Doueihi and Anor v RTA

Land and Environment Court (NSW)|2004-03-05|Before: Cowdroy J

Introduction 1 The applicants appeal against a Determination of Compensation made pursuant to the Land Acquisition (Just Terms Compensation) Act 1991 ("the Just Terms Act"). The applicants are entitled to compensation arising out of the acquisition of land known as No. 134-138 Great Western Highway, Mays Hill also being known as lot 4 in deposited plan 165054 and lot 1 in deposited plan 745175 and being the whole of the land contained in folio identifier 4/165054 and 1/745175 ("the subject land"). 2 The acquisition of the subject land was gazetted on 17 December 2001. Compensation in respect of the market value of the land acquired has been assessed under s 55(a) of the Just Terms Act at $970,000. Disturbance pursuant to s 55(d) of the Just Terms Act has been assessed in the amount of $40,000. 3 The first named applicants, namely Mr and Mrs Doueihi owned the subject land as joint tenants. The second applicant was the owner and operator of a florist business ("the business") which was mostly located on No. 136-138 of the subject land. Erected thereon was a corner shop and associated sheds at the rear. A cottage known as No. 134 Great Western Highway was used for the purpose of accommodation for an employee of the business. 4 Since the commencement of the proceedings, the parties have agreed that the appropriate amount of compensation in respect of two issues. Compensation for No. 134 is agreed at $305,000 and compensation for disturbance is agreed at $40,000. Accordingly the issues remaining are confined to the valuation of the property comprising No.136-138 and the valuation of the business. 5 The central issue in dispute relates to town planning. It is acknowledged that the existing business did not have development consent for its entire operations at the date of acquisition. The resolution of such issue is fundamental to the determination of the applicants' entitlement to compensation for both No. 136-138 and for the business.

Background Facts Site planning history 6 On 24 June 1983, development consent 83/118 was granted by the Council of the Municipality of Holroyd ("the council") to N & J Malkin in respect of No. 136-138 for the purpose of the extensions of the existing shop for the following purpose:- …use of the existing shop to be extended for the sale of take-away foods, including the installation of griddle toaster, pie warmer and a sandwich bar.

The sale and preparation of take-away food is at all times to be confined to premises known as 138 Great Western Highway (corner shop). Shop 136 Great Western Highway is only to be used for the sale of groceries and no other purpose. 7 From 1983 various shop licences were issued by Holroyd Council ("the council") for No. 136 and No. 138. No. 138 appeared to operate as a take away food shop and No. 136 as a small goods take away shop. 8 On 12 September 1988 the council granted consent number 88/293 authorising the use of the existing shops as a milk bar and florist shop. Although such consent was granted "for the use of the existing shops as a milk bar and florist shop" at 134-136 Western Road, Westmead the parties accept that such consent applied to No 136-138. 9 On 12 October 1988 building application 88/1128 ("BA 88/1128") was submitted to council by Mrs Doueihi pursuant to Ordinance 70 of the Local Government Act 1919 described as renovations to house, shop and new garage. The application was accompanied by existing floor plans. Such plans show that No. 138 was used solely for retail purposes, being a fish and chip shop. No. 136 shows a "games room" which in fact was the front room of the existing shop referred to in development consent 83/118. 10 By letter dated 3 November 1988 Mr Doueihi wrote to the council. In his letter he stated his awareness that he was "not entitled to increase the commercial site by more than ten per cent". His letter referred to his need to have a garage in which to park his motor vehicle and delivery van and to install a cool room for the flower business. His letter requested permission to build both the garage and cool room. 11 On 21 December 1988 Mr Doueihi was informed by the council that the garage could be erected but a cool room next to the garage could not be erected without development consent. The building application was amended by deletion of renovations to the house and shop, thereby confining the building application to construction of a garage. On 17 January 1989 the council granted approval to BA 88/1128 for the construction of the garage at the rear of No. 138. 12 In January 1989 Mr Doueihi applied to the council to install a cool room in the area marked "store" in the rear of the shop at No. 138. On 13 January 1989 the council granted consent number 89/23 for "the conversion of an existing storeroom into a coolroom". 13 At the date of acquisition the subject land was zoned 2(a) (Residential "A" Zone) under the provisions of the Holroyd Local Environmental Plan 1991 ("the LEP"). The objectives of such zone are described in the LEP as follows:- Zone No 2 (a) (Residential "A" Zone) 1 Objectives of zone The objectives of this zone are: (a) to provide and maintain the amenity of a predominantly low density living area and to enable sensitive infill of medium density housing styles, (b) to allow people to carry out a reasonable range of activities from their homes while maintaining neighbourhood amenity, (c) to enable development for purposes other than residential only if it is compatible with the character of the living area and has a domestic scale and character, and (d) to restrict development which is of a traffic generating, offensive, hazardous, noisy, intrusive or environmentally inappropriate nature.

