Eureka Operations Pty Ltd v Transport for New South Wales - [2021] NSWLEC 41 - NSWLEC 2020 case summary — Zoe

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Eureka Operations Pty Ltd v Transport for New South Wales

[2021] NSWLEC 41

Land and Environment Court (NSW)|2020-12-17|Before: Duggan J

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At a glance

Source facts

Court

Land and Environment Court (NSW)

Decision date

2020-12-17

Before

Duggan J

Source

Original judgment source is linked above.

Judgment (43 paragraphs)

[1]

Nature of proceedings

On 21 June 2019, the Applicant (Eureka) held a leasehold interest in the land known as 131-133 Cobra Street, Dubbo (the Site).
By Acquisition Notice published in the Government Gazette on 21 June 2019, the Respondent compulsorily acquired part of the Site comprising an area of 15.3m2 (the Acquired Land).
Eureka was offered compensation for the acquisition of its interest in the Acquired Land. Eureka has, pursuant to s 66 of the Land Acquisition (Just Terms Compensation) Act 1991 (Just Terms Act) objected to the amount of compensation offered.
Eureka's leasehold interest commenced on 1 December 2003, pursuant to registered dealing AB566973V with VER Custodian Pty Ltd (VER) (formerly Shell Company of Australia Pty Ltd) dated 27 November 2003 (Eureka Lease).

[2]

Facts

The Site is located on the south-eastern corner of the intersection of Cobra and Fitzroy Streets, Dubbo (the Intersection), approximately 1.7km south-east of Dubbo City Centre.
Cobra Street forms part of the Mitchell Highway; heading west via the Great Western Highway, the route provides access to Broken Hill. Fitzroy Street is a local arterial road that provides access between north and south Dubbo.
Prior to the date of acquisition, the Site comprised Lot 12 in DP 229245 and Lot 21 in DP 228851 and had a total land area of 1,518.8m2. The 15.3m2 of land acquired had, prior to acquisition, formed part of Lot 12. After acquisition the residue of the Site comprised an area of land and was contained in Lot 6 DP 1213064 (the Retained Land).

[3]

Public purpose

In very broad terms (and sufficient for the purposes of the determination of the issues in this matter) the parties agreed that the relevant public purpose for which the land was acquired was for the purposes of the Roads Act 1993, specifically for the construction, operation and maintenance of the Fitzroy and Cobra Street (Mitchell Highway) intersection upgrade (the Public Purpose). In order to achieve the Public Purpose intersection upgrade works and works that affected access to the Retained Land were required and will collectively be referred to as the Public Purpose Works.
The Intersection upgrade works comprised: 1. The signalisation of the Intersection with traffic lights; 2. The reconfiguration of traffic lanes within the road reserve; and 3. The provision of extended medians separating the flow of traffic.
This reconfiguration of the Intersection is illustrated in Figure 1. Figure1: Annexure C to the Joint Report of Traffic Engineers Tim Rogers and Ken Hollyoak dated 2 July 2020, folio 145.
In addition, works were to be undertaken to alter the configuration of the pre-acquisition access to the Retained Land in the following manner: 1. The western driveway on Cobra Street was to be removed; 2. The eastern driveway on Cobra Street was to be widened. The Respondent gave an assurance at the hearing of this matter that such a driveway would be permitted to be used for entry and exit and the traffic impact has been assessed on that basis; and 3. The two driveways on Fitzroy Street were to be removed and replaced by a single widened driveway located between the two previously existing driveways. Exiting manoeuvres from this driveway would be restricted to left-turn only; the right-turn exit manoeuvre would not be permitted.
It was agreed that, as a consequence of the Public Purposes Works, vehicles will no longer be able to undertake the following manoeuvres: 1. Exit the Site by turning left onto Cobra Street via the western driveway; 2. Exit the Site by turning right onto Fitzroy Street via the southern driveway; and 3. Enter the Site by turning right from Fitzroy Street via the southern driveway.
It was agreed by the traffic experts that as a consequence of the carrying out of the Public Purpose Works the access arrangements to the Retained Land would be altered with a consequential net decrease of 47.2% of the numbers of vehicles attending the Site prior to the carrying out of the Public Purpose Works.

[6]

Basis of claim for compensation

On or about 31 October 2019, the Valuer-General of New South Wales determined the compensation payable to the Applicant under the Land Acquisition (Just Terms Compensation) Act 1991 for the compulsory acquisition of the Applicant's interest in the Acquired Land as $164,479. The totality of this sum related to disturbance costs pursuant to s 55(d) of the Just Terms Act. It was determined that there was no relevant compensable loss pursuant to any other head of compensation.
It was agreed that the market value of the Eureka Lease relating to the Acquired Land was of a nominal amount pursuant to s 55(a) of the Just Terms Act, the determination of which required the effect on value of the carrying out of the Public Purpose to be disregarded: s 56 Just Terms Act. It was further agreed that by adopting a before and after valuation methodology for Eureka's claim under s 55(f) such exercise would ensure that any such s 55(a) loss would be incorporated into the compensation to the extent necessary.
There was no dispute that the Service Station Use carried out on the Retained Land would be a less profitable enterprise as a consequence of the carrying out of the Public Purpose Works. The dispute relates to whether the agreed impact on that profitability is a compensable loss for the purposes of s 54 of the Just Terms Act.
Eureka contends that the impact of the carrying out of the Public Purpose Works insofar as such works would result in a reduction in custom is compensable either: 1. Pursuant to s 55(a) and (f) of the Just Terms Act as the loss of value of the Eureka Lease pursuant to s 55(f) relating to: any… decrease in the value of any other land of the person at the date of acquisition which adjoins…the acquired land by reason of the carrying out of, or the proposal to carry out, the public purpose for which the land was acquired, requires a determination of the value of the Eureka Lease having regard to the impact on the total profitability of the Service Station Use on the Retained Land; or 2. In the alternative, if the sum of compensation derived from the exercise in (1) above is determined on the basis of an "independent operator" (the rationale dealing with this characterisation is dealt with below) Eureka has a claim for special value of the land pursuant to s 55(b) being the financial value of advantages enjoyed by Eureka relating to the amount of profit it could generate by its use of the parent parcel.
Eureka also claims various additional disturbance amounts.
The Respondent rejects the submissions that the loss of profits is relevantly related to the interest in the land. It contends that, to the extent that there will be a change in the profitability of a Service Station Use, that loss would be wholly encompassed in the market value of the land determined by the profit rent methodology.

