Harmon International Holdings Pty Ltd v Pashon Electrical Pty Ltd

Issues for determination

1. In their commercial list response filed on 6 May 2020, the defendants refer to Mr Marchese's valuation of the Crystal Street property dated 16 March 2020 and allege it contains manifest error of two types.
2. The first type is asserted to be fundamental errors of valuation principle on three specific bases, namely no assessment of "highest and best use" of the subject land, an erroneous approach to comparable sales, and the adoption of an "averaging" methodology inconsistent with the proper adjustment of comparable sales and the ascertainment of market value.
3. The second type of error alleged is factual errors indicative of fundamental deficiency in the approach to valuing the subject land. The commercial list response identifies six matters of the second type, such as the misidentification of the Local Government Area (LGA).
4. The defendants' cross-claim, also filed on 6 May 2020, seeks a declaration that the Crystal Street valuation contains manifest error within the meaning of the Deed of Partition and an order pursuant to s 66G of the Conveyancing Act appointing trustees to hold that property on statutory trust for partition.
5. Despite the defendants' pleading referring only to the Crystal Street property valuation, the hearing proceeded on the basis that the defendants' claim of manifest error also extended to the Parramatta Road property valuation.
6. The defendants rely on an expert report from David Lunney, a certified practising valuer, dated 11 March 2020 (Lunney Report) in which Mr Lunney comments on Mr Marchese's valuation reports for both the Crystal Street and Parramatta Road properties. Mr Lunney was cross-examined on matters common to both property valuations as well as on matters specific to the Parramatta Road property valuation (see, for example, T9.48-50, T11.27-T12.2, T28.15-24).
7. The plaintiffs' written submissions refer to the "valuations" and their counsel made closing submissions dealing with errors alleged to be common to both valuation reports and error specific to the Parramatta Road property (see T65.17-24).
8. The hearing also proceeded on the basis that the errors alleged by the defendants were those referred to in a document described as "Annexure A to Defendant's Submissions - Detailed list of errors in the Marchese valuations" (as amended) (MFI-2). MFI-2 identifies 27 alleged errors, most of which are common to the valuations of both properties.
9. By the end of closing submissions, the defendants had refined their claim of what was asserted to be manifest error. They no longer pressed three errors relating to the comparable sales approach (items 8, 9 and 10 of MFI-2) and the errors relating to the "averaging" methodology (items 18 and 19 of MFI-2). They also acknowledged that some errors referred to in MFI-2 "overlapped" (for example, items 12 and 14).
10. Having regard to the above, the issues for determination are: 1. the meaning of manifest error for the purposes of cl 2.3 of the Deed of Partition; and 2. whether Mr Marchese's valuations of the Crystal Street and Parramatta Road properties contain manifest error of the type referred to in MFI-2 as failures as to highest and best use (items 1-6), comparable sales approach (items 7, 11, 12, 14, 15 and no purpose of valuation set out), capitalisation method (items 16 and 17) and errors of fact (items 13, 20 to 26)
11. In term of relief, it is common ground that the plaintiffs would be entitled to the relief they seek if the valuations are unaffected by manifest error. The plaintiffs also accept that a partition of the properties by a trustee appointed under s 66G of the Conveyancing Act is appropriate if manifest error is established.

Overview of the Crystal Street and Parramatta Road property valuations

1. As noted above, Mr Marchese issued his valuations of the Crystal Street and Parramatta Road properties in two reports dated 16 March 2020 - one for each property. The reports detail Mr Marchese's valuation methodology and reasoning process and adopt a common structure and valuation approach.
2. Mr Marchese's reports were issued in response to the joint letter of instruction dated 6 March 2020 from Pashon's solicitors, The Norton Law Group. The joint letter of instruction relevantly states: Pashon and Harmon are the registered proprietors of the [Crystal Street and Parramatta Road properties]. The parties are intending to petition the properties whereby each party will take and retain ownership of one of the above-mentioned properties. There may need to be an adjustment between the parties to achieve parity of value. The parties require you to undertake a valuation of the two properties and to provide a current day market valuation for the properties. … If you require any further information relating to the properties including arrangements for access, please let us know …
3. It seems that, other than the joint letter of instruction, no submissions or other information was provided by the parties to Mr Marchese.
4. Each valuation report issued by Mr Marchese refers to the following: the subject property being inspected on 11 March 2020; the Property Type as "Commercial property"; the Interest Valued as the "Unencumbered Freehold Interest"; the Purpose of the Valuation as being to establish the current market value of the property; and the Valuation as having been prepared in response to the 6 March 2020 joint letter of instruction
5. The "Valuation Methodology" adopted by Mr Marchese is identified in each report as the "Direct Comparison & Capitalisation Method", the latter being described as a "check method". The reports include definitions of "Market value", "Highest and best use" and "Value as if complete". The "Valuation" of each property is expressed to be on an "As Is" basis.
6. Each valuation report includes a section that describes the following: 1. the land details, title particulars, encumbrances and services of the subject property: Section 3; 2. the zoning of the subject property. Both properties are recorded as being subject to the Marrickville Local Environmental Plan 2011 and in "Zone B1 Neighbourhood Centre": Section 4; 3. the location of the subject property in Petersham: Section 5; 4. the use to which the subject property is currently put and the condition of the property. Each property is described as "a mix vacant possession and existing tenancies" currently fitted out with residential studio apartments, with eight and five studio apartments in the Crystal Street and Parramatta Road properties respectively: Section 6; 5. properties that are said to comprise comparable sales evidence for the subject property. Five properties are identified for the Crystal Street property and six are identified for the Parramatta Road property: Section 7.1; and 6. the Petersham property market: Section 7.2
7. Section 8 of each report is titled "Summary of Comparable Sales Evidence". This section includes a table of the comparable sales evidence for the subject property that refers to the sale price, land area, gross lettable area (GLA), a $/m2 GLA rate of the comparable property and whether the property is "comparable", "superior", "inferior" or "similar" to the subject property (Table 8.1).
8. In section 8 of each report, Mr Marchese calculates, for "valuation purposes", a market average $/m2 GLA rate and adopts a rounded value based on that market average rate purportedly applied to the GLA for each subject property (market average GLA value). For the Crystal Street property, the market average GLA value is identified as $1,110,000. For the Parramatta Road property, the market average GLA value is identified as $790,000.
9. Section 9 of each report is titled "Valuation Approach". Section 9.1 relates to the direct comparison valuation approach. In this section, Mr Marchese calculates a direct comparison market value for the subject property, as at 16 March 2020, based on sales of similar properties from the immediate vicinity within a 5 km radius over a 12-month period by reference to sales figures from the "closest comparable range".
10. For the Crystal Street property, the market value on the direct comparison method is $1,300,000, based on the closest comparable range from $1,282,000 to $1,309,000.
11. For the Parramatta Road property, the market value on the direct comparison method is $1,100,000, based on the closest comparable range from $1,072,000 to $1,250,000.
12. Section 9.2 of each report values the subject property adopting a capitalisation (check method) valuation approach based on rental income. In each report, it is noted that current leasing information regarding the subject property had not been supplied, that there is no Development Application (DA) approval to allow use as studio apartments and, therefore, a rental figure believed to be in line with the leasing market as at the date of the valuation is adopted. The rental figures adopted are based on the original usage of the subject properties of a top floor two-bedroom apartment and ground floor use as commercial space. Mr Marchese proceeds to calculate the value of each subject property using the expected yields and the expected rental income determined by reference to rentals of comparable two-bedroom top floor residential and ground floor commercial properties.
13. For the Crystal Street property, the valuation on the capitalisation (check method) approach is $1,360,000, based on a capitalisation rate value of $815,000 (rounded) for the 2-bedroom apartment and $545,000 (rounded) for the ground floor commercial space.
14. For the Parramatta Road property, the valuation on the capitalisation (check method) approach is $1,185,000, based on a capitalisation rate value of $730,000 (rounded) for the apartment and $455,000 (rounded) for the commercial space.
15. Section 9.6 of each report identifies that the valuer gives more weight to the direct comparison method due to the strength of the sales evidence and that the mean value between the direct comparison and capitalisation methods was adopted to arrive at the valuation figure for each property on an "As Is" basis. As noted above, this led to a valuation on an "As Is" basis of $1,330,000 for the Crystal Street property and $1,150,000 for the Parramatta Road property.