Actual use of the premises 14 Mr Ibrahim Doueihi gave oral evidence concerning the use of the building known as No. 136-138 when he and his wife purchased the property. With reference to the area known as "games room" located in No. 136, he said that such room was used for pinball machines with groceries displayed for sale on shelves around the walls. It was not used as a residential room in conjunction with the house on No. 136. The room marked "shop" at No. 138 was used as a fish and chip shop. The room known as "store" within the shop at No. 138 was used for storage of boxes and stores. Mr Doueihi converted that room into a cool room pursuant to consent 89/23 granted to him by the council. 15 When Mr Doueihi commenced his business in 1989, the "games room" was utilised for the display of flowers, toys sold in conjunction with gifts of flowers, arrangements of silk flowers and as a reception area with a desk used for interviews with clients for events such as weddings. It was also used for a milk bar, but such use ceased in 1994. The area described as "shop" on No. 138 was used principally for the sale of flowers. Drinks, chocolates and chips comprised about ten per cent of the business, and stock used for this purpose was located on two shelves. Refrigerators for drinks and ice cream were located in the shop. Cigarettes were also displayed for sale. The business also sold soft toys, cards, wreaths and incidental items typically sold by florist shops. 16 Pursuant to council approval granted to BA 88/1128 Mr Doueihi constructed the approved garage at the rear of No. 136-138, but it was not used for the parking of his vehicles. Instead Mr Doueihi installed a bunching machine in the garage which was used for the purpose of bunching of flowers. The business comprised the retail sale of flowers from the shop at No. 138, and the wholesale supply of bunches of flowers to clients who sold flowers as part of retail operations in various locations in Sydney such as Franklins stores and petrol stations. By arrangement with such clients, unsold bunches of flowers would be collected and returned to the applicants' premises. Bunches would then be dismantled to remove unsaleable flowers, and then re-bunched. Accordingly the bunching machine and the sale of the bunched flowers to wholesale clients comprised an important component of the business. 17 In February 1994 various renovations were carried out inside the buildings. A contractor working as a shopfitter informed Mr Doueihi that if the work was internal, no council permission was required. Salma Doueihi, the daughter of Mr Doueihi testified that she telephoned the council in 1994 to inform them of alterations which the applicants wished to make within No. 136-138. Ms Doueihi was advised that a development application was not required for an internal renovation consisting of the installation of a glass-door display cabinet. However Mr Doueihi acknowledged, as is verified by the town planning experts' agreement, that portions of the buildings on No. 136-138 were used for the business without consent of the council. 18 In 1999 a new bunching machine was acquired. The garage was extended from No. 138 by three or four metres across the rear of No. 134 to accommodate the bunching machine. The construction, for which no council approval was obtained also included the installation of a concrete slab. Mr Doueihi said that he did not seek council consent for such construction because he owned No. 134 and did not believe that it was necessary. 19 The premises at No. 136-138 were vacated on 30 September 2002. A new business operated by the second applicant entitled "Flower City" opened on 1 October 2002 at 1 Franklin Road, Mays Hill in close proximity to the Great Western Highway and to the subject land. The bunching machine was relocated to the new address and the motor vehicles owned by the business were also retained. Agreement was reached between the applicants and the respondent concerning a value of such items and an amount representing that value has been deducted from compensation already paid to the applicants.