[7]

Competing valuation methodologies

The competing positions of the parties relating to this issue turns on the appropriate valuation methodology to be adopted in valuing the leasehold interest of Eureka in the context of the s 55(f) considerations.
It was agreed that the impact of the carrying out of the Public Purpose on the Retained Land was to be undertaken in accordance with the before and after valuation approach. However, there is a fundamental dispute as to what was to comprise the relevant considerations in this exercise.
Eureka contends that due to the nature of its interest and the highest and best use of the land that the appropriate valuation methodology is to determine the value based upon a discounted cashflow approach (DCF). Eureka contends that the capacity to earn the income from the business is so intrinsically related to the occupation of the Site that the market would pay a sum to purchase the Lease over and above a consideration of whether the rent payable under that lease discloses a profit rent. That is, the business return is the appropriate measure of value that the market would use to determine the value of Eureka's Lease when the lease is put to the hypothetical marketplace for its hypothetical sale.
The Respondent contends that such approach is valuing more than the impact on the leasehold interest and therefore, the appropriate approach is one that determines value based upon whether there is a profit rental. This approach requires a determination of three variables: 1. The passing rent; 2. The market rent; and 3. The capitalisation (discount) rate to be applied to the difference (the profit rent).
The determination of the inputs on either a DCF or profit rent methodology depends, in part, on the character of the hypothetical purchaser of the leasehold interest. The three potential characters that may comprise such market are: an operator the subject of an alliance as evidenced by the Alliance Documents; a well-resourced networked operator; or an independent operator.
In the circumstances it is appropriate to determine first the method of valuation to be adopted with respect to Eureka's Lease as, depending upon which valuation method is applied, it will also be necessary to determine different disputes as to the inputs to be applied to a valuation method, which disputes vary depending on the method adopted.

[8]

The Lease

In addition to the Eureka Lease, VER has granted a concurrent lease of the Site to Viva Energy Australia Pty Limited (Viva). No evidence was tendered in these proceedings of the terms of Viva's concurrent lease, notwithstanding, it appears to be common ground that the concurrent lease is not to be taken to diminish Eureka's leasehold interest.
The Eureka Lease provides: 1. A lease term - the precise termination date is in dispute and will be considered separately; 2. The payment of rent calculated in accordance with cl 4, which was nominated in Schedule 1 of the Lease for the first year after commencement and reviewed thereafter in accordance with the formula provided for in that clause; 3. That Eureka has the right to occupy the leased area and to use the fuel equipment, but it has no interest in the fuel equipment: cl 2.1(a)(ii); 4. That Eureka has the quiet enjoyment of the leased area subject to rights of access granted to others under the Lease: cl 2.2; 5. The Eureka Lease may not be terminated other than in accordance with the Alliance Agreement: cl 15; 6. By cl 2.1(a) the lease granted to Eureka was: (i) A lease of the Leased Area for the conduct of the Business, together with the right to control safety and to preserve access through any drive-through area forming part of the Leased Area; (ii) The right to use the Fuel Equipment for the conduct of the Business; and (iii) Provide access to the Shop to [Eureka's] entities and Associates for the purpose of promoting, advertising and displaying offers by any other [Eureka] entities… 1. [REDACTED]; 2. That Eureka must conduct the Business on the days and during the hours notified: cl 3.10; and 3. That Eureka may not assign the lease or part with possession other than in accordance with cl 36.1 of the Alliance Agreement (cls 14 and 16).
As can be observed above the Eureka Lease makes reference to another agreement referred to as the Alliance Agreement which is defined cl 1.1 of the Eureka Lease to mean: 1.1 Alliance Agreement means the agreement of that name between SCOA, Shell Gas, CSA, CMFL and [Eureka] as amended from time to time.
The application, relevance and import of the Alliance Documents as they relate to the subject matter of these proceedings is disputed. For the purposes of the determination of the nature and scope of Eureka's leasehold interest the question arises as to whether it is to be assumed that the nature and scope of that interest is determined by reference to the Alliance Documents; or if recourse can be had to the Alliance Documents to ascertain the nature, scope and term of relevant interest as expressed in the Eureka Lease. The Respondent contends that the Alliance Documents relate to an entirely personal interest which is irrelevant to the determination of compensation relating to the leasehold interest.
To the extent that other aspects of the Alliance Documents may be relevant to other issues in dispute it will be addressed below.

[12]

Mr Lunney's evidence

Mr Lunney is also a real estate valuer with many years of experience in valuing a diverse range of property types and interests. In this case, Mr Lunney acknowledged that he was not a specialist in valuing service stations but that through his practice he has experience in valuing such types of properties himself and by reviewing and analysing valuations undertaken by one of his staff members who does specialise in service station valuation.
Mr Lunney then undertook a "market rental valuation". Such a valuation was undertaken by reference to the actual or projected data relating to: fuel throughput volumes; gross margins on fuel sales; and projected shop sales and typical margins. Mr Lunney deduced the actual figures for these factors from the Eureka financial information provided to him.
Mr Lunney then adopted the approach set out at [68] of his report in chief as: I note that real estate valuers often apply an industry "rule of thumb" in assessing a market rental value in the range of 15%-25% (net of outgoings) of the actual of projected gross profit which could be generated from the service station business".
Mr Lunney then applied his rule of thumb of 20% to determine market rent. In addition, Mr Lunney undertook an analysis of a number of leaseholds of service station businesses which were in fact transacted to verify this "rule of thumb" in Annexure 2 of his report. This analysis related to the granting of a lease by a landlord to a tenant. This analysis was of nine sites. The analysis indicates a relationship between passing rent and the gross profit margin as a percentage. Of these transaction the analysis indicated a range between 16.5% and 21%.
On Mr Lunney's methodology if the actual rent paid (the passing rent) is less than the market rent determined by the rule of thumb that difference will comprise a profit rent. The profit rent is a valuable asset as it represents the amount of rent notionally saved by the lessee in not paying the market rent.