Basis of challenge

1. Ordinarily, error on the part of a valuer will not be sufficient to invalidate a valuation if it is made in accordance with the terms of the relevant contract. As McHugh JA stated in Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 at 335-336: … the question whether a valuation is binding upon the parties depends in the first instance upon the terms of the contract, express or implied. … By referring the decision to a valuer, the parties agree to accept his honest and impartial decision as to the appropriate amount of the valuation. They rely on his skill and judgment and agree to be bound by his decision. … [As] between the parties to the main agreement the valuation can stand even though it was made negligently. While mistake or error on the part of the valuer is not itself sufficient to invalidate the decision or the certificate of valuation, nevertheless, the mistake may be of a kind which shows that the valuation is not in accordance with the contract. A mistake concerning the identity of the premises to be valued could seldom, if ever, comply with the terms of the agreement between the parties. But a valuation which is the result of the mistaken application of the principles of valuation may still be made in accordance with the terms of the agreement. In each case the critical question must always be: Was the valuation made in accordance with the terms of a contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. … The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract.
2. This statement of principle has been approved in subsequent cases: see, for example, TX Australia Pty Ltd v Broadcast Australia Pty Ltd [2012] NSWSC 4 (TX Australia) at [18], [112]; Hill v Forteng Pty Ltd [2018] FCA 1501 (Hill v Forteng) at [63]; Shoalhaven City Council v Firedam Civil Engineering Pty Ltd (2011) 244 CLR 305; [2011] HCA 38 at [26].
3. Pursuant to cl 2.1 of the Deed of Partition, the parties agreed to cause the Crystal Street and Parramatta Road properties to be valued by Mr Marchese, a registered valuer, in accordance with a joint letter of instruction that was referred to as being annexed to the Deed. There was no joint letter of instruction annexed to the Deed of Partition in evidence and the joint letter of instruction sent to Mr Marchese, in fact, predates the Deed of Partition. As set out at [22], the joint letter of instruction directs Mr Marchese to provide a current day market valuation for the subject properties.
4. By cl 2.3 of the Deed of Partition, the parties agreed: For the purpose of the implementation of the provisions of this Deed the Parties shall accept the values of the Parramatta Road Property and the Crystal Street Property as determined by the Valuation ("the Valuation") save for manifest error.
5. Pursuant to the Deed of Partition, the parties also agreed that, within 28 days of the valuations, they would do all things and sign all documents to cause the transfer of the interests in the properties as between Harmon and Pashon (cls 3.1.1 and 3.1.2), the discharge of the loan and NAB mortgage (cl 3.1.3) and the parity payment by the party with the greater valued property to the other party (cl 3.1.4).
6. Although the joint letter of instruction to Mr Marchese predated the Deed of Partition, it is common ground that Mr Marchese's valuations of the Crystal Street and Parramatta Road properties set out the values and comprise "the Valuation" for the purposes of cl 2.3 of the Deed of Partition and determining whether manifest error is established.

