, with the uncertainties related to the adoption by the Minister of the Landfill Environmental Management Plan and the process of public consultation required before it could be adopted. He considered that there was no certainty that the project would continue to the end of 2004. He added that whenever it was closed, there would be requirements to meet a certain profile before closure in order to avoid erosion and water ponding problems. In his view, the royalty could not be regarded as a secure income stream.

75 Mr Maloney acknowledged that a 30% capitalisation factor was rare in a business with a real estate component, but pointed out that discounted rates associated with large land subdivisions varied between 22% and 30%.

76 In his report dated 28 February 2000 Mr Smithson, in his opinion based on the royalty method of calculation, considered that a rate of 12.5% would be appropriate. He considered that if there was an appropriate management and closure plan submitted, there was little risk that the closure date would be brought forward. It could be reasonably assumed that any prudent owner would ensure that an appropriate management and closure plan is put in place. He considered that current volume and gate price should be able to be maintained, despite opening of future competition during the period. He concluded:

"There is obvious risk, however in the light of the current levels of demand, we consider a purchaser would see the projected cash flow as reasonably secure in comparison to other investment opportunities."

77 By the date of the hearing of the appeal he had increased his suggested rate to 14%, a rate which he sought to justify at the hearing. It must be noted, however, that in his report of 18 June 1999, dealing with the discounted cash flow method, he considered that an appropriate discount rate was 20% "to reflect the risk inherent in the cash flow". In his revised opinion on that method of valuation in his report of 28 February 2000 he continued to use that rate "not(ing) the risks associated with ongoing income stream, including maintaining volume and gate prices until the closure in 2004".

78 In his oral evidence Mr Smithson sought to justify the rate of 14% by repeating that, in his opinion, the risk of closure in December 2000 was reasonably low. Parliament having fixed a maximum height of 27 metres, it was unlikely that the deposit would not rise to that level. He considered that by virtue of the size of the facility, its economies of scale and its market domination it was unlikely that the gate price would diminish. He recognised that what was being capitalised was the royalty only, and suggested that the appellant, if it continued as operator, would be a strong tenant, that risk of default was low, but if there were default there remained the possibility of the owner taking over the licence. He acknowledged some risk that anticipated volumes might not be achieved, but he considered 14% to represent the upper end of the risks in respect of sale of leased properties.

79 I have no hesitation in rejecting Mr Maloney's capitalisation rate. The risk of early closure, whilst it must be allowed for, was, in my opinion, minimal. The WWMC had been shown to be operating very profitably and was likely, if it continued, to do so. It was conveniently placed to receive 55% of the Adelaide metropolitan area's solid waste. There was no suggestion that that proportion was likely to diminish during the life of the centre as a waste disposal centre. The appellant had an overwhelming financial incentive to ensure that the facility was kept open for as long as possible. Such incentive would ensure that it not only obtained the necessary guidelines for the preparation of the Landfill Environmental Management Plan as early as possible, but that it produced a plan likely to cause minimum public controversy, whilst still utilising the maximum permissible height of 27 metres. True it was that there had been public controversy over the centre's future. However, the mainstay of that controversy had been removed by the Closure Act setting the maximum height and the ultimate date of closure. Not even the respondent could object any longer to either of those. In my opinion there was little risk of the project not proceeding, perhaps even with a different operator if necessary, to the limits imposed by the Closure Act, and I think that Mr Maloney was inclined to give far too much weight to the risk of it not proceeding beyond December 2000.

80 In likening this exercise to the subdivision of land and to profit and risk factors applicable in the valuation of broadacre land ripe for subdivision, I consider that Mr Maloney also erred. A moment's reflection will show, and Turner v Minister of Public Instruction [1956] HCA 7; (1956) 95 CLR 245 confirms, that discount factors in such an exercise consist of two major components. One is the developer's expected profit on sale in allotment form. The other is the degree of risk associated with deriving that profit. In this case, the assumed profit or rate of return is given and its maximum period is certain. The capitalisation rate needs only to reflect the risks inherent in deriving that return.

81 I consider that Mr Maloney also erred in failing to take into account the very nature of the income that he considered, and which I agree, should be the subject of capitalisation. He was not being asked to allow for all the risks associated with operating a business. The receipt of the royalty depends only on maintenance of the assumed gate price and the continued supply of waste. It has none of the risks associated with the operation of other aspects of the business, such as would justify an increase in the risk factor if the business itself were being valued.

82 That leaves the other two risks that Mr Maloney identified. There is perhaps some risk that the gate price would not be maintained. I am inclined to agree with Mr Smithson, however, that until closure, the appellant will continue to have a dominant influence on the market by virtue of the size of the WWMC, its economies of scale and its convenient location. The likelihood of its being subject to downward gate price pressure is not great. If anything, the reverse could happen.

83 Mr Smithson also acknowledged that there was some risk that the total expected volume might be achieved, and some allowance must be made for that. However, the relatively low risks associated with the other factors cannot justify a rate of 30% as advocated by Mr Maloney.