[13]

Mr Firth's evidence

Mr Firth is a forensic accountant specialising in forensic accounting and valuation.
Mr Firth contended that the appropriate value of a leasehold interest in the nature of the Eureka Lease is the present value of the cash flows or earnings that are generated from that interest. The net present value (also known as the DCF method) is the most theoretically sound method of valuing leasehold interest for the reasons he contends at [5.6] of his report that: 5.6.1 An asset (including an interest in land) is worth its future cash flows, discounted to recognise the risk of achieving these cash flows and the time span over which they will be achieved. The net present value/ discounted cash flow methodology ("NPV / DCF") assesses each cash flow of the asset into the future and discounts these cash flows using a discount rate to the present value. The discount rate reflects the risk of the cash flows being generated. 5.6.2 The net present value / discounted cash flow methodology is based on the economic principle of future benefits. It uses the concept of the "time value of money" to determine the valuation. The time value of money concept is that an amount of money available now is worth more than the same amount in the future. The receipt of an amount of money in the future is not certain. Events and circumstances may prevent the cash flow from being generated. Investors seek to be compensated for such risks. Therefore, an amount of money is more valuable now than the same amount received in the future. The NPV / DCF methodology is the addition of each future cash flow discounted to the present value. 5.6.3 The use of the net present value technique for the subject site is the most appropriate methodology as it allows the cash flows / earnings to be valued until the end of the lease term and not in perpetuity.
Mr Firth relied upon the concept of a "trade related property" (TRP) which comprises a property, such as hotels, fuel stations and restaurants, that usually change hands in the marketplace whilst remaining operational. He considered that TRP's were typically valued on the basis of their potential Earnings Before Interest Taxes Depreciation and Amortisation (EBITDA), as adjusted to reflect the trading of a "reasonably efficient operator" and often on the basis of either a DCF methodology or by use of a capitalisation rate applied to the EBITDA. Mr Firth relied on the International Valuation Standards Council - Guide Note 12 (IVSC) for support for his approach, which he considered endorsed his approach to the valuation of the Eureka Lease as a TRP.

[14]

Dr Ferrier's evidence

Dr Ferrier is also a forensic accountant specialising in forensic accounting and valuation.
Dr Ferrier had relied upon the advice of Mr Lunney that to the extent that a property has particular attributes which make it uniquely suitable for a particular kind of business those attributes will be reflected in the market rental for the property. Therefore, the value of a leasehold asset will be high where the property is capable of supporting a profitable business, but that high asset value will be offset by the correspondingly higher liability to pay rent. Therefore, where the rent is a market rent the leasehold interest will be nil.
Where the rent being paid is not market rent but some lesser sum the leasehold interest may have a value as the business will be able to achieve higher profits arising from the lower liability to pay rent. In that case, the leasehold value is the difference (being the profit rent) and that value is attributable wholly to the leasehold interest.
Whilst Dr Ferrier agreed with Mr Firth's statement that: the value of the leasehold interest is the present value of the cash flow earnings that are generated from the leasehold interest, he did so only on the proviso that the identified cash flows or earnings are those solely generated by the leasehold interest and not those generated by other assets such as plant and equipment, goodwill, trademarks etc.
He considered it essential that the value of the leasehold interest not be confused with the value of the business being conducted from a property which is occupied under a leasehold interest. A valuation based upon the net present value of the future cash flow is a valuation of all of the assets and represents the total business value. In the present context, whilst considering the profitability of the business undertaken was the primary determiner of value of the Lease, it was only the concept of profitability derived from an analysis of limited aspects, namely, fuel sales and shop sales and not other aspects such as intangible assets.
It is appropriate for the purposes of the Just Terms Act to use the profit rent methodology for the valuation of the leasehold interest in circumstances where it is necessary to distinguish between: 1. The value of the leasehold interest as an interest in land; and 2. The value of the other assets and liabilities which contribute to the earnings of the business conducted from the leasehold land.
Dr Ferrier did not consider that the concept of valuation of a TRP was relevant in the circumstances of the Just Terms Act. He noted that the IVSC Guidance Note 12 had been withdrawn by the IVSC and a discussion paper was issued to consider whether TRP represented a distinct asset class that represented unique valuation challenges and that in the discussion paper it was stated that "the distinction between valuing a real property interest and a business in occupation of that property was confused in both GN12 and the proposed IVS 232". He, therefore, did not consider it appropriate to value the Eureka Lease as a TRP as it conflated the business value with the value of the real property.

[15]

Eureka's submissions

Eureka submitted that the appropriate method to determine the compensation payable for the acquisition of its leasehold interest is to be undertaken on a before and after basis to take account of the decrease in the value of the adjoining Retained Land by reason of the carrying out of, or the proposal to carry out, the Public Purpose for which the land was acquired: s 55(f) of the Just Terms Act. The before and after approach would permit a consideration of all of the relevant heads of compensation in s 55 of the Just Terms Act.
There was no relevant market evidence for the partial acquisition of a leasehold interest of a Service Station Use and as a consequence the comparable sales method of valuation was not appropriate.
It was appropriate to use an earnings-based methodology for a Service Station Use as: 1. The leasehold interest confers upon Eureka the bundle of rights concerning the land reflected in the "exclusive possession" of the Site. The leasehold interest vests in the lessee the ability to use the Site and make commercial profits on the payment of rent and compliance with the obligations required by the Lease; 2. The nature of the user of the land by Eureka was of a character where the locational and special characteristics of the land had a direct consequence on the profitability of the Service Station Use - it was the inherent features of the land that dictated the profit. The highest and best use of the Site for a Service Station Use is because the land is located on a busy road at an intersection that makes that use the best use. It is not any peculiarity of the business model that renders the use by Eureka particularly profitable, therefore, the profit-making is a feature of the interest in the land and not the business being conducted on that land. Such an approach to the valuation of a leasehold interest was recognised in Roads and Maritime Services v United Petroleum Pty Ltd (2019) 99 NSWLR 279 per Basten JA at [20] (emphasis added): The point of distinction between disturbance and market value may be readily explained, both in relation to land used and operated for commercial purposes by the owner and land the subject of a lease where the lessee uses the land for commercial purposes. Assuming in each case that the actual use is the best economic use available, the market value of the land may be calculated by capitalising annual maintainable earnings at an appropriate discount rate. (This was the exercise undertaken by the valuers in the present case.) Where the land is put to a commercial use by a lessee, "the lessee would be entitled to an amount to represent the value of the lease to him for the balance of the term ... as his share of the full value of the land," as explained by Williams J in Geita Sebea v The Territory of Papua. In that case, the lessee was the government and hence the value of the lease was deducted from the compensation payable by the acquiring authority to the owner. 1. The adoption of such a valuation methodology is orthodox and such has been recognised with respect to uses of this type on leased land that have been referred to as TRP's in valuation guidelines such as the International Standards Council International Valuation Standards (31 January 2020) at [6.20] where it is stated: For some real property interests, the income-generating ability of the property is closely tied to a particular use or business/trading activity (for example, hotels, golf courses, etc). Where a building is suitable for only a particular type of trading activity, the income is often related to the actual or potential cash flows that would accrue to the owner of that building from the trading activity, The use of the property's trading potential to indicate its value is often referred to as the "profits method". The specific term "trade related properties" is defined and adopted in the Royal Institute of Chartered Surveyors RICS Valuation - Global Standards (31 January 2020) (expressed on their face to incorporate the International Valuation Standards). It defines that term as: trade related property any type of real property designed for a particular type of business where the property value reflects the trading potential for that business. And nominates the appropriate valuation of such trade related properties on an earnings-based methodology. 1. The actual operations at the Site was a Coles Express service station/retail store which is a perfect example of a TRP. It is a use that lends itself to particular parcels of land (such as corner sites on intersections) and which, once in place, lends itself exclusively to that use. Any sale of the relevant interest in the land that generates access to the profit-making from that use will need to account for the potential income stream available to that interest-holder.
The narrow nature of the use that is able to be carried out on the Site by virtue of the terms of the Eureka Lease and the defined term "Business" reinforces that the business use is tied to the lease interest in the manner of what is often referred to as a TRP.
Eureka further submits that if there are two equally valid valuation methodologies open to the judicial valuer the methodology that favours the dispossessed owner is to be preferred: Sydney Water Corporation v Caruso (2009) 170 LGERA 298 at [3].

[16]

Respondent's submissions

Attention must be paid to what the Just Terms Act requires to be valued: s 55 Just Terms Act. In this case, the focus is upon s 55(f). This provision does not allow compensation for consequential financial or business losses, it allows compensation only to the extent that the Public Purpose has diminished the value of the lease.
The task that is posed by the Just Terms Act is to determine on a traditional before and after basis and in this case, focussed solely on the differential in value of the leasehold interest. The Orthodox (and correct) approach to be undertaken to assess the market value (if any) of leasehold interest is to consider whether there is any "profit rental". If so, then that would have applied to it the same discount rate as would be applied to all other business related cashflows.
It is common ground that compensation for the actual acquisition of the 15.3m2 from the leasehold interest of Eureka gives rise to nominal compensation both in terms of market value and disturbance. The acquisition itself has no material impact on Eureka's occupation of the Retained Land or its business. This is not a case where business losses may be (or are) claimed under s 55(d), including those identified in s 59(1)(f), because no costs or losses of that kind are the consequence of the acquisition.
It is also common ground that the Public Purpose of the acquisition will adversely affect Eureka's business by virtue of restrictions on vehicular traffic in and out of the Retained Land. However, compensation for any such adverse effect cannot be claimed as disturbance under s 55(d), or at all. All that is compensable is the extent to which the market value of the interest in the Eureka's Lease in the Retained Land has diminished, with reference to s 55(f).
Not all losses that the Applicant may suffer from the acquisition and the Public Purpose will be compensable. However, this proposition is not controversial; losses that are not within any of the express heads of compensation are not compensable as s 55 sets out an exclusive code for determining compensation: Tolson v Roads and Maritime Services (2014) 201 LGERA 367.
Only the diminution in value of the leasehold interest is compensable. Whilst there is expert evidence as to impacts on Eureka's business, it must be borne in mind that the financial effects of those impacts themselves are not compensable, except to the extent that the market value of the lease itself is affected. It is only that effect that is compensable.
This is not a case where there are conflicting, but equally valid, methodologies.
The profit made by (and thus the value of) any business is generated by a number of assets including goodwill and other tangible, physical assets in addition to the lease. The "the economic benefit that the leasehold confers on the Applicant" and "greater opportunities for profit" from the lease are different to "the market value of the lease" and, whilst reduction in them might effect some reduction on that market value, they are not to be directly equated with it. The gross profit methodology used by Mr Firth does not distinguish between the decrease in the value of the Eureka Lease as a consequence of the Public Purpose, and the decrease in the value of those other assets.
That the IVSC might think that valuation of TRPs might be undertaken in the manner in which Mr Firth has done so (and this is not admitted), does not assist the Court. As a matter of construction of s 55(f) the Court is limited to assessing only one asset in the bundle of those that comprise a TRP, namely the leasehold interest. Had the Parliament intended this to include consequential business type losses then it would have given an entitlement to disturbance (ss 55(d) and 59(1)(f)) in respect of impacts of the Public Purpose, but it did not.
The Applicant has failed to make out its case that compensation should be assessed in accordance with Mr Firth's approach, noting that the Applicant bears the onus of proof: Roads and Traffic Authority (NSW) v Perry (2001) 52 NSWLR 222 at [67] per Handley JA with whom Powell and Hodgson JJA agreed.

[17]

Determination of appropriate valuation approach

The entitlement to compensation under the Just Terms Act is derived from s 37 which provides: 37 Right to compensation if land compulsorily acquired An owner of an interest in land which is divested, extinguished or diminished by an acquisition notice is entitled to be paid compensation in accordance with this Part by the authority of the State which acquired the land.
Part 3 of the Just Terms Act then dictates that the amount of compensation is to be determined in accordance with Division 4 which relevantly provides at s 54(1): 54 Entitlement to just compensation (1) The amount of compensation to which a person is entitled under this Part is such amount as, having regard to all relevant matters under this Part, will justly compensate the person for the acquisition of the land.
Section 55 then dictates the only matters to which regard must be had in determining the amount of compensation.
The primary claim for compensation in this case is not concerned with the determination of the value of the interest in land terminated by the acquisition. Rather, the claim relates to a determination of: (f) any increase or decrease in the value of any other land of the person at the date of acquisition which adjoins or is severed from the acquired land by reason of the carrying out of, or the proposal to carry out, the public purpose for which the land was acquired.
That exercise is quite different from a s 55(a) determination of market value in two material respects: it relates to land that was not acquired; and, requires attention to be had to the impact on the value of that Retained Land caused by the carrying out of the Public Purpose, not the impact caused by the acquisition itself.
There is no statutory dictate as to how such a change in value is to be determined. Whilst both parties in this case referred to the market value of this change in value, the use of such a term is, in strict statutory terms, incorrect. "Market value" is a defined term in the Just Terms Act relating to the head of compensation in s 55(a), and in terms requires the impact of the Public Purpose to be disregarded (commonly referred to as the "statutory disregard"), therefore, it has no direct application to the assessment of compensation under s 55(f).
Notwithstanding that the legislative provision contains no guidance as to the manner of ascertainment of "value" in s 55(f) the context of the legislative provisions do assist. The definition of "market value" in s 56 expresses, in part, the concept of the ascertainment of value as developed from the High Court's decision in Spencer v Commonwealth of Australia (1907) 5 CLR 418 which was expressed at 432 per Griffith CJ in the following terms: In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e., whether there was in fact on that day a willing buyer, but by inquiring "What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?" It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together.
It would be inconsistent to regard the common concept of value in s 55(f) to be somehow different from the concept of value in the s 55(a) determination. Therefore, it appears appropriate to consider the determination of the value referred to in s 55(f) as being the exercise referred to in Spencer (that is, a determination of a hypothetical sale in a hypothetical market), with the proviso that what is being valued is the change in value of interest by reason of the carrying out of the Public Purpose on land retained after acquisition: see Roads and Maritime Authority v Allandale Blue Metal Pty Ltd (2016) 212 LGERA 307 at [20]. Accordingly, rather than a reference to market value for the purposes of s 55(f) a better reference is to the "value at market" of the impact of the carrying out of the Public Purpose.
The reference in s 55(f) to the ascertainment of the change in value in the Retained Land is still a reference to the valuation of the claimant's particular interest in the land: see United at [25], where the exercise was formulated by Basten JA in the following terms: Secondly, Aerated Water established the principle that what is to be valued depends upon the nature and circumstances of the interest in question and the term of the interest. As explained by Griffith CJ: "All matters which would be so taken into consideration by an intending purchaser, and which relate solely to the situation and condition of the land and the improvements upon it, and the right of ownership and enjoyment which the purchaser would acquire in respect of them, are, in my opinion, elements to be taken into consideration in estimating the value of the tenant's actual interest. The element of hope or expectation of non-disturbance arising from the physical condition of the land is not a hope of a separate and distinct interest to accrue after the expiration of the term, but an element in the value of the actual term itself." Thus, the personal relationship between the tenant and the lessor, which might have provided a basis for renewal of the lease at the expiration of the term, was not a factor to which regard could be had in assessing the value of the current interest of the lessee. On the other hand, the possibility of renewal was a factor which could be taken into account, based on the circumstances of the lease and the land, which might in any event allow a "sitting tenant" to obtain a price of the remainder of a lease beyond a simple calculation of the potential profits over the remainder of the term.
Therefore, what is required in the determination of the value at market of the claimant's interest in the land, is the ascertainment of the factors that a hypothetical purchaser would consider influenced the price the market would pay to attain the benefit of that interest.
In this case, the hypothetical market into which the hypothetical vendor and purchaser are engaging is the assignment (sale) of the Eureka Lease to another who wishes to continue to use the land for the Service Station Use (purchaser). Inherent in that task is the need to ascertain the matters which the hypothetical market would consider affected the value of the Eureka Lease in the before and after scenario.
In this case, there are no comparable sales of either the partial acquisition of a lease or the sale of a lease for a Service Station Use to another operator. Therefore, value cannot be ascertained by a direct comparison in an established market. Accordingly, in order to perform the statutory function of determining value, the value must be ascertained by other methods.
The Respondent, at least by inference, equates a determination of value at market of an interest by reference to an earnings basis as a claim for consequential business losses (which has expressly been precluded from being claimed as a disturbance loss under s 59(f): see United). Such a characterisation is misplaced. The valuation of land by reference to the market asks what a hypothetical buyer and seller would transact the interest for. It has long been accepted that a market for real estate can establish a value for a parcel of land by reference to factors not related to the real property interest being acquired, for example, access to views; proximity to public transport; and positive and negative benefits of being located on main roads. These factors are a feature of the land but are not interests conferred by the title to the land, yet they influence the value placed on the transaction of the real estate. For that reason, it is incorrect to ask what is the value attributed solely to the real estate which comprises the interest. The correct question is what would the market pay to have the benefit of the interest in the land taking into account all of the positive and negative features of that land.
By way of example, as was identified in Allandale; and United at [20], [25] and [49] - loss of profits may be the foundation for the determination of market value or value at market, in which case it is not a claim for consequential business losses, but the ascertainment of the value placed by the market by reference to accepted indicia such as the profit derived from the commercial exploitation of the land. Each claim will turn on the nature and circumstance of the interest - in some cases an earnings based approach may be a more reliable valuation methodology and in others it may not be.
How the market determines value may alter depending on the nature of the interest and the particular features and attributes of a particular interest. There is no matter of principle or dictate of the statutory language that precludes the determination of the value of an interest on an earnings-based methodology. The only question is whether such approach, in the particular circumstances of the interest in question, is an approach the market would adopt in the determination of value.
Accordingly, in this case I am not determining as a matter of general valuation principle whether a profit based methodology is appropriate for all commercial leases, but rather asking what the hypothetical market would pay to acquire Eureka's particular leasehold interest in this particular parcel of land in the before and after scenarios. On the evidence adduced and the reasons that follow, I prefer the evidence of the Applicant over that of the Respondent and conclude that the value of the Eureka Lease would be ascertained by referenced to the DCF method as identified by Mr Firth.
On the evidence in this case, there was no valuation approach that was agreed either between the real estate valuers or the accounting experts. Mr Dyson, real estate valuer disputed the "rule of thumb" and profit rent - and he was not challenged on this evidence. Mr Lunney's evidence (which was also not challenged) related to "assessing a market rental value" of the Eureka Lease. That instruction carried with it a direction to determine market rent rather than to determine the value at market of the Eureka Lease.
The opinions of Dr Ferrier turned upon the advice he received from Mr Lunney that he recited at [3.6] of his statement of evidence in the following terms: I have been advised by Mr Lunney, a real estate valuation expert retained by Clayton Utz, that, to the extent that a property has particular attributes which make it uniquely suitable for a highly profitable business, or make it uniquely suitable for a particular kind of business (such as a service station) those attributes will be reflected in the market rental for the property. It is for this reason, for example, that retail premises with street access command higher rentals than premises located in the same property but above street level.