Meaning of manifest error

1. In TX Australia, a case involving a challenge to an expert determination with accompanying reasons, Brereton J (as His Honour then was) observed that the key requirement for manifest error is that "the error be apparent on the face of the determination and reasons": at [20]. His Honour also observed, at [20], that: "manifest error" … does not distinguish between "facile errors" and "those of complexity", nor between obvious errors and less obvious errors, nor between errors of law and errors of fact …
2. In Funtastic Ltd v Madman Film and Media Pty Ltd [2016] VSC 708 (Funtastic) at [53], Almond J reviewed the authorities referring to manifest error and observed: A 'manifest error' in the context of arbitral awards liable to be set aside … has been variously described as an error that is 'apparent to the understanding of the reader', 'obvious rather than arguable', 'easily demonstrable without extensive investigation', 'an oversight [or] blunder so obvious as to admit no difference in opinion' or 'apparent to the judge upon a mere perusal of the reasoned award'. It is clear that an error that is 'abstruse, obscure or inconsequential' will not fall within the definition of 'manifest error'. (Citations omitted).
3. In Funtastic, His Honour concluded that manifest error was confined to clear and obvious errors having regard to the ordinary meaning and purpose of the term and the object and context of the independent accountant's appointment under the relevant share sale agreement. In my view, Almond J's approach in Funtastic is apt in this case.
4. As manifest error is not defined by the Deed of Partition, its meaning is to be determined based on the usual principles of contractual interpretation by reference to the language used, the context and purpose of the transaction, and the objects which the transaction was intended to secure. The relevant question is what a reasonable businessperson would have understood the term to mean: Illawarra Community Housing Trust Ltd v MP Park Lane Pty Ltd [2020] NSWSC 751 at [42]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 (Mount Bruce Mining) at [46]-[47]; Electric Generation Corporation v Woodside Energy Limited (2014) 251 CLR 640; [2014] HCA 7 (Electricity Generation Corp v Woodside) at [35].
5. Mr Marchese was appointed as an expert, not as an arbitrator, in the context where it was intended that the properties would be partitioned, his valuations would determine whether an adjustment might need to be made to achieve parity of value as between the parties and they would act expeditiously to do what was required under the Deed of Partition upon receipt of the valuations.
6. The Deed of Partition simply says that the parties were to instruct Mr Marchese to value the properties in accordance with a joint letter of instruction that required him to provide a current day market valuation of the properties. Unlike many valuation appointments, neither the Deed nor the joint letter of instructions referred to any particular standards, guidelines or other mandatory requirements to which Mr Marchese was to have regard in undertaking his valuation task. The parties left to Mr Marchese's skill and judgment as a registered valuer the determination of his preferred valuation methodology and all other matters relating to the process by which he chose to arrive at the current day market value of the properties, including whether to seek information from the parties. The parties also left the format of the valuation as a matter for Mr Marchese, including whether it was to be issued in the form of a non-speaking valuation or not, and did not deal with what was to happen in the event of manifest error.
7. As the defendants submitted, the ordinary meaning of "manifest" is something that is clear or obvious, apparent or plain to the eye or mind.
8. Taking into account the ordinary meaning and the matters referred to at [46] and [47], in my view, the term "manifest error" in this case means those errors that are apparent, in the sense of being clear and obvious, to the ordinary reader of the valuations. As cl 2.3 the Deed of Partition does not expressly restrict "manifest error" to any particular type of error, in my view, such error could extend to clear and obvious errors of any category, such as an error of calculation, fact, proposition, application of valuation principle or law that the reader could identify from the face of the valuations themselves.
9. That said, I do not accept the defendants' submission that the misapplication of valuation principle or methodology by Mr Marchese necessarily involves an error of law in this case or that legal error would arise because of manifest "illogicality" or "unreasonableness" as that principle is described in cases that apply to administrative decision-making, such as Minister for Immigration & Multicultural Affairs v Eshetu (1999) 197 CLR 611; [1999] HCA 21 at [40].
10. An error of valuation principle may be - but need not be - an error of law: Maurici v Chief Commissioner of State Revenue (2003) 212 CLR 111; [2003] HCA 8 at [8]. Errors in valuation methodology have been described, generally speaking, not as errors of law but mistakes in the course of doing what a contract requires a valuer to do within their own judgment: TX Australia at [80].
11. The determination of value is generally a question of fact and involves matters of degree and judgment. Where, as here, the decision as to what valuation methodology should be applied was left to the valuer and the valuations were not undertaken in a statutory context, it is difficult to see how any error of law could arise. A perverse or unreasonable finding of fact in the context of a valuation is not, without more, an error of law and reasoning that shows that a finding of fact is unsound, such as whether a property is comparable or not, does not suffice for there to be an error on a question of law: Barkat v Roads and Maritime Services [2019] NSWCA 240 at [48].
12. The issue for determination is whether the valuation reports contain manifest error. In my view, that is to be determined not by reference to whether Mr Marchese conducted the valuation process fairly, whether his values are logical or reasonable or how another valuer, acting reasonably, would have approached the task, but by reference to what errors (if any) are apparent on the face of the valuations themselves in a context where the parties left a range of matters to Mr Marchese's discretion, judgment and opinion.
13. That is not to say that the Court cannot have regard to the evidence of Mr Lunney. Expert evidence may be permissible to assist the Court in understanding the nature of the alleged error. See, for example, Hill v Forteng where the court accepted the opinion of an expert witness that the company's expert had made a manifest error in his application of a discount methodology: at [71]-[74]. In TX Australia, Brereton J also considered expert evidence about whether certain services and forms of broadcasting could be considered comparable although he ultimately concluded that manifest error had not been established, noting that an error was not "manifest" if it required the adducing of contentious expert evidence: at [94].
14. I am also not persuaded that, in determining whether the valuations contain manifest error, the Court can otherwise go beyond the valuations themselves and consider extrinsic and other objective material, like local planning controls and instruments to which Mr Marchese did not have regard, in order to ascertain whether there is manifest error as the defendants submitted. To be manifest, the error must be apparent on the face of the valuations reports themselves.
15. The other question that arises from the parties' submissions is whether a manifest error in this case has to be material to the outcome of valuations of the subject properties.
16. The plaintiffs submitted that a manifest error would have to actually impact the outcome of the valuations as it would be "draconian" if a clear and obvious "typo" that had no possible impact on valuation constituted manifest error and led to invalidity of the valuations. Their counsel referred to "his Honour Justice Brereton's decision" as authority for that proposition, which I took to be a reference to TX Australia (T65.36-T66.1).
17. I do not read Brereton J's decision in TX Australia as supporting the plaintiffs' position. His Honour's inclusion of "facile" errors at [20] and reference to the reasoning of the plurality in Westport Insurance Corporation v Gordian Runoff Ltd (2011) 244 CLR 239; [2011] HCA 37 that "manifest error" does not require the error to be of any particular quality, character or egregiousness (at [42] per French CJ, Gummow, Crennan and Bell JJ and [163] per Kiefel J) suggest that manifest error could extend to what might be described as a superficial and easily correctable error and one that might not have a significant or material impact on valuation.
18. In Hill v Forteng, O'Callaghan J noted the consequences of the alleged errors, including one which made a difference of a little over $7000. In Funtastic, Almond J appears to have adopted a definition of "manifest error" which eschewed errors that were inconsequential and dealt with the issue of the apparent impact of the errors as part of a consideration of the appropriate remedy in that case. I note that the English courts have held that manifest error must be obviously capable of affecting a determination: see, for example, Veba Oil Supply and Trading GmbH v Petrotrade Inc [2002] 1 Lloyd's Rep 295 at 302.
19. At the hearing, the defendants contended that materiality is not required for manifest error although they accepted that a typographical error would not be sufficient. They also submitted that the errors they identified should lead the Court to conclude that there may well be materiality arising from them (T44.23-24).
20. Considering the Deed of Partition as a whole and the purpose of the valuation exercise being to ascertain the need for a parity payment, in my view, manifest error for the purposes of cl 2.3 must be an error that is capable of having the potential to affect the valuation(s) in some way, whether that impact is identified by reference to a particular dollar amount or not. To construe manifest error in cl 2.3 in a way that would vitiate the whole of Mr Marchese's valuations from a clear but superficial mistake that could not ever be of any consequence to value seems to me to lead to a result that makes commercial nonsense or works commercial inconvenience and not what the parties would have intended: Electricity Generation Corp v Woodside at [35]; Mount Bruce Mining at [51].

