Eureka Operations Pty Ltd v Transport for New South Wales

Evidence

1. In addition to the evidence that was adduced at the earlier hearing the parties each tendered further evidence by way of expert reports from the financial consultants, Mr Firth for the Applicant and Dr Ferrier for the Respondent. Neither expert was cross-examined on this further evidence.
2. Mr Firth gave evidence that in his opinion the provisions contained in the Eureka Lease that permitted early termination were of a type where the risk of early termination would have been accounted for in the discount rate for leasehold cashflows. The risk of that the Alliance Agreement could terminate earlier (or be extended) was known to the market as expressed in the independent report prepared by Grant Samuels in 2007 and the assessment of the discount rate expressed in that report of 9-10% took that risk into account.
3. It was Mr Firth's opinion as summarised in [3.11] of his report that: 3.11 For the reasons set out in this supplementary report, in my opinion: 3.11.1 A hypothetical purchaser would assume the end date of the lease to be 2 February 2029. 3.11.2 The appropriate discount rate and approach to the assessment of compensation in the Joint Expert Report dated 29 October 2020 is unchanged. 3.11.3 However, as a result of the findings at paragraph [142] of the judgment in Eureka Operations Pty Ltd v Transport for New South Wales [2021] NSWLEC 41, Justice Duggan made certain findings with respect to the calculation of compensation and for the purposes of calculating compensation in accordance with these findings, but substituting for a lease term of 9.614 years, compensation should be calculated as $752,813 (refer calculation at Appendix 3 to this report).
4. Dr Ferrier gave evidence that in the first hearing the evidence assumed that the lease term was either 4.86 years or 10 years. Having regard to the decision of Preston CJ of LEC in Eureka (No 2) at [151] there is a risk that the Eureka Lease could terminate at another date. He stated at [13] of his report that: 13. There is a risk that the lease could terminate such that the remaining term was something other than either 4.86 years or 10 years, including the risk that the remaining term could be less than 4.86 years. As this risk was not taken into account in either the discount rate or the duration of the cash flows, the opinions I expressed in the joint report dated 29 October 2020 would change if that risk were to be taken into account.
5. His conclusion as to the advice he would give a hypothetical purchaser was expressed in [14] as: 14. As the Land and environment Court determined that the hypothetical purchaser would be a networked operator, and presumably a networked operator in competition with the parties to the Alliance Agreement, I would advise the hypothetical purchaser that: (a) In the absence of evidence to the contrary, there appears to be a significant risk that the Network Planning Committee would recommend that the site should cease to be an Alliance Site in order to prevent a competitor deriving the benefits of the Alliance Agreement; (b) If a decision were made to terminate the site as an Alliance Site, the lease would come to an end, and the hypothetical purchaser would no longer be able to trade from that site, such that after that date, the site could be operated by a member of the Alliance; (c) The most appropriate method of allowing for the risk of earlier termination is to adopt a lease term which, on the balance of probabilities, is most likely to occur and to assess the net present value of the forecast future profits over that remaining lease term; (d) Although it would be, in principle, possible to allow for the risk of earlier lease termination by increasing the discount rate, I would advise the hypothetical purchaser that such an approach is problematic and speculative because: (i) there is no evidentiary basis for assessing the change in risk because there are no market transactions where an asset with a similar risk profile was exchanged; (ii) the agreed discount rates include a rate of return required by equity investors to compensate them for market risk, which is non-diversifiable and, therefore, cannot be avoided. A market-derived rate of return does not provide for any extra return to compensate for specific risk because that risk is diversifiable and, therefore, can be avoided. Adding a specific risk premium to the cost of equity would be contrary to the theory underlying a market-based assessment of the discount rate, and should only be done where there is no practicable alternative; (iii) If the duration of the cash flows was reduced by assuming a shorter lease term, then the present value would be reduced by some amount. If, on the other hand, the duration of the cash flows were not amended but instead the discount rate was, then the specific risk premium would have to be set at such an amount that the same alteration to the present value would occur as would have occurred if the duration of the cash flows had been amended. Thus, the correct specific risk premium could only be determined by knowing the duration of the cash flows. Any specific risk premium set without this information could only be speculative.
6. Dr Ferrier was of the opinion that a purchaser would make a financial allowance for the uncertainty of the term of the lease. Such a risk should not be reflected by an adjustment to the discount rate. Further, the approach of Mr Firth should not be adopted as the reliance upon the Grant Samuels report is flawed as it is clear that the risks assessed in that report did not include the risk of a reduced lease term. The most sound approach is to determine the lease term that, on the balance of probabilities, was most likely to occur and assess the net present value of the forecast future profits over that remaining lease term.