Mr Lunney and Dr Ferrier formed their opinions on the assumption that market rent will capture the market value of the Eureka Lease. As a general proposition of a generic commercial use (where location and other attributes of the land do not add value to the commercial use undertaken on that land) such an analysis may be sufficient to determine value. However, no valuation approach is applicable in every case. The appropriate valuation approach can only be determined after considering how the attributes to the land may affect value in each particular case.
Whilst on one view the calculation of the cash flow of the business may, in effect, be valuing any number of assets including but not limited to the asset that is represented by the lease, if the that is how the market values the Eureka Lease, then it matters not how the components that are utilised to derive the value are characterised.
In the circumstances of this case, I prefer the evidence of Mr Firth and Mr Dyson that the market would consider that the attributes of the land available for commercial exploitation by the interest conferred by the Eureka Lease was such that the value of the Eureka Lease would be determined other than by a profit rental method. The Business, as defined, is not a broad or general entitlement to use the land for a range of permissible uses or to conduct the business at the absolute discretion of a lessee. The Eureka Lease dictates the nature of the business to be conducted, the range of the products to be sold and the hours of operation. The right to occupy carries with it the mixed right and obligation to conduct the commercial use in a particular specified manner.
It is apparent from the drafting of the Eureka Lease terms that some recourse was to be had to the terms of the Alliance Agreement to either ascribe meaning to defined terms or to state the circumstances affecting the exercise of certain powers. By that drafting technique the parties expressed an intention that, to the extent necessary to give commercial efficacy to their agreement, the Alliance Agreement was taken to have been incorporated into the Eureka Lease. To approach a construction of the express terms of the Eureka Lease without reference to the Alliance Agreement would be to ignore the operation of the text, the commercial intentions of the parties and would produce a commercial inconvenience. Accordingly, the Eureka Lease should be construed as notionally incorporating the expressly referred to terms of the Alliance Agreement as if such terms were reproduced in full in the Eureka Lease: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at [46]. This construction does not have the consequence that the entirety of the Alliance Documents are incorporated or that any personal or other benefits or obligations conferred by the Alliance Documents are incorporated into the Lease terms. This approach merely "lifts" the text referred to in the Alliance Agreement and "drops" those words into the Eureka Lease at the appropriate point of reference. The Eureka Lease and the Alliance Documents continue to operate independently.
On such a construction of the Eureka Lease the constraint on use provided by the definition of "Business" operates as a constraint on the lessee's use of the land. The requirement to operate the Business in a certain manner - such as hours of operation, limitation on goods to be sold - are elements that touch and concern the land. Such an approach is recognised by authorities such as: Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237 at [74] and from the concepts of restrictions as to user as being capable of touching and concerning the land.
I accept the Respondent's contention that the limitation in the definition in the Eureka Lease to acting as an agent for Viva in the sale of fuel did not touch and concern the land because the requirement to sell Viva's fuel benefits Viva whether or not it retains an interest in the land and therefore is enforceable in contract only against the original lessee and not subsequent interest holders. A distinction is to be drawn between the benefit Viva obtains in contrast to VER's interest as landlord. Viva is not a party to the Eureka Lease. Therefore, there is no true benefit that flows to VER from the requirement to sell Viva fuel except as a recognition of the alliance arrangement evidenced in the Alliance Documents. Accordingly, the requirement to sell Viva's fuels as agent for that company is a personal covenant that would not be enforceable upon assignment or transfer of the Lease. Therefore, the nature of the interest would one that would attract an operator (either networked or independent) subject to the terms of the Eureka Lease absent the obligation and entitlements conferred by the balance of the Alliance Documents and absent the dictate that the lessee act as agent for Viva in the sale of fuel.
The features of the land, being its location at an intersection on a busy main road, renders this Site especially suitable for the Service Station Use. This attractive location is also illustrated by the presence of another Service Station Use on the opposite corner of the Intersection. The highest and best use is not only intimately tied to the locational characterisation of the land but are dictated by the express terms of the Eureka Lease that specify the Service Station Use as the approved user and dictates the manner that such use will be undertaken. It is this interweaving between the locational features and the commercial use of the land that ties the commercial return of the commercial use to the Lease that confers the entitlement to carry on that commercial use.
The use of a profit rent method isolates certain components of this Business (such as fuel throughputs and shop sales) to determine the amount a person would pay as rent and a landlord would accept as rent to enable occupation of the land. That isolation of part profit expense is said to limit the value to just the leasehold interest, which is only an asset of value. The use of the concept of a profit rent may be appropriate where the profit-making use of the land is relatively unrelated to physical and locational attributes of the land (a first floor office use on a high street as an example). However, where the occupation of land that has inherent profit-making features for a particular use, the exploitation of which is largely open to any occupier of that land, I consider that such would have value over and above a profit rent.
This relationship between the features of the Site and the profitability of the Service Station Use is further reinforced by the evidence in this case that the commercial return of this land could be achieved by any reasonably efficient operator of such use and was not achieved by virtue of a particular attribute of the particular operator. Such a link between the business return and the land indicates that the hypothetical market may determine value of the right to occupy the land on the terms in the Eureka Lease is to be ascertained not by reference to a profit rent, but rather the impact on the returns the business that the Eureka Lease permits and requires to be undertaken as a term of its occupancy of the Retained land.
The use of the Eureka earnings to identify the value at market in the before and after scenario is also appropriate. Firstly, of significance, in the circumstances of this case, was the general acceptance by the valuers that the earnings generated by Eureka in the before scenario were an expression of the "highest and best use" dictated by the locational features of the Site. That is, the earning capacity of the Site existed largely independent of the identity of the particular operator of the Service Station Use. This, on the evidence in this case, indicates that the value of the Eureka Lease is that the holder of the Lease is given the right of exclusive possession to carry out the use which enables the earnings to be realised. The value of obtaining the Eureka Lease is reflected in that earning capacity as a whole and not on isolated elements of earnings that reflect in the quantum of profit rent.
Secondly, to the extent that there was a concern that some intangible assets (such as goodwill) were assets that reflected on profit were, to a large extent, taken account of in the use of the Eureka earnings. These asset classes did not change as a consequence of the carrying out of the Public Purpose Works. That is, the intangible assets such as goodwill, brand recognition and the like was accounted for in the calculation of the after scenario. These assets either did not change and would remain neutral or, as was the evidence in this case, continued to positively affect the profitability of the Service Station Use by retaining custom that would have been lost as a consequence of the carrying out of the Public Purpose Works.
Thirdly, the acquisition, being only a partial acquisition had no effect on the incurring of costs. The Service Station Use in both the before and after scenarios would maintain the same expenses such that no adjustment was required to be made. This consistency of expense renders more credible the change in earnings being attributable alone to the impact of the Public Purpose Works.
Finally, it was accepted that, after due analysis by the forensic accountants of the Eureka financial records, that the Eureka earnings represented the earnings capability of a "reasonably efficient operator". Therefore, there was no need to adjust the earnings for any particular impact on earnings capacity due to Eureka being the operator.
The use of the Eureka earnings data also permitted, if appropriate, for the difference in earnings between a networked operator and an independent operator to be identified by the appropriate adjustments made by the forensic accountants.
For all of the reasons outlined above, I find that the appropriate valuation methodology is a before and after assessment of the value of the Eureka Lease having regard to the DCF of the Service Station Use adopting the Eureka EBITDA as the indication of the base earnings capacity the market would utilise to determine that value.