Failures as to highest and best use

1. This complaint, which is common to both valuation reports, alleges that Mr Marchese's valuations contain manifest error because he failed to assess the highest and best use of the subject properties
2. The defendants submit that valuing property based on the highest and best use of land is a fundamental valuation principle, referring to Boland v Yates Property Corporation Pty Ltd [1999] HCA 64; 167 ALR 575 where the High Court stated that "a dispossessed landowner should be compensated for the value of his or her land on the basis of its highest and best use". The defendants also refer to the New South Wales Court of Appeal's decision in Roads and Traffic Authority of New South Wales v Mosca [2006] NSWCA 159; 146 LGERA 335 at [15] where the Court said that "[t]he basic principle of compensation law is that the land must be valued at the relevant date in its existing condition with all its potentialities as potentialities".
3. The defendants also rely on Mr Lunney's expert evidence. He opines that Mr Marchese failed to analyse the subject properties and the market to determine the "highest and best use" of each property which was a significant omission and an error of valuation principle (Lunney Report at [58]). Mr Lunney also opines that ascertaining the "highest and best use" is generally required to determine the market of prospective purchasers to which a particular property would appeal and is implicit in and the starting point for any valuation (Lunney Report at [59]).
4. The defendants point to a range of matters that Mr Lunney opines any valuer, acting reasonably, would consider as part of a highest and best use analysis. The matters referred to by the defendants are Mr Marchese's lack of assessment of the permissibility (or prohibition) of the existing use of the properties as studio apartments having regard to the zoning of the properties; lack of assessment of the permissible floor space ratios of the properties; lack of assessment of whether the current use of the properties could be made lawful through a future Development Application, and failure to conclude that heritage restrictions affected one or both properties. Mr Lunney's evidence is that, in the absence of considering those matters, it was not possible for Mr Marchese to have determined whether the current use of the subject properties was the "highest and best" use (Lunney Report at [62]).
5. The plaintiffs submit that manifest error in relation to highest and best use has not been demonstrated for two reasons.
6. First, they submit that, as Mr Marchese was not required to follow any particular guidelines or apply any particular valuation principle, it was left to Mr Marchese's judgment and opinion as to whether he had regard to the highest and best use of the properties, and there can be no error if he failed to do so.
7. Second, they submit that, on the evidence, it cannot be said that it is apparent from the face of the valuations that Mr Marchese failed to assess the best and highest use of the properties, such that his valuations contain manifest error in that regard.
8. It is a well-recognised principle of valuation that land should be valued by reference to the best use of the land. The concept of highest and best use has been described as implicit in the theoretical basis of the assessment of the market value of land at a given point in time: Spencer v Commonwealth (1907) 5 CLR 418 at 441; [1907] HCA 82; ISPT Pty Ltd v Melbourne City Council [2008] VSCA 180 at [37]-[41]; Alan Hyam, The Law Affecting Valuation of Land in Australia (6th ed, 2020, The Federation Press) at 213.
9. There is no doubt that Mr Marchese's valuation reports do not set out any express analysis of the highest and best use of the subject properties or whether their current use is their highest and best use by reference to the matters identified at [65] above. However, in my view, it does not follow from the fact that he does not explicitly deal with those matters that Mr Marchese's reports contain manifest error as alleged by the defendants.
10. Highest and best use was not identified as a specific criterion by the Deed of Partition or the joint letter of instruction, and the contract between the parties did not oblige Mr Marchese to provide detailed reasoning on how he arrived at his valuations. In that context, I am not persuaded that Mr Marchese was required to undertake an analysis of whether the current use of the properties was their highest and best use or set out his reasoning of how and whether, as a matter of fact, he determined what was their highest and best use. Even if I were to accept that usual valuation principle required some consideration of the highest and best use for the valuations, it seems to me that, in this case, all Mr Marchese needed to do was to come to a view on that matter and proceed to value the properties on that basis.
11. Mr Marchese's reports make clear that he was cognisant of the highest and best use principle in the context of his market valuations; his reports refer expressly to the definition of both "market value" and "best and highest use". He adopted valuation methodologies for the subject properties that assumed a use different to current usage, noting that their current usage as studio apartments were not DA approved. His reports refer to the local environment plans of the subject properties which, on their face, permitted "shop top housing" with consent and his counterfactual assumption of mixed commercial and residential use for the valuations of the subject properties was based on their original usage.
12. In cross-examination, Mr Lunney was asked about Mr Marchese's choice to value the subject properties as partly residential and partly commercial and whether it was possible that this mixed-use approach was the highest and best use of the subject properties. Mr Lunney's conceded that "[i]t may be that the original prior use of the properties, as retail space on the ground floor, residential on the upper floor, is the highest and best use".
13. Mr Lunney went on to disagree with the proposition that it was not possible to know whether Mr Marchese directed himself to the highest and best use of the properties, asserting that Mr Marchese did not direct himself to that question. However, his disagreement with the proposition that Mr Marchese's approach might have considered the highest and best use was, at least in part, based on what appears to have been Mr Lunney's incorrect view of Mr Marchese's counterfactual assumption relating to the use of the subject properties. In cross-examination, Mr Lunney referred to Mr Marchese's counterfactual assumption as "two [different] apartments" and a retail or commercial downstairs component. On that premise, Mr Lunney also disagreed with Mr Marchese's opinion that the most likely purchaser would be an owner-occupier.
14. Rather than two apartments (as Mr Lunney asserted), Mr Marchese's reports adopt a counterfactual assumption of one apartment (of two bedrooms) on the upper floor and commercial space on the lower floor for his capitalisation approach (see Crystal Street property valuation report dated 16 March 2020 (Crystal Street property report) at 28 and Parramatta Road property valuation report dated 16 March 2020 (Parramatta Road property report) at 27). This is consistent with Mr Marchese's direct comparison valuation approach; the properties that he identified as most "comparable" were mixed residential and commercial properties with a "top floor residence" and commercial space downstairs (see, for example, the Percival Road Stanmore, King Street Newtown and Paramatta Road Camperdown properties which were identified as comparable for the Crystal Street property).
15. In my view, Mr Lunney's concession in cross-examination and the matters referred to at [71], [72] and [75] undermine Mr Lunney's opinion that Mr Marchese did not direct himself to the question of the highest and best use of the subject properties (Lunney Report at [61]). While not stated explicitly, it seems just as likely (and perhaps could be inferred as more than likely) that Mr Marchese formed an opinion, in the exercise of his own judgment and skill, that the generic highest and best use of the subject properties was as mixed commercial and residential based on their original usage and, having done so, he proceeded to undertake his valuations on that basis. Even if Mr Marchese did not form such an opinion, in circumstances where Mr Marchese was not required by the contract to consider and deal with highest and best use in his valuation reports, Mr Lunney conceded that the highest and best use of the properties may be their original usage of an upper floor residential apartment and ground floor commercial space and Mr Lunney also accepted that the valuation methodologies adopted by Mr Marchese were sound and orthodox (Lunney Report at [13]), I am not persuaded that the failures to address highest and best use are clear and obvious errors on the face of the valuation reports.
16. I am also unpersuaded by the defendants' submission that manifest error is demonstrated as any reasonable reader would be left wondering what the class of purchaser would be having regard to the highest and best use of the subject properties. On a plain reading of the valuation reports, it seems clear that Mr Marchese's opinion was that the likely class of purchasers would be an owner-occupier (on the basis of one apartment and not two), with the use of the subject properties as mixed commercial and residential.
17. It follows that I am not satisfied that the defendants have established that Mr Marchese's valuation reports contain manifest error under this category.