84 I turn to Mr Smithson's assessment. I also have some difficulty with his justification for the rate of 14%.

85 In the first place, he too made an error in relating his chosen rate to rates of return on leased properties. Rent will usually be a fixed amount payable regardless of the level of profitability of the tenant's business. In some cases, it may have a fixed component and a variable component if a certain level of turnover of the tenant is achieved. It will seldom, as in this case, be related solely to the turnover of the tenant or licensee. In this case, if the licensee is, for some reason, unable to generate income, the landowner will receive nothing. The landowner's fortunes are tied very closely to the licensee's ability to attract business and to maintain the projected gate price. In that respect, there are many more uncertainties associated with the maintenance of the owner's projected income than there would be in respect of conventionally leased properties.

86 In the second place, it is not insignificant that Mr Smithson considered, for the brief reasons given in his reports, that a rate of 20% was appropriate for the capitalisation of the expected net returns of the owner as an operator. Many of the risks associated with the derivation of that income are identical in each case. There is the same risk of possible early closure. The risk of maintaining the anticipated gate price and the risk of not being able to maintain the existing throughput rate to the end of the operation are the same in both cases. Admittedly, there are added risks borne by the operator which are not necessarily borne by the owner. They are the risks inherent in operating a business and in incurring greater operating costs than anticipated, and the risk of possibly being deprived, for some reason, of the licence under the EP Act. Neither of those risks is borne by the owner. On the other hand, the owner does bear a risk of failing to negotiate the 11% royalty figure. This is perhaps relatively slight, because I have chosen the more conservative figure. Had the royalty rate been determined at 14%, some greater risk might have to be allowed for.

87 All this means that in my opinion Mr Smithson's assessment of 14% is too low, but the rate must be something less than the rate properly applicable to the capitalisation of the operator's expected net profits. Because the value of the land based on the discounted cash flow method was agreed, the appropriate capitalisation rate for that expected income was not the subject of any detailed analysis. In his reports, Mr Smithson used 20%, which resulted in his opinion of the value at that time being $12,000,000. Mr Maloney did not undertake a discounted cash flow valuation. Ms Carolan, who was not called, used a capitalisation rate of 35%, resulting in a valuation of $7.5 million. For reasons which have not been disclosed to me, Mr Smithson and Ms Carolan resolved their differences based on that method and agreed a final figure of $11,000,000. From that I can conclude that the appropriate capitalisation rate for that method of calculation would be not less than 20%. It could be more.

88 I am left in a position where I am not satisfied with the capitalisation rate proposed by either valuer. In Anthony v The Commonwealth (1973) 47 ALJR 83 at 94 Walsh J was faced with a similar dilemma. However, he did not feel constrained to accept one or the other, and exercised his own judgment as to the value of certain water pipelines by way of improvements effected on land the subject of compulsory acquisition. Such an approach was also considered appropriate by Zelling J in this Court in Doherty v Commissioner of Highways (1974) 7 SASR 57 at 83, where he said:

"Judges do not have to accept the valuations of the valuers of either side and frequently arrive at a figure or figures which constitute a modification or modifications of the figures submitted by one or more valuers.... They are guided in coming to their conclusion by the evidence of the valuers together with the other evidence in the case."

89 In the end the determination of the appropriate rate is a matter of judgment, taking into account all the relevant factors in evidence before the Court. Having regard to the various factors I have mentioned, in my judgment the appropriate capitalization rate should be of the order of 18%.

90 Having determined the three issues presented for decision, I am conscious that, at the end of the day, the global figure to be assessed as the value of the land will not necessarily be the precise mathematical result of the figures which I have determined. There is a possibility, I hope remote, that the figures which I have determined may require some adjustments to other figures. I have not attempted to undertake the necessary mathematical calculation myself, but when it is known, there will be a need to fix upon an appropriate global figure as the value of the land. Having published these reasons, I will hear the parties further both as to what the final valuation figure should be and as to the costs of the appeal.

1. All relevant provisions of the Local Government Act 1934 have since been repealed as from 1 January 2000: Local Government (Implementation) Act 1999 s 6

2. See Corporation of the City of Adelaide v City of Salisbury (Unreported, Bleby J, 16 October 1998 Judgment No S6914)

Wingfield Waste Depot Closure Act 1999

Supreme Court Rules 1987

Supreme Court Rules and Land and Valuation Rules 1978

Valuation of Land Act 1971

Waste Management Act 1987

Environment Protection Act 1993

Land and Valuation Rules 1978

Wingfield Waste Depot Closure Act 1999

Supreme Court Rules 1987

Supreme Court Rules and Land and Valuation Rules 1978

Valuation of Land Act 1971

Waste Management Act 1987

Environment Protection Act 1993

Land and Valuation Rules 1978

At a glance

Court

Decision date

Before

Source

Judgment (113 paragraphs)

Parties

Legislation Cited (16)

Cases Cited (5)