Eureka's submissions

1. Attention to the reasons of Preston CJ of LEC in Eureka (No 2) at [156] makes it apparent that the remitter relates to the question of how the market might account for "uncertainty in the term of the [equitable] lease", that is, only that component of the term beyond the original termination date of 28 April 2024.
2. As is expressed by the evidence of Mr Firth, the flexibility in the arrangement of the Eureka - Viva alliance had been assessed in the Grant Samuels report on the merger of Coles and Westfarmers and indicates that the market would, with consideration of those arrangements, identify an appropriate discount rate. That discount rate assisted the experts in this case (Mr Firth and Dr Ferrier) to adopt an appropriate discount rate at the hearing relevant to valuation of the particular leasehold interest of Eureka.
3. Accordingly, it is appropriate to determine the value of Eureka's interest, taking into account the Eureka Lease end date with the included early termination provisions, in the same manner that the experts determined value in the earlier proceedings (where such sum is adjusted to take into account the findings at [142] and determine value in the sum of $752,813 plus the undisturbed findings of disturbance).
4. Eureka's primary submission was that whilst there may have been uncertainty in the term of the Eureka Lease such uncertainty was not of a magnitude that it would have resulted in the market discounting the value of the lease for such uncertainty.
5. To the extent that the Respondent contends that the Eureka Lease makes provision for termination as a consequence of the actions consequent upon a recommendation of the Network Planning Committee (see the submissions at [21] and [22] below) such submissions should be rejected as: 1. The propositions contended for assume the identity of what must instead be treated as a "hypothetical" vendor for the purposes of application of s 56(1) to s 55(a). That is, the proposition depends upon the vendor being the Applicant which is contrary to the terms of s 56(1). 2. The argument presumes that this vendor would engage in willing and not anxious dealings with the hypothetical purchaser over the highest and best use available for those interests, all the while knowing that it will engage with a third party to terminate those interests. Further, despite the hypothetical "sale" occurring at a time when no pre-conditions to any possibility of early termination have taken place, the argument assumes that the hypothetical vendor will take steps after the sale has occurred to initiate and fulfil those pre- conditions; derogating from its grant (and if not committing fraud at least engaging in wildly unlawful misleading and deceptive conduct). 3. The argument presumes that the hypothetical vendor would presume and negotiate on the sale of the interest for the lowest and least profitable use available to it and, somehow, "carry the auction" over any other available hypothetical purchaser who would be looking to take advantage of the highest and best use achievable from the purchase of the interest(s). 4. Even if the Court were to treat the hypothetical vendor as, nevertheless, the Applicant, then in order to "perfect" the equity and ensure the creation of a registrable lease equivalent to that equity would enforce, it would be necessary for the Applicant to assign those severable parts of the "Alliance Rights and Obligations" as concerned the concept of the "Agreed End Date" affecting the leasehold estate under cl 36.1 of the Alliance Agreement. That is, to make the lease effective would require transferring to the purchaser all those rights under the Alliance Agreement that could cause any change to the term of that interest. Anything less than that would not be a "sale" of that interest. That would put the hypothetical purchaser in the position of needing to agree to any change to the Agreed End Date of that lease by reference to the creation of a Network Planning Agreement under cl 8.7. 5. The propositions contended for apply the concept of the before and after assessment as if it is an end in itself and not merely a means to an end - which is that it is the provisions of the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) that are to be given proper effect. Thus, the observations of Leeming JA at [13] and of Tobias JA in Roads and Traffic Authority v McDonald (2010) 175 LGERA 276 at [88] are apt. As the Court noted in final addresses at the original trial, the primary statutory source of compensation for the Applicant is under s 55(f). Assessment of compensation on that paragraph requires no analysis of hypothetical parties, or indeed of any hypothetical sale - concentrated as it is on the diminished economic value of the interest(s) left in the hands of an affected owner by reason of the carrying out of a public purpose. To that extent, the extreme inferences the Respondent asks the Court to draw about the "sale" for s 55(a) purposes need not be engaged with at all. 6. The submissions read out of existence the continued legal interest held by the Applicant for a term certain up to 2024 (at least). This is contrary to the finding of White JA at [56] as well as that of Preston CJ of LEC at [146] in Eureka (No 2). The legal interest available to Eureka has always been treated in these proceedings as undeniably adversely affected by the carrying out of the public purpose. There is no reason why the equitable interest should detract from the value to a purchaser of the combination of legal and equitable interest. The equitable interest can, it is submitted, only enhance value (or, put more accurately, is more significantly adversely affected by the carrying out of the public purpose resulting in a greater amount of compensation payable).

Respondent's submissions

1. The possibility of early termination of the Eureka Lease as identified by the Court of Appeal in Eureka (No 2) was not considered or addressed by the parties at the initial hearing. The risk of early termination is significant as it is amenable to being terminated by the actions of third parties irrespective of any breach or other conduct of the holder of the lease, which renders the Eureka Lease in effect, terminable at will. The consequence of the finding in Eureka (No 2) is that the term is, as and from the date that effected that change (being a date before the date of acquisition) capable of early termination. Such risk of early termination is apparent for the whole of the term of the Eureka Lease remaining after acquisition.
2. As a consequence, the market at the date of acquisition would not assume the Eureka Lease would run to the full term of the equitable lease of 2 February 2029 or even the lesser term as was identified in the initial proceedings of 28 April 2024. The hypothetical purchaser would assume that the only period over which it has a secure term is, at most, 3 months from the date of acquisition.
3. The determination of the first quarter (that is, 3 months) after acquisition is the only certain period as the Alliance Agreement provides: 1. Clause 8 deals with Network Planning and establishes a Network Planning Committee comprising representatives appointed by the parties (two representatives per party - cl 8.8); 2. The Network Planning Committee is required to meet no less frequently than quarterly (cl 8.3) and its meetings may be at any place in Australia or by telephone or other electronic means (cl 8.12); 3. The Committee has specified functions including to recommend whether any Alliance Site should cease to be an Alliance Site and the date on which it should so cease (cll 8.1(d) and 8.2(g)); 4. Where a recommendation of the Committee is accepted by the senior representatives of the parties identified in cl 8.7 that acceptance is a Network Planning Agreement; 5. By operation of cl 9.2, such an Alliance Site ceases to be such on the date that the clause refers to as the Agreed End Date; and 6. All this could occur without the hypothetical purchaser being involved in any way.
4. The hypothetical purchaser would have no reasonable expectation that there would not be brought into existence a relevant Network Planning Agreement in circumstances where: 1. The hypothetical purchaser would be a networked operator and thus a competitor of Viva and Eureka; 2. The rent payable under the Lease is less than market rent (Eureka enjoyed a profit rent); 3. The rent payable to Viva under the Lease ($83,318 pa) is significantly less than the rent payable by Viva under its concurrent lease from VER Custodian Pty Limited ($281,139 pa); 4. Given that the Committee is required to meet no less frequently than quarterly, the hypothetical purchaser would have an expectation that such an Agreement would come into existence within, or shortly after, that period from the date of acquisition; 5. From the Alliance members' perspective, the occupation and control of the Site would have been lost to them upon the transfer of the lessee's interest to the hypothetical purchaser; and 6. Due to the Site being out of their possession and control the parties to the Alliance Agreement would be unable to achieve performance of the obligations under the Alliance Agreement with respect to the Site. Fundamentally, the Alliance Agreement is concerned with Eureka operating the Business defined to be generally operating as Viva's agent in selling fuels and operating convenience stores. Once the lease had been assigned to the hypothetical purchaser this became impossible for the Site. The reason why Viva had been content to receive a relatively nominal rent as above would no longer exist.
5. If the Respondent's submissions are not accepted it is inappropriate to accept the approach of Mr Firth as he relies upon the Grant Samuels report, which did recognise the flexibility of the arrangement between the relevant parties but did not consider a risk of the type identified by the Court of Appeal that the Eureka Lease could be terminated at will.

Findings on Redetermination of compensation

1. Contrary to what was submitted by Eureka, the decision in Eureka (No 2) does not permit an approach that treats the term of the Eureka Lease as being different for the original stated term and the extended date. That is, it cannot be said that Eureka held simultaneous equitable and legal interests each depending upon a different lease term. As explained in [148] and [153] of Eureka (No 2) once the Eureka Lease was subject to the Deed it affected the deletion of the fixed lease term and substituted another range of lease terms, including but not limited to the extended date to 2 February 2029. As the amendment was not properly executed or registered, from that date forward there was an equitable lease created that incorporated the Eureka Lease with the lease term being the earlier of the available dates. Accordingly, the "legal" term to 18 February 2024 ceased and the "equitable" term superseded it. For that reason, on this remitter, it is appropriate that the whole of the remaining term of the Eureka Lease at the date of acquisition be treated as being subject to the equitable lease term and not the previous term.
2. As identified in the remitter, I am required to determine how the market would treat the potential for an early termination of the Eureka Lease. As was identified by Preston CJ of LEC at [149] of Eureka (No 2) the term of the lease was the earlier of one of five defined dates. In the remitter hearing the parties agreed that the only possible of the five defined dates that was relevant to my determination was the risk that the parties to the Alliance Agreement agreed that the Eureka Lease should cease to be an Alliance Site by operation of the provisions of cl 8 of the Alliance Agreement being the process identified at [151] of Eureka (No 2).
3. The market to which I am to consider is the hypothetical sale of Eureka's interest in the land comprising the Eureka Lease with a term to 2 February 2029 subject to the possibility of earlier termination. The "possibility" is to be assessed in the context of determining the value at market (see [78]-[80] of Eureka (No 1)) of the hypothetical transaction being one undertaken by a willing but not anxious seller to a willing but not anxious buyer. The seller in this context is one that has the same character as Eureka in that it is the seller and concurrently is the party to the Alliance Agreements including the capacity to agree to an early termination of the Eureka Lease pursuant to cl 8. This characterisation accepts, as was submitted by Eureka at [18(1)] above that it is not in fact Eureka that is the vendor, however, I cannot ignore that the interest being transacted contained within it a term that permitted the vendor and another third party to terminate the lease term earlier than 29 February 2029, and that the vendor did upon the sale not contract out of the independent entitlement to exercise that right.
4. I accept the submission of the Respondent that in undertaking this task I cannot assume that the hypothetical transaction was conditional upon Eureka not exercising its rights under the Alliance Agreement. The hypothetical sale cannot be conditional as the hypothetical transaction relates to the interest held at the acquisition date with all of the benefits and burdens that comprise that interest. For the same reason I cannot accept Eureka's submission at [18(4)] above that Eureka would be required to assign the rights to the purchaser to "perfect the equity" as what was being sold in the hypothetical transaction was the equitable lease, which lease had as one of its terms a termination date that was variable in that it was capable of being terminated prior to the nominated latest date of 2 February 2029.
5. Therefore, the relevant question is a determination as to what the market would assess as the likelihood of the Eureka Lease being terminated at an earlier date pursuant to the provisions of cl 8 of the Alliance Agreement and in light of that assessment any relevant impact on the amount that would be paid to acquire the Eureka Lease with that inherent risk.
6. Having regard to the context in which the hypothetical transaction is to take place a willing but not anxious seller would be seeking to obtain the best price for the interest it is transacting. On any of the evidence in this case the best price would be obtained for the Eureka Lease with the term expiring no earlier than 2 February 2029. Applying the additional findings I made earlier in Eureka (No 1) at [142] it does not appear in dispute that a lease with a term of no earlier than 2 February 2029 would achieve at market a value of $752,813.
7. The question then arises as to whether that value would be reduced by the market to take account of the risk inherent in the Eureka Lease that the term of the lease could be reduced at any time during the term by the operation of cl 8 of the Alliance Agreement.
8. At the time of the hypothetical transaction the terms of the Eureka Lease provided for a defined term to 2 February 2029, with provision for a reduction of that term. The relevant provisions for the reduction of that term required a number of steps to be undertaken including a recommendation to be made and importantly the joint agreement between Eureka and Viva that the Site would cease to be an Alliance Site. The consent of both parties was essential for the Site to cease to be an Alliance Site and consequently the term of the Eureka Lease reduced. Such consent could be unilaterally withheld by either party.
9. However, it is also notable that the Alliance Agreement: 1. Did permit the transfer of the Eureka Lease with consent where such consent could not be unreasonably withheld. The Alliance Agreement identified the circumstances in which the withholding of consent would be reasonable and there was no circumstance that related to the transfer of a lease to a "competitor": cl 14 of the Eureka Lease and cl 36.1 of the Alliance Agreement; 2. Did not make provision for an automatic removal of an Alliance Site, the Site upon transfer of a lease to a party other than a party to the Alliance Agreement, even if a transfer was to a competitor; and 3. Did make provision for consent to transfer to be conditional: cl 36 of the Alliance Agreement.
10. Such factors would operate in the assessment of the purchaser as indicating that while there was a risk that the lease term could be reduced it was not an immediate or necessary consequential risk upon the sale.
11. In order to determine the value at market I have to assume a transaction of a willing vendor. It is also appropriate that I assume that such a willing vendor is seeking to obtain the best price achievable at market for the interest being transacted. In such a case it is counterintuitive for an assumption to be made that the vendor would only seek to achieve a price of 3 months (or such lesser sum) on the assumption that the provisions of cl 8 will be exercised to reduce the lease term, as to do so would be to reduce the value for a circumstance that has not yet crystalised and one that is wholly within its control to ensure that crystallisation does not occur. That is, the vendor can withhold consent to the cessation of the Site as an Alliance Site, pursuant to cl 8 of the Alliance Agreement. It is wholly within the hands of the vendor.
12. To the extent that the Respondent has identified reasons why the risk of the triggering of the cl 8 powers would be reasonably foreseeable as a real risk at [22] above those motivations are more likely attributed to Viva (not being a party to the sale) and not the vendor. Whilst the Network Planning Committee may recommend the removal of the Site as an Alliance Site, such recommendation had no consequence unless both Eureka and Viva consented to that course. This fact I consider would weigh heavily in the mind of the purchaser as one that reduced the risk that the lease term would be reduced.
13. Further, as to the contention that there would be a loss of business income as a consequence of the transfer such is not a matter that would affect Eureka as the sale value was determined on the basis of achievable income and, therefore, on that assumption Eureka would not experience that loss. The disparity between the Eureka benefit from the sale and the Viva losses from the sale are matters between them as third parties and do not relate to the hypothetical sale of Eureka's interest in the land. It would be assumed that, to the extent of any disparity, those parties would make acceptable arrangements between themselves pursuant to the Alliance Agreement, for example, by conditioning the consent to the transfer to allow a distribution of the sale funds. For those reasons, I do not consider that these factors would operate in the purchaser's assessment such that the risk that the lease term would be reduced would be considered, on the balance of probabilities, a real risk.
14. I note that the Respondent suggests that the risk of the exercise of the powers under cl 8 is more stark where the purchaser is, as I have found, a networked operator as such a purchaser would be in direct competition with the vendor ([25] of the Respondent's written submissions). Inherent in this submission is that somehow the sale to a competitor was undesirable notwithstanding that it would achieve a higher sale price. To adopt such an assumption, therefore, is to assume that the sale would not be willingly made, which assumption is inconsistent with the assumptions that have to be made on the hypothetical sale. Further, it assumes that the vendor would have a particular subclass of purchasers for whom the cl 8 power would be likely exercised and another subclass where such likelihood would be less. Again, this raises a qualification of the market and the willingness of the sale that is inconsistent with the necessary assumption to be made in determining that the sale is willing and the settling for best market price available. For those reasons, I do not consider that these factors would operate in the purchaser's assessment such that the purchaser would consider, on the balance of probabilities, that there was a real risk that the lease term would be reduced.
15. For the reasons I have outlined, I find that there was a risk that the lease term could be reduced. I do not consider that the risk is one that would cause a purchaser (even a networked purchaser) to deem that risk as likely of crystallising within the first three months of the lease being transferred. Nor do I consider that the purchaser would consider that the risk was a real likelihood during the lease term up to and including 2 February 2029. That being said, however, there was a residual risk. The term of the Eureka Lease contained a provision that permitted a reduction in the term by acts undertaken by third parties unrelated to its performance of the lease terms. Such a term and the residual risk would warrant a reduction in the amount paid. I consider that such discount, however, upon an assessment of the risk in the context of the hypothetical sale would be minor.
16. The parties agreed that if I did not accept the primary approach adopted by either of them - as I have not as identified above - in assessing the quantum of any discount the parties identified the preferred method as a percent adjustment representing that risk. The Applicant indicated that a minor adjustment (as I have found) as being in the order of 5%. In making that submission, however, the Applicant indicated that it would be an appropriate adjustment for only that part of the lease term beyond the original term of 28 April 2024. For the reasons identified above, I consider that any reduction for risk must be applied to the full lease term, however, I do accept that a minor discount would be best represented by a sum of 5% of the sale value.
17. For those reasons, I adopt a 5% reduction of the purchase price of $752,813 ($37,640.65 rounded to $37,600) producing a value of $715,213 together with disturbance and costs previously determined by me in Eureka (No 1).

Costs

1. I note that the costs order made by me in Eureka (No 1) was not the subject of the remitter and, therefore, shall remain the appropriate order as relates to the Eureka (No 1) proceedings.
2. The parties have indicated that there may be circumstances that would affect the terms of any costs order and that it is appropriate that the parties have the opportunity to consider my reasons before any order for costs of the remitter proceedings are determined. Accordingly, I will reserve the costs of the remitter hearing.

Orders

1. The Court orders that: 1. Compensation under Pt 3 Div 4 of the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) (the Act), for the compulsory acquisition of the Applicant's interest in land in Certificate of Title Lot 12 DP 1213064 known as 131-133 Cobra Street, Dubbo NSW, is determined in the sum of $856,841.72 plus statutory interest being payable under ss 49 and 50 of the Act. This sum comprises: 1. $715,213 for market value of the acquired land under s 55(a) of the Act and the decrease in value of the Applicant's adjoining land under s 55(f) of the Act, calculated in accordance with [5] of this judgment; and 2. $141,628.72 for disturbance under s 55(d) of the Act. 1. I direct the parties to address me at 9am on 25 August 2022 as to whether any part or parts of these reasons should remain restricted from publication having regard to the Confidentiality Order made on 14 December 2020. 2. The Respondent is to pay the Applicant's costs as agreed or assessed of the hearing. 3. The costs of the remitter hearing are reserved. 4. The exhibits are returned.

Amendments 26 August 2022 - Publication as restricted - lifted 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. Decision last updated: 26 August 2022