Comparable sales approach errors

1. The defendants' next category of alleged error relates to Mr Marchese's approach to comparable sales.
2. The claimed errors can be summarised as follows: 1. errors in valuation approach and principle by not assessing the sale of the subject properties themselves and failing to make appropriate adjustments to the comparable sales and subject properties (MFI-2 items 7, 12, 14 and an unnumbered item); 2. errors in calculating the market average GLA value for each of the subject properties (MFI-2, item 11); and 3. an error in the Parramatta Road property valuation arising from the use of sales of comparable properties which did not meet Mr Marchese's own stated criteria (MFI-2, item 15).
3. The defendants also allege that Mr Marchese made a number of factual errors in the assessment of the comparable sales properties (MFI-2, item 13) which I deal with as part of the alleged errors of fact later in these reasons.

Did Mr Marchese make manifest errors in valuation approach and principle in dealing with comparable sales and the subject properties?

1. The defendants submit that Mr Marchese erred in a manifest way by failing to apply usual valuation principle in his treatment of comparable sales. The contentions are, in essence, that Mr Marchese used comparable sales for the subject properties as the basis for his valuations but, contrary to recognised valuation principle, he made no adjustments for differences between the sales and subject properties to account for inferiority or superiority.
2. Further, the defendants say that Mr Marchese failed to assess the sale price of the Crystal Street and the Parramatta Road properties themselves as part of his comparable sales analysis. Related to this, they say that it was a manifest error on the part of Mr Marchese not to have acknowledged the purpose of the valuations in the reports themselves that the properties were being valued in the context of the proposed partition.
3. At the hearing, the defendants' counsel submitted that Mr Marchese's approach to valuation was not consistent with the authorities that say an actual adjustment must be made for each property, citing Marroun v Roads and Maritime Services [2012] NSWLEC 199 (Marroun).
4. In Marroun, the Court referred to the comparable sales method of valuation as involving the accumulation, analysis, adjustment and application of comparable sales to a subject property. The Court observed that "adjustments are made to find a basis for practical comparison, for example, by hypothesising a unitary rate to reflect differences (such as size, location, use, date, etc) between a respective potentially comparable sale and the subject property": at [202]. The Court went on to observe that adjustments for differences may be made explicitly or implicitly, and that adjustment is a deductive process based on reasoning which draws on the skill, expertise and experience of a valuer: at [203].
5. The defendants' counsel also submitted that Mr Marchese's approach would leave a lay reader asking "why is my property different to that. You just say inferior, superior but why? On what basis? ... there is an absolute mystery as to how [Mr Marchese] has drawn that conclusion …" (T51.26-38). This complaint seems to be more about a lack of transparency regarding Mr Marchese's approach to comparable sales and adjustments.
6. In this case, Mr Marchese did not engage in any explicit adjustment process. He referred to differences in the land size, GLA, location and configuration of each of the comparable sales properties referred to in Section 7 of his reports, asserted whether the property was "comparable", "superior", "inferior" or "similar" to the subject property and then divided the sales price by the GLA for each comparable sales property. To use Mr Lunney's words, from some "implicate adjustment" or "value judgment", Mr Marchese subsequently went on to derive the $/m2 GLA rate to apply to the subject properties. In his report, Mr Lunney also states that, in order to determine whether a particular sale property may be considered "superior" or inferior", the orthodox method of valuation would be to undertake an analysis of each property to determine whether there are any relevant differences for which adjustment may be made to achieve equivalence or comparability between the sale property and the subject property (Lunney Report at [105]). He then goes on to state that no such analysis or adjustment is set out in Mr Marchese's reports (Lunney Report at [106]).
7. Whether or not an adjustment to a sale that is said to be comparable should be made, and if so by what amount, is a matter of degree and of judgment: Barkat v Roads and Maritime Services [2019] NSWCA 240 at [49], per Emmett AJA (Leeming JA and Simpson AJA agreeing). Just where the line is drawn on what is comparable and the assessment of the risks of adjustment is peculiarly within the valuer's sphere of skill and for them to determine: Sydney Water Corporation v Marrickville Council [2014] NSWCA 438 at [33], citing Brewarrana Pty Ltd v Commissioner of Highways (No 2) (1973) 6 SASR 541 at 551; 32 LGRA 170 at 180.
8. I also do not read the authorities as meaning that a valuer in the position of Mr Marchese would be manifestly wrong by engaging in some implicit adjustment process. Mr Marchese was not acting as an arbitrator or expert witness whose report risked rejection for want of transparency. Nor did the letter of instruction require him to give reasons. The fact that Mr Marchese's reports did not set out any analysis of adjustments or led to some "mystery" around why he formed the view that a property was comparable, inferior or superior does not, in my view, demonstrate that Mr Marchese did not make any adjustments or was manifestly wrong in not doing so.
9. As to the defendants' complaint about Mr Marchese's failure to assess the sale prices of the subject properties themselves, in my view, this issue is akin to a difference in judgment, opinion and evaluation and does not constitute obvious error on the face of the valuations.
10. While Mr Lunney opined that the recent actual sale price of a subject property may be regarded as the best prima facie evidence of market value, the previous sales of the subject properties took place more than two years prior to the valuations; a period beyond which a valuer would ideally have regard, according to Mr Lunney. As Mr Lunney stated in his report, a valuer would place more weight on recent sales being transacted within a six-month period, rather than sales that occurred two to two and half years prior to the date of valuation (Lunney Report at [125]). Subject to one property in respect of Crystal Street, all of Mr Marchese's comparable sales were within a twelve-month period of the valuation date. On Mr Marchese's approach, there was, therefore, good reason not to include the older sale prices of the subject properties themselves.
11. In any event, in my view, Mr Marchese could not be manifestly wrong in the manner asserted given the Deed of Partition and joint letter of instruction did not specifically require him to assess the previous sale prices of the subject properties or compare them for the purposes of his current day market valuations. While the purpose of the valuations was to achieve parity value, Mr Marchese's mandate was to provide current day market valuations of the properties, not to provide valuation reports that explained why the properties were priced differently in 2017 and 2018 and what, if anything, had impacted the change in their values since they were last sold.
12. I also do not accept the defendants' submission that the absence of any reference to the purpose of the valuations in the reports themselves amounts to manifest error under cl 2.3 of the Deed of Partition. I fail to see how not expressly referring to the partition of the properties and the possible need for an adjustment between the parties to obtain parity value could constitute manifest error in and of itself. Both reports reference the joint letter of instruction which made it clear to Mr Marchese that the valuations were being undertaken in the context of the proposal to partition the properties and the possibility of a payment to ensure parity of value.
13. It follows that I am not satisfied that Mr Marchese's valuation reports contain manifest error in respect of items 7, 12, 14 and the "no purpose of valuation set out" item referred to in MFI-2.

Did Mr Marchese make a manifest error in calculating the market average GLA value for each of the subject properties?

1. It is common ground that Mr Marchese made a mistake in Section 8 of his valuation reports by applying the derived market average $/m2 GLA rate (essentially a building area rate) to the land area of each of the subject properties.
2. In the Crystal Street property valuation, he applied the land area of 171m2 to come to a rounded market average GLA value of $1,110,000, rather than applying the GLA of 185m2 to come to a value of $1,202,500.
3. For the Parramatta Road property, he applied the land area of 158m2 to come to a rounded market average GLA value of $790,00, rather than applying the GLA for that property. In addition to this, there is also a question as to what is the correct GLA for the Parramatta Road property. In the Parramatta Road property report, Mr Marchese refers to two GLAs: 150m2 (pages 4 and 8) and 200m2 (page 13). In cross-examination, Mr Lunney also gave evidence that there was nothing in the Parramatta Road property report that enabled him to identify whether the GLA was 150m2 or 200m2.
4. The plaintiffs submit that Mr Marchese's mistake in applying the land area instead of the GLA is not a manifest error for the purposes of cl 2.3 of the Deed of Partition because his market average GLA value analysis did not, in the end, form part of his valuations so as to "infect the result" (T65.44). They point to the values of the subject properties having been derived from Mr Marchese's direct comparison and capitalisation calculations, as set out in section 9.1-9.2 of the reports, rather than from an application of the mistaken market average GLA values
5. The difficulty with this submission is that Mr Marchese's reports indicate that his analysis on a market average rate per square metre basis was undertaken for "valuation purposes" and "used for this purpose of valuation" (Crystal Street property report at 26, Parramatta Road property report at 25). These statements were made in both reports after an earlier statement to the effect that transactions in an owner-occupier market are "conducted on a rate per square metre to determine a real value".
6. Thus, in Mr Marchese's own words, his calculations of the market average GLA values were relevant to and formed part of his analysis and reasoning concerning the valuations of the subject properties. Presumably, the calculations must have formed some part of Mr Marchese's overall assessment of the values of the subject properties notwithstanding it may not be apparent or explicit from his reports how they were, in fact, used as part of that assessment.
7. The plaintiffs also contended, by reference to the Parramatta Road property valuation, that if the error was rectified mathematically, "you get very close to the valuation" of $1,100,000 (using the direct comparison approach) (T66.19-20). By that submission, I understood the plaintiffs to be suggesting that there was no manifest error because a correction of the error would not lead to any significant difference in the valuation outcome. Two points can be made in response to that submission.
8. First, the plaintiffs' calculation assumed that the Parramatta Road property GLA was 200m2 which, based on the discrepancies noted at [97], is not an assumption that is supported by the evidence.
9. Second, even if 200m2 is the correct GLA, getting "very close" to the dollar value of the valuation on the direct comparison method still leaves some gap in value that can be expected to be capable of having the potential to affect the overall outcome of the valuation.
10. On a plain and objective reading of the reports, Mr Marchese obviously miscalculated the market average GLA values as part of his valuation process and I am not persuaded by the plaintiffs' submission that the apparent errors are of no possible consequence to Mr Marchese's valuation process, reasoning and outcomes. It follows that I accept the defendants' submission and Mr Lunney's evidence that it was manifestly erroneous for Mr Marchese to have calculated the market average GLA values using land area and, in doing so, it prevented a like-for-like comparison with the comparable sales