Expert evidence 20 Town planners, namely Mr Neustein for the applicants and Mr Rowan for the respondent, prepared a joint statement. Such statement establishes that the commercial use of the garage for flower bunching was an unauthorised use; the use of the residential area of No. 136 for commercial purposes was an unauthorised use; the use of the slab area between the garage and the rear of No. 134 for commercial purposes was an unauthorised use; the erection of the awning and that the slab between the garage and the rear of No. 136 was an unauthorised development. Such experts agreed that existing use rights as defined in s 106 of the Environmental Planning and Assessment Act 1979 ("EP&A Act") had been created in respect of the shop at No. 138, the rear cool room and possibly the toilet of No. 138 which authorised the continued commercial use of such land despite the residential zoning prescribed by the LEP. 21 As to No. 136 Messrs Neustein and Rowan agreed as follows: That the floor area of the shop at No. 136 (30sqm), if used legally as part of the approval for milk bar and flower shop, would add to the area of existing use rights to the extent of about 95 sqm total.

As a consequence, the experts agreed that the maximum floor space which was authorised for commercial use did not exceed 95m 2 . 22 Messrs Neustein and Rowan agreed that there was no limitation contained in the relevant planning instruments prevailing at 1988/99 which limited approvals for extension or change to non-conforming uses to 10% of the gross floor area. A council memorandum dated 25 October 1988 records that a 30% increase in the floor size of the shop would have been unacceptable but another council memorandum 21 December 1988 records that a council officer would have supported the installation of a cool room refrigerator increasing the floor size of the shop by 10% of the floor area. Messrs Neustein and Rowan also agree that the area entitled "games room" indicated on the 1988 drawings had formerly been the subject of grocery/post office use at No. 136 and that such area had not been approved as part of the residence. Planning considerations 23 Officers of the council made two inspections relating to complaints concerning the operation of the business. One complaint in July 1989 related to the placing of flowers on the footpath. The second complaint made in May 2001 related to operating hours. Messrs Neustein and Rowan agreed that the fact a council takes no action against, or does not follow-up, an illegal activity or development does not indicate that the council approves of such illegal activity or development. 24 Mr Neustein referred to several other businesses in the vicinity of the subject land which operate as non-conforming uses and to the premises at 1 Franklin Street, Mays Hill to which the applicants' business was re-located as "Flower City". Such premises had existing use rights for an automotive smash repair business. The applicants applied to the council for a change of use to a florist business and for the development of a cool room on part of the land formerly used as a car park. Consent was granted for such uses. Mr Neustein considered that a florist business was no less intensive a use of the site compared to that of the previous use. 25 Mr Neustein considered that there was a likelihood that council would have granted approval to an expansion of the business conducted at the subject site. His conclusion was based upon the fact that the council had not attempted to restrain the unlawful use of much of No. 136-138; that council officers had attended the premises in response to complaints and had inspected the premises, and that the council tolerated other non-conforming uses in its local government area. 26 Mr Rowan considered that if an application were made to council to expand the existing use the council may have required the applicants to remove the unauthorised buildings and structures. The council may also have sought to restrain the operation of the business on those portions of the land which did not have lawful approval under consent number 88/293. Mr Rowan considered that prior to and at the date of acquisition, an owner of the subject land was at "serious risk" that the council might serve enforcement notices to obtain a cessation of the unauthorised use, and for demolition of the unauthorised structures. Mr Rowan was of the opinion that: …a reduction in the area of retail activity would return a greater part of the building and site to residential use on the sit [sic] as once existed, in line with the objectives of the zone.

Consequence of council inspections 27 The applicants submit that council officers were at all times fully aware of the nature and extent of the florist business being conducted by the applicants at No. 136-138, as evidenced by their inspections following complaints. The respondent submits that the investigation of a complaint does not lead to the conclusion that the council thereby condoned the unlawful operation of the business on the whole of the subject land. Such conclusion could only be made upon various assumptions, including the state of knowledge held by the council officers of the actual consents and conditions applying to the subject land, an appreciation of the extent of the lawful operations thereon, and knowledge of the precise limitations prescribed by the consents. 28 The Court rejects the submissions of the applicants. The fact that officers of the council visited the subject premises on occasion over a period of twelve years in response to various complaints, and may have inspected the premises, does not lead to the conclusion that the council was condoning the use of whole of the premises for the operation of the business. Such conclusion could only be drawn if the inspections were carried out with the knowledge of the non-conforming use.

Whether the council would have approved the unlawful use of the subject land 29 The applicants submit that although much of the business operated in portions of the buildings at No. 136-138 without council approval the Court should find that it was possible the council would have approved of the non-conforming use, had consent been sought. The applicants submit that because council made no objection to the continuation of the unauthorised use there was a chance that the council would have granted consent to the extension and intensification of the florist business on the subject land. The applicants submit that there is no evidence of adverse environmental impact in consequence of the operation of the business on the subject land. Despite it being located within a residential area, a motor car garage was operating its business behind No. 138 and the council had approved the use of the land at 1 Franklin Street for the purpose of the florist business, including the installation of a cool room upon part of a car park used by the former automotive smash repair business. For these reasons, the applicant submits that there was either a 70% chance or at least a 50% chance that the use of the business would have been approved by the council. 30 The respondent relies upon Environmental Planning and Assessment Regulation 2000 especially cl 41, cl 42(2)(b) and cl 43 thereof. It submits that the decision of the of the Court of Appeal in Lemworth Pty Ltd v Liverpool City Council (2001) 53 NSWLR 371 operates to confine the use of the subject land to the "unit" which has the benefit of the existing use. The "unit" in this instance only applies to the area of 95m2 and not the whole of the premises. The respondent submits the applicants would require approval of council to a three fold increase in floor space in the area occupied by the business, and that the council would have no power to grant consent to the operation of such an expanded area. 31 The respondent submits that even if the council did have the power to approve the extension and intensification of the existing use rights of the subject land, it would not have granted consent due to merit considerations required to be considered by s79C of the EP&A Act. Such consideration would include the historical concern shown by council to limit any expansion of the commercial use of the subject land; the objectives of the zone in which the subject land was situated being in conflict with the commercial use; public response to community notification of the current unauthorised use of the subject land and the extent and the intensification of such use. The respondent also submits the fact that the council granted consent to the use of a florist business at 1 Franklin Street is irrelevant since such consent authorised a less intense use than that formerly being conducted on that site. 32 The submission of the applicants requires the Court to speculate upon a chance that council would approve the use of the unauthorised portions of the subject land for the purpose of a florist business. In assessing the highest and best use of land for the purposes of an award of compensation under the Just Terms Act, the Court must assess hypothetical uses however that is an entirely separate matter to making an assessment of a chance that a council might grant consent to an otherwise unlawful use. 33 The fact that other non-conforming uses may exist within the Holroyd local government area does not establish that those uses are necessarily unlawful. Mr Neustein conceded that such uses may have been lawfully conducted on the basis of existing use rights. The fact that the council had taken no steps to restrain the florist business conducted by the applicants does not lead to the inference that council had given tacit development consent for its operation. Additionally the fact that council had authorised the use of 1 Franklin Street for the florist business does not create any inference that it would approve such use on the subject land. 34 In the absence of evidence by the council that it was likely to approve the extent of the applicants' business use, the Court cannot draw the inference upon which the applicants rely. The applicants bear the onus of proof of establishing that, upon the balance of probabilities there was either a 70% chance or a 50% chance or any chance that approval would be granted. The applicants have not discharged the necessary onus to enable the Court to conclude that there was a chance that consent would be granted to the use of the substantially increased portion of the subject land for a florist business.