[21]

Findings on lease term

The Eureka Lease term for the purposes of the hypothetical transaction required to be assumed for the purposes of s 55(f) is the term provided for in the registered lease.
As observed above, the Alliance Agreement is referenced to some extent in the Eureka Lease as outlined at [32] above. The Alliance Agreement is a contractual arrangement between the parties to that agreement relating to the manner in which they will come together to provide an integrated offering by way of fuel sales and grocery sales. The relevant parties to the Alliance Agreement have interests in either fuel or groceries. By allying themselves the integrated offering is seen to be beneficial to all participants. The Alliance Documents provide the agreed mechanisms for that alliance as between the nominated parties. It is a contractual arrangement pertaining to the business interests of the alliance and to that extent it is a personal interest, not an interest in land. Whilst the Alliance Agreement does identify, by reference to the identity of certain land, land to which the Business referred to in the agreement is being undertaken it does not create an interest in that land. Accordingly, I accept the Respondent's submission and find that the Alliance Agreements are personal to the parties and do not operate to alter the term of the Eureka Lease.
The rights and obligations relating to those agreements do not run with the land. Further, they are not "notified" in the relevant sense by presence on the register. To suggest that the vendor would "tell the purchaser" what the end date is and that such representation would be relied upon for the purposes of determining an appropriate purchase price is not reasonable.
As identified in United recited at [79] above, such personal relationships are not relevant to the ascertainment of the term of a lease.
To the extent that it was suggested that the Alliance Agreement operated to confer a right power or privilege on Eureka over or in connection with the Retained Land the right conferred was subject to the provisions of the Alliance Documents and there was no provision of those Alliance Documents that was identified as being capable of alienation being an essential character of such right: Dial a Dump Industries Pty Ltd v Roads and Maritime Services (2017) 94 NSWLR 554 at [159].
Accordingly, compensation is to be determined on the basis that the Eureka Lease terminates on the date nominated in the registered lease being 28 April 2024.