Did Mr Marchese make a manifest error in the use of sales for the Parramatta Road valuation which did not meet his own criteria?

1. The defendants submit that it was manifestly wrong for Mr Marchese to use the sales of the Norton Street Leichhardt and Parramatta Road Camperdown properties (with sale prices of $1,072,500 and $1,250,000 respectively) for the "closest comparable range" to determine the market value of the Parramatta Road property. Mr Lunney's evidence is that, on any objective analysis, these properties could not be considered as the most comparable to the Parramatta Road property having regard to the differences in size, GLA and zoning.
2. The plaintiffs did not specifically address me on this alleged error but made a general submission that Mr Marchese's choice of comparable sales was a matter for his own value judgment and is not impeachable.
3. At a general level, I accept the force of the plaintiffs' submission that the choice of comparable sales was a matter of fact and judgment for Mr Marchese. As Mr Lunney accepted in cross-examination, the determination of what properties should be selected as comparable to the subject property involves skill, judgment and experience on the part of a valuer.
4. However, in this case, I accept Mr Lunney's criticism that Mr Marchese's use of the Norton Street Leichhardt property as one of two of the most comparable sales for the purpose of determining market value on the direct comparison method defies any rational or logical explanation and have concluded that Mr Marchese's use of that property for that purpose involves manifest error.
5. The issue with the plaintiffs general submission is that it does not deal with the fact that Mr Marchese has used the sale price for a property (the Norton Street Leichhardt property) that his own report identifies as "inferior" and one which does not have mixed commercial and residential use (see Parramatta Road property report at 21 and 25, Table 8.1). Consequently, instead of using the sale prices of the two mixed commercial and residential properties that his report identifies as being most comparable to assess the market value of the Parramatta Road property on the direct comparison method (namely the Cavendish Street Stanmore property with a sale price of $1,170,288 and the Parramatta Road Camperdown property at $1,250,000), he has erroneously used the sale price of an "inferior" property as the lower of the closest comparable range together with the sale price of only one comparable property.
6. While the sale price gap between the Norton Street and Cavendish Street properties may not be significant (around $100,000), as a matter of logic, using the higher priced Cavendish Street property as one of the two most comparable sales for the purpose of determining market value on the direct comparison method would lead to a different and slightly higher value for the overall valuation of the Parramatta Road property
7. Accordingly, I accept the defendants' submission and Mr Lunney's evidence that Mr Marchese made a manifest error in using sales for his direct comparison valuation of the Parramatta Road property that did not meet his own criteria.

Capitalisation method errors

1. The next alleged errors arise from Mr Marchese's capitalisation of rental income method of valuation.
2. There are two types of error raised. The first relates to the misapplication of capitalisation rates (item 16). The second involves a range of alleged methodological errors that are said to impact his capitalisation method of valuation (item 17).
3. As noted above, Mr Marchese valued each property adopting a capitalisation (check method) approach based on rental income. In each report, Mr Marchese applied a per annum capitalisation rate to the estimated per annum rental for the two-bedroom apartment to arrive at a capitalisation rate value in rounded figures.
4. The first alleged error arises because Mr Marchese's reports refer to market research as indicating that "investors are seeking yields in the order of 3.20% per annum for Commercial warehousing within the INNERWEST region", and the calculation of the capitalisation rate value for the two-bedroom apartment adopts the 3.20% capitalisation rate. In other words, on the face of Mr Marchese's reports, he has erred by adopting a capitalisation rate for the wrong type of property, commercial warehousing, and by applying it to the estimated income stream for a residential apartment.
5. The plaintiffs submit that this is simply in the "cut and paste error basket". They pointed to the previous two pages of the reports that indicated that Mr Marchese was undertaking an analysis of capital return on a rental basis and using two-bedroom apartments as his comparables.
6. I am not persuaded by the plaintiffs' submission. Unlike other obvious "cut and paste" errors in Mr Marchese's reports, [1] the clear error concerning commercial warehousing is not corrected elsewhere in the reports. In my view, it is also not open on the evidence to assume that the error is limited to the words "commercial warehousing" only and does not extend to the application of the 3.20% rate. The plaintiffs could have led evidence from Mr Marchese to confirm that the error was of a "typographical" nature only, relating to the words "commercial warehousing" and not to the rate, but chose not to do so. Nor did the plaintiffs challenge Mr Lunney's evidence in cross-examination that it is a fundamental error to apply a commercial warehousing capitalisation rate to the income stream for residential apartments.
7. While this error might be described as superficial and easily fixed, the application of a capitalisation rate for the wrong property type was used as part of Mr Marchese's calculation of market value on the capitalisation (check method) valuation approach and, thus, on the face of the valuation reports themselves, affected the overall outcome of the values of the subject properties.
8. Accordingly, I am satisfied that the application of commercial warehousing capitalisation rates to the subject properties involved manifest error in each report.
9. As to the second alleged error, Mr Lunney refers to five other matters which he says are fundamental methodological errors in Mr Marchese's capitalisation of income approach (Lunney Report at [162]).
10. The first three matters relate to the counterfactual assumption about a different configuration of the subject properties based on original use and not current use, the lack of any consideration for possibly regularising the non-DA approved works and current uses of the properties, and the lack of any allowances for the time, cost and risk of removing those unlawful works. These matters overlap with the criticisms regarding highest and best use which I have already dealt with. In my view, they do not constitute manifest error.
11. The fourth is the absence of analysis or market evidence in support of the capitalisation rates adopted. For reasons similar to those set out earlier, I do not accept that the absence of Mr Marchese's reasoning or market evidence demonstrates manifest error in this case. In any event, I note that Mr Marchese's reports refer to market research through "RealEstate.com.au" as the basis for the yields and rates he adopted.
12. The last matter raised by Mr Lunney was the calculation of retail income on the basis of a mean or average as being incorrect in principle. As noted above, at the hearing, the errors in relation to the averaging method were no longer pressed by the defendants.