Alternative basis for conclusion 35 The applicants concede that a substantial proportion of the development and use of the subject land did not have approval from the council at the date of acquisition and that existing use rights existed across a maximum of 95m2 of No. 136-138. However they submit that they are not seeking to obtain any increase in its value caused by its use contrary to law. 36 Whether there was a chance that the council might have approved such extension and intensification of the existing use rights of the subject land is not relevant to the assessment of compensation, which must be determined in accordance with the Just Terms Act. The provisions of that Act require a valuation of the subject land and the business to be made at the date of acquisition. 37 Section 56(1) of the Just Terms Act provides:- (1) In this Act: market value of land at any time means the amount that would have been paid for the land if it had been sold at that time by a willing but not anxious seller to a willing but not anxious buyer, disregarding (for the purpose of determining the amount that would have been paid): (a) any increase or decrease in the value of the land caused by the carrying out of, or the proposal to carry out, the public purpose for which the land was acquired, and (b) any increase in the value of the land caused by the carrying out by the authority of the State, before the land is acquired, of improvements for the public purpose for which the land is to be acquired, and (c) any increase in the value of the land caused by its use in a manner or for a purpose contrary to law.

38 No authority has been referred to which would support the applicants' contentions that they are entitled to compensation upon the basis of a chance that the unauthorised use would be rendered lawful. In its assessment of the market value of the subject land and business the Court is required to disregard any increase "in the value of the land caused by its use in a manner or for a purpose contrary to law". Accordingly the development and use of the subject land which does not have lawful approval cannot be included in the market value of the subject land and business pursuant to s 56(1)(c) of the Just Terms Act.

Property valuation 39 Mr Large and Mr Gray, the property valuation experts agreed that the property value of No. 136-138 when confined to the permitted use, that is, a retail use over 95m2 and a residential use of the remainder, is an amount of $425,000 with a special value of $0. In view of the findings made in respect of the town planning issue, the applicants are limited to a determination in the amount of $425,000 in respect of compensation for the property value of No. 136-138. Valuation of the business 40 Mr Lonergan for the applicants and Mr Kelly for the respondent, the expert valuers of the business provided their opinions as to the value of the business on several bases, including a valuation of the business as it actually operated, including the non-conforming use at the date of acquisition. 41 Mr Lonergan used a capital asset pricing model and determined that a multiple of 3.6 should be applied to the future maintainable earnings of the business ("FME") of one year, which he was instructed to accept as being $200,000. Mr Lonergan then applied a series of "discounts" to account for the risk a purchaser would take that rectification of the unauthorised use would occur. He also applied a "rough and ready" cross check which determined a similar valuation. 42 Mr Kelly used trading statistics to calculate the value of the business. Mr Kelly was of the opinion the value of the FME of one year was $150,000, according to the trading history of the business. Mr Kelly used industry information that suggested purchasers of florists paid no more than the FME of one year to conclude that a multiple of 1 should be applied to the FME of one year to determine the value of the business. 43 As a result of the findings, that for valuation purposes only the lawful use can be considered for the calculation of compensation, it is not necessary for the Court to determine which valuation method should be applied to the valuation of the business as it actually traded at the date of acquisition. 44 Messrs Lonergan and Kelly conferred. They agreed that if the business were to be valued at the date of acquisition as a business conducted upon the authorised portions of the subject land, such valuation is to be confined to a floral retailing business conducted on those portions of No. 136-138 which were authorised for that purpose. 45 Such experts also agreed that the value of the business should comprise the FME of one year and such amount was $86,000. Mr Kelly was of the opinion that the value of the entire business should only comprise the FME of one year, being $86,000.

46 Mr Lonergan agreed that the amount of $86,000 was the appropriate value for that component of the business. However he considered that the net tangible assets ("NTA") of the business should be added to that amount to reflect the true value of its assets. Additionally Mr Lonergan considered that a premium of $16,000 should be added to the value of the business, such sum representing a monetary sum which a purchaser would pay for the prospect of having the benefit of trading for at least six months utilising the non-conforming portion of the subject land. 47 With respect to the premium, the Court does not consider it appropriate to award any sum representing a period during which the business might operate without consent. Such an award would be entirely speculative and the amount of $16,000 being based upon 50% of after tax profit for a six month period is itself speculative. There is no basis to suggest that a willing but not anxious purchaser would pay a premium for the business, knowing that it was being conducted essentially without consent and was liable to be restrained by council forthwith. 48 As at the date of acquisition, the written down value ("WDV") of the plant and equipment was $254,061. This amount included the value of a Mercedes Benz motor vehicle having a WDV of $172,574 and a bunching machine having a WDV of $34,316. Messrs Lonergan and Kelly agree that as at the date of resumption, the WDV of the Mercedes car should be further written down to $90,000. 49 Mr Kelly was of the opinion that most retail florist businesses were acquired for the value of their goodwill and that assets were not, from his experience, included in such sales. He also said that the Mercedes car was excessive and unnecessary for that type of business. Mr Kelly believed that such a vehicle was obtained essentially for the private use of the first named applicants and therefore should not be regarded as comprising an asset of the business. He also considered that the bunching machine was relevant only to the non-conforming use and therefore should not be treated as an asset of the business. Mr Kelly assessed the value of the NTA in the amount of $105,000. The latter assessment did not take into account the value of the stock on hand as at 17 December 2001. Further, it only allowed the value of the remaining assets of the business, including the bunching machine at $15,000. 50 Mr Lonergan considered that any NTA of the business which was not directly related to the lawful operation of the business would comprise surplus assets which could be sold by a purchaser of the business for cash. Accordingly he regarded any surplus assets as properly comprising assets of the business. Mr Lonergan did not agree that no allowance should be made for the value of the Mercedes car, nor of the bunching machine. 51 Mr Lonergan assessed the value of the NTA at $145,000. He was of the opinion that the value of the bunching machine was at least $40,000. It had been imported less than five years previously for the sum of $75,000. 52 For the purpose of the valuation of the business, it does not matter that assets may be surplus to its needs. If the items have been acquired by the business, and have been included in the audited accounts as assets, the Court will treat them accordingly. 53 The Court prefers the opinion of Mr Lonergan concerning the value of the NTA. His assessment takes into account both the value of the stock on hand at the date of acquisition recognises that the bunching machine comprised an asset of the business. 54 It follows that the second applicant's entitlement to compensation for the value of the business operating on the subject land at the date of acquisition is an amount of $231,000 comprising FME of one year of $86,000 and the value of the NTA in the amount of $145,000.

Compensation Entitlement 55 As a result of the findings made above the applicants are entitled to compensation in the sum of $1,001,000. The first named applicants are entitled to be paid $305,000 for No. 134 and $425,000 for No. 136-138 pursuant to s 55(a) of the Just Terms Act. The second applicant is entitled to be paid the sum of $231,000 in respect of the value of the business pursuant to s 55(a) of the Just Terms Act. The applicants are entitled to be paid the sum of $40,000 for disturbance pursuant to s 55(d) of the Just Terms Act.

Costs 56 Costs have not been argued. Accordingly the question of costs is reserved.

ORDER that the respondent pay the applicants compensation pursuant to s 55 the Land Acquisition (Just Terms Compensation) Act 1991 in the amounts of $961,000 for market valuation and $40,000 for disturbance;

ORDER that costs be reserved;
ORDER that the exhibits be returned.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

CITATION : Doueihi and Anor v RTA [2004] NSWLEC 51 FIRST APPLICANTS Ibrahim Doueihi and Mariette Doueihi

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Judgment (17 paragraphs)

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