[25]

Findings on character of operator

The market for Service Station Uses was agreed to comprise both independent and networked operators. It was also accepted that this particular Service Station Use would be attractive to both networked and independent operators. However, in a competition between the two it was accepted that a networked operator would pay more for the entitlement to occupy and use the Site for the Service Station Use and therefore, would likely be the successful purchaser if offered to the market.
It was agreed by the forensic accounting experts in the evidence that the networked operator would suffer less lost earnings from the carrying out of the Public Purpose as a networked operator would have some market attraction that would encourage a customer to undertake less convenient manoeuvres to continue to attend the Site rather than utilise another more convenient service station and convenience store. Further, in cross examination Dr Ferrier accepted that a networked operator would have a more beneficial pre-tax discount rate affecting its earnings and therefore, would be more likely to be successful in any market competition with an independent operator.
The concept of a networked operator does not proceed on the assumption that the purchaser would be bound by the same terms and conditions as the Alliance Documents but rather assumes a well-resourced player in the market that would seek out a well-located site with the associated earnings capacity that occupancy of the site could bring The evidence was that there are such persons in the hypothetical marketplace.
Where it is accepted that there are two distinct classes of persons competing for the interest and that one such class has a distinct and determinative advantage over the other - that class of purchaser is the likely hypothetical purchaser. In this case that would be a networked operator.
I further take into account that an independent operator would likely be interested in a standalone style opportunity for fuel and convenience sales. The strict terms of the Eureka Lease with respect to the nature of the business to be conducted would be less attractive as it would not offer the opportunity for complete independence in the conduct of the business.
For those reasons, based upon the evidence in this case, I find the hypothetical purchaser would be a well-resourced networked operator. The accountants evidence reached an agreed position that if the purchaser was a networked operator the reduction in traffic movements in the order of 47.2% would produce a decrease in profitability of 23.6%. This percentage is, therefore, the appropriate figure to be adopted in the after scenario.

[40]

Findings on disturbance claims

Dealing firstly with the claim for the fees of Mr Rogers pursuant to s 59(a) as legal costs. It is clear from the evidence of Ms Mozjejko's affidavit sworn 13 March 2020 that Mr Rogers' fees, whilst not addressed to the legal firm, were transmitted to that firm for payment.
There is, therefore, some question over whether the legal practitioner had retained Mr Rogers and was, therefore, liable for the payment to him of his fees and whether the fees would be recoverable from Eureka by the legal practitioner as a disbursement. Ms Mozjejko's evidence does not provide an answer to these questions. However, whilst such a contractual relationship may arise in determining the question of whether a consultant's fees are recoverable as a legal cost under s 55(a) I do not consider it to be determinative.
The terms of s 59(a) specifically, in terms refers to: "(a) legal costs reasonably incurred by the persons entitled to compensation in connection with the compulsory acquisition of the land."
The text and context of this provision indicates a legislative intent that the dispossessed owner is not to be responsible for the costs of obtaining appropriate (reasonable) legal services relating to the acquisition. In that context such legal services must include, at least in part, the determination of the appropriateness of the offer of compensation. Where a legal practitioner determines that some further advice is required from another qualified person to enable them to provide the legal services of advising on the offer, it would be inconsistent with the legislative purpose to compensate the dispossessed owner for only part of the fees required to be incurred to enable the legal advice to be provided. Whilst the reference to legal costs is quite specific in terms it is broad in substance. The fees are to be recoverable if they are reasonably incurred and to that extent if they are reasonably necessary for the legal practitioner to provide the advice relating to the acquisition then such fees are recoverable as a s 55(a) disturbance claim. This construction does not turn on the contractual relationship of the retainer of the consultant or whether it is recoverable as a disbursement, but rather whether it is reasonably necessary to enable the legal services to be provided in connection with the compulsory acquisition of the land, including, but not limited to, any offer of compensation.
For those reasons, I find Mr Rogers fees are properly claimable as disturbance pursuant to s 55(a) of the Just Terms Act.
Whilst a similar argument could be made with respect to the fees of Mr Firth, reading s 59 as a whole, his fees as a valuer can only be recoverable if he meets the statutory character of a "qualified valuer". It would produce an inconsistency with the operation of s 59 if unqualified valuers fees could only be recoverable as legal costs under s 59(a) and qualified valuers fees under s 59(b). To read the section as a whole in its context valuers fees are recoverable whether as legal costs, or where no lawyer is retained, as valuers fees only if the valuer is a qualified valuer as defined in s 59(2).
Accordingly, for Mr Firth's fees to be recoverable at all his fees must be the fees of a "qualified valuer" as defined in s 59(2). It is agreed that at the date the fees were incurred Mr Firth was not relevantly a qualified valuer, as defined. The question is whether, for the purposes of s 59(b) he was a qualified valuer, in that he was capable of being registered as a valuer but had not, at the date of the fees were incurred, effected registration.
The statutory language indicates a temporal requirement that at the time the fees are incurred that the person is as a matter of fact, a qualified valuer. The capacity for becoming a registered valuer is not envisaged in that statutory language. It is apparent that the statutory intention is to ensure that a dispossessed owner obtains advice relating to the acquisition from a person who has nominated qualifications at the time the advice is given, not the date the payment of the fees is sought. That was not the case in the present circumstance. To allow valuation fees to be claimed as a s 59(b) disturbance item of the basis of some future capacity to fall within the definition of qualified valuer (or on the basis that at the time the person was not precluded from so applying) would be to ignore the clear words of the section in the context and would require the importation of words into that section that is not warranted on a reasonable construction of the Act as formulated. The fees claimed for Mr Firth are not claimable as disturbance for valuation fees under s 59 at all.
For those reasons, I determine disturbance is payable in the amount of $141,628.72 made up of the agreed legal costs and the costs of Mr Rogers.