Factual errors

1. The defendants also submit that there is a multiplicity of factual errors in the valuations that relate to the subject properties and the descriptions of the comparable sales properties which constitute manifest error.
2. It is clear from a review of the reports that there are mistakes and inconsistencies in the way in which Mr Marchese describes aspects of the Crystal Street and Parramatta Road properties. The mistakes include the misdescription of the LGA for the Crystal Street property as "Canterbury-Bankstown" (page 4), the misidentification of the registered proprietor of both properties (page 8 in both reports) and the misidentification of the zoning of the Crystal Street and Parramatta Road properties as "General Commercial - Business - Subject to INNERWEST Local Environment plan 2009" (page 4 in both reports).
3. Mr Marchese also seems to have made an error in the Crystal Street property report where he states, on page 9, that the property is not affected by "other restrictive encumbrances, covenants, easements or other planning restrictions which might otherwise detrimentally affect the value of the commercial property … ". As identified in the Valuer General land valuation report annexed to Mr Marchese's valuation report, the Crystal Street property is subject to heritage restrictions imposed under a planning instrument (Crystal Street property report at 39, CB108).
4. The defendants accept that these errors, by themselves, are not sufficient to constitute manifest error. However, they submit that there are so many errors that, when considered cumulatively, they undermine the reliability of Mr Marchese's reports such that the Court should conclude that they amount to manifest error for the purposes of cl 2.3 of the Deed of Partition. I am not persuaded by that submission.
5. The mistakes to which I was referred are, in my view, properly to be regarded as "cut and paste errors" given the correct LGA, registered proprietor and zoning for Crystal Street property are referred to in other parts of the reports. As the defendants' counsel conceded at the hearing, the most material of the errors would be the misdescription of the LGA which was later corrected.
6. Mr Lunney also accepted that some of the errors were in the category of superficial-type cut and paste errors which would have no bearing on the valuation itself (for example, T10.31-34), that he had to go to external sources to identify most of them, such as the planning portal and local environment plan zoning map (for example, T12.46-47), and that his own report contained errors of a similar type (for example, T11.32-34).
7. As to the errors regarding the descriptions of the comparable sales properties, Mr Lunney accepted in cross-examination that the information contained in his report on which the assertions of error were based was obtained from sources external to Mr Marchese's valuation reports, such as information gleaned from his own " RP Data" searches, his own calculations, real estate agents and other data sources to which Mr Marchese may or may not have access. I also note that information in Mr Lunney's report relating to at least one of the comparable sales properties was also shown to be erroneous. In those circumstances, I do not accept that the factual errors raised by the defendants are errors that are apparent on the face of the valuations or are indicative of a fundamental deficiency in the valuation approach which Mr Marchese employed.
8. Accordingly, I am not satisfied that the factual errors referred to by the defendants are manifest error for the purposes of cl 2.3 of the Deed of Partition.

Conclusion and relief

1. In conclusion, I am satisfied that the Crystal Street and Parramatta Road property valuations contain manifest error but not to the extent claimed by the defendants. The manifest errors common to both properties relate to Mr Marchese's calculations of the market average GLA value for each of the subject properties and the misapplication of capitalisation rates for commercial warehousing in his capitalisation method of valuation. I am also satisfied that Mr Marchese was manifestly wrong in his use of the Norton Street Leichhardt sale for the "closest comparable range" to determine the market value of the Parramatta Road property where it did not meet his own criteria.
2. As I have concluded that the valuations are affected by manifest error, they are not final and binding. It follows that the plaintiffs' summons seeking orders that the defendants do all things required to transfer its interest in the Parramatta Road property to Harmon and to pay the amount of $90,000 to achieve parity in the values of the Parramatta Road and Crystal Street properties fails and should be dismissed.
3. By their cross-claim, the defendants seek declaratory relief and an order under s 66G of the Conveyancing Act 1919 (NSW) for trustees to be appointed to hold co-owned properties on statutory trust for partition. No objection was taken by the plaintiffs to a declaration being made and it is an appropriate form of relief in this case.
4. As to an order under s 66G, at the end of the hearing, the plaintiffs indicated that if they were unsuccessful with their claim they would accept a partition of the properties by a trustee, subject to the properties being partitioned in the way contemplated by the Deed of Partition which the defendants appear to accept. The parties should confer on the form of orders for partition and the identity of suitable trustees.
5. The usual order as to costs is that they follow the event: Uniform Civil Procedure Rules 2005 (NSW), r 42.1. As the plaintiffs have failed on their claim and the defendants have had success on the principal issue of whether the valuations contain manifest error, I will also make an order that the plaintiffs are to pay the defendants' costs of the proceedings.
6. I have deferred making any orders at this stage and invite the parties to confer and send to my associate agreed short minutes that reflect these reasons. The parties are at liberty to approach my associate if agreement on the form of orders cannot be reached or a party wishes to seek a different or special costs order.

Endnote

1. For example, the misdescriptions of the registered proprietor of the properties as "MRS Property No 1 Pty Ltd" for the Crystal Street property at page 8 and the Parramatta Road property at page 8, the misidentification of the Local Government Area as Canterbury-Bankstown for the Crystal Street property at page 4, and the misdescription of the Deposited Plan for Parramatta Road at page 8. 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: 15 March 2021