Hurstville City Council v RTA

resumption of lease to acquiring authority LEGISLATION CITED: Compensation:- valuation of leasehold interest acquired

DATES OF HEARING: 04/21/1999; 04/22/1999; 04/23/1999

DATE OF JUDGMENT DELIVERY: 05/04/1999

Applicant: Mr M H Tobias QC With: Mr J E Robson (Barrister)

Solicitors: Deacons Graham James

Respondent: Mr J B Maston (Barrister)

Solicitors: I V Knight Crown Solicitor

Contents Paragraphs Compulsory acquisition 1 - 8 The council's approach to the assessment 9 - 11 The State Valuation Office approach to the method 12 - 14 The issues 15 - 20 The value of the council's interest in the land 21 - 51 Disturbance 52 Compensation 53 - 55

IN THE LAND AND Matter No. 30207 of 1998 ENVIRONMENT COURT Coram: Talbot J OF NEW SOUTH WALES Decision Date: 4 May 1999

Hurstville City Council Applicant v Roads and Traffic Authority of New South Wales Respondent

By notification dated 3 April 1998 the Roads and Traffic Authority of New South Wales (the RTA) acquired a lease over four parcels of land forming part of a larger parkland and recreational area known as Beverley Grove Park owned by Hurstville City Council.

The lease terminates after a term of four years or such earlier date as the RTA may require.

In general terms the permitted use under the lease is for the construction and support of a road, namely the M5 Motorway.

The subject lands are irregular in shape, flat level grassed areas which are currently used as playing fields, mainly soccer and cricket, and passive recreation such as walking dogs and flying kites.

The lands are zoned part 6(a) Open Space and part 9 Arterial Road Reservation under Hurstville LEP 1994.

The subject land is classified as community land. It is listed as a sports ground under the adopted plan of management.

For the purpose of assessing compensation, both parties have disregarded the Arterial Road Reservation and made their assessment on the basis of Open Space.

Community land can only be used in accordance with a plan of management. Section 45 of the Local Government Act 1993 provides that a council cannot sell, exchange or otherwise dispose of community land. There is a restricted opportunity to lease within the constraints of s 46 and s 47.

Mr Terry Dundas AAPI, a registered Real Estate Valuer, followed the approach taken by the Chief Judge in Prince Alfred Park Reserve Trust v The State Rail Authority ((1997) 96 LGERA 75), where her Honour assessed compensation at a premium rental determined at six per cent of the land value capitalised for the term of the lease at 10 per cent, as his preferred basis of assessment.

Alternatively Mr Dundas utilised what he described as the most commonly accepted method of valuation of property affected by restrictive leases, that is, to defer the capital value of the property for the term of the lease.

In both cases he determined the land value at $250/m 2 by analysing and applying comparable sales of residential land being the equivalent of the market price of land acquired for open space use.

The State Valuation Office approach to the assessment

Mr Errol Ferdinands AAPI, Registered Valuer, firstly made a direct comparison with actual current returns from seasonal licensing of Beverley Grove Park and other parks, principally Hurstville Oval. He adopted the maximum gross return at Hurstville Oval over four years, presently discounted at 10 per cent, notwithstanding that the cost of maintenance substantially exceeds the fees recovered from sporting organisations.

Alternatively, setting aside the possibility, if any, of the sale of the land within the terms of the plan of management, he determined a freehold value of the land as open space for the purpose of applying the Prince Alfred Park approach. The freehold value derived from comparable sales of open space land assisted by the decision of Bannon J in Hornsby Council v RTA (unreported 30016 of 1995 29 May 1996) determined by Mr Ferdinands is $40/m 2 .

Mr Ferdinands prefers the direct comparison of the comparable rental approach as he believes the assessment based on a freehold sale value and a rental on such value to be less reliable.

Although Mr Ferdinands does not prefer it, both valuers agree that compensation can be assessed at a premium rental determined at six per cent of the land value capitalised for the term of the lease at 10 per cent.

There is no expressed basis for the adoption of six per cent other than, it was the rate accepted by the Court in the Prince Alfred Park case, and professional judgment. There being no issue in that respect, it can be accepted as reasonable. It is also agreed that 10 per cent is a generally accepted commercial rate for capitalisation of rent over the term of the lease.

The outstanding issue in respect of the premium rental approach is the question of how the land value should be determined.

Although the discount of actual rents achieved may be an acceptable approach in a conventional commercial situation, I agree with the applicant that it is unrealistic to have regard to it in a circumstance where the landholder is a council which is essentially providing a community service.

The alternative method utilised by Mr Dundas, namely to defer the capital value of the land for four years, is in the Court's opinion a reasonable check on the premium rental approach. Here again the Court is driven to resolve the issue of the appropriate land value to be applied.

The real issue therefore is to determine an appropriate and proper market value to be attributed to the land for the purpose of assessing the amount of compensation on either basis.

In one respect it could be reasonable to adopt a value which is derived from sales of residential land because, in order to acquire land for open space use, a council will be either a purchaser with the ultimate power of compulsory acquisition or acting as a statutory authority exercising the power of resumption over land that, in most cases, has a highest and best use for residential purposes.

However, that approach ignores the fact that the subject land is already being used for open space. The council has been deprived of the benefit or right to exploit that open space land in the public interest. This is not a case where the open space reservation should be ignored in order to determine compensation payable for land acquired for that purpose.

The loss to the council must be assessed on the basis that it cannot, during the period of the lease, provide the public with the pre-existing facility for active and passive recreation.

Although it is arguable that the council can only replace the land over the term by gaining access to land which is otherwise suitable or zoned for residential purposes, it is nevertheless not entitled to a reinstatement.

The legislation dictates that compensation shall be assessed as the market value of the land together with any special value and loss attributable to disturbance. The loss attributable to disturbance has been agreed in the sum of $6000.

The market value of the land is to be determined on the basis of its highest and best use. If it was placed for sale on the open market, it would be sold subject to the open space zoning which constrains its use to uses compatible with the purpose of the zoning.

Originally Mr Dundas made no attempt to place a market value on the land as land entered in the market for sale as open space land. As I have already said, he preferred to regard the value of the land as the price paid by a statutory authority acquiring it for the purpose of open space. The problem with the approach taken by Mr Dundas is that it requires the Court to treat the land as something which it is not. The land is not land which, at the date of resumption, can be regarded as residential land. It is open space designated for the purpose of passive and active recreation by members of the public.

Mr Ferdinands pointed to a number of sales which he considered to assist as being comparable for the purpose of assessing the market value of the land as open space.

Under the plan of management it is reasonable to assume that for the whole of the term of the lease, the council would have continued to provide the land for the authorised community purposes of open space. Section 46 of the Local Government Act 1993 authorises the grant of a lease for a broad range of purposes, including public recreation, social and intellectual welfare or development of persons, although they must be generally consistent with the status of the land as community land in accordance with the core objectives of a sportsground specified in s 36F.

It is appropriate to assess the rental return from the property having regard to its highest capability. However this does not involve having regard only to the actual cash return from sporting organisations as Mr Ferdinands attempted to do. It is also inappropriate to make the direct comparison which Mr Dundas draws with commercial returns from other categories of land, as this, in my opinion, produces a rent out of all proportion to a realistic expectation from this class of property.

In Prince Alfred Park Trust the underlying value of the land does not appear to have been an issue. Her Honour noted that the applicant's valuer had derived a value of $600/m 2 by having regard to comparable sales. The attack by the respondent was directed to the determination of the highest and best use of the resumed land. The applicant had regard to two comparable sales of land (in proximity to the resumed land) for open space purposes having identified recreation facilities, refreshment rooms or underground parking as uses permissible with consent in respect of the resumed land. On the other hand the respondent considered the highest and best use of the resumed land was for the purpose of two tennis courts. Her Honour rejected the respondent's submission in that respect. She found that the highest and best use of the resumed land was for active or passive recreation, including recreational facilities. In doing so, she took into account the provisions of a draft plan of management.

The decision of Bannon J in the Hornsby case involved the resumption of lands which, at all relevant times, were classified by the council as community land for the purpose of Ch 6 Pt 2 of the Local Government Act 1993. Mr Dundas also presented valuation evidence to the Court on that occasion. He considered the resumed land in two ways. Firstly, as land wholly or partly suitable for residential or medium density housing and secondly upon the basis that the council, in order to replace the resumed land, would have to purchase land on the open market being either residential land or open space land not subject to restrictions. Bannon J was unable to accept either basis. The respondent on the other hand valued the land as open space without restrictions. His Honour complained that no yardstick was afforded by the evidence as to the value to the council of the subject parcels as open space subject to restrictions. His Honour recalled that council's community land may only be used in accordance with a plan of management and that the land is largely dedicated to public use and accordingly its value in the market place must be regarded as small.

Justice Bannon's observations should be taken in the proper context of the resumption of land in respect of which, by dint of s 45 of the Local Government Act 1993, a council has no power to sell, exchange or otherwise dispose of it.

The decision in the Hornsby case does not, in my opinion, constrain the Court from having regard to a commercial return on the value of the land determined according to its status as open space for the purpose of deriving a premium rental. Section 46 of the Local Government Act authorises the council to grant a lease or licence of community land if the grant of such lease or licence is expressly authorised by a plan of management and it does so in accordance with such provisions subject to other restrictions which are not relevant for present purposes.

Mr Ferdinands, in his formal statement of evidence, considered Parcel Two in the Hornsby case and a sale of Fraser Park at Marrickville to establish that the subject site has a value of $40/m 2 . In response to a challenge raised by Mr Tobias QC that it is contrary to valuation principle to adopt a Court determination as evidence of a comparable sale, he said that he relied principally upon the sale of Fraser Park at Marrickville. He used the decision of Bannon J to determine the discount to be applied to land held as community land.

Bannon J, with reluctance, felt obliged to assess compensation at one third of each of the valuations provided to him. Bannon J relied principally upon the advice of the Privy Council in Corrie & Anor v MacDermott [1914] AC 1056 where the owner was prohibited from ever building on the land or alienating it. The value could not be measured by the value of unrestricted land in a similar position. On the other hand the land was of value to the corporation who enjoyed it with the rest of the adjoining land, for the use of the citizens as a garden, which garden would be so much the less valuable because it was smaller. The relevant value is the value to the owner while taking into account the effect of restrictions on disposition. The principles established by that decision and other authority cited by Bannon J are relevant only to the determination of market value of land where the whole of the fee simple is acquired.

Sales relied upon by Mr Ferdinands range from $24/m 2 for a sports centre at Milperra through to $50/m 2 paid by the National Parks Service to the Department of Health for land at Bedlam Bay for the purpose of establishing a regional park. He adopts the sale of Fraser Park at Marrickville at $48/m 2 . However this sale included substantial improvements. He also made reference to a sale of land to Warringah Shire Council at Frenchs Forest which Bannon J had adopted as most comparable. This last sale analysed at $51.23/m 2 .

Mr Ferdinands reduced the $48/m 2 achieved at Fraser Park to $40/m 2 to take account of improvements. This, he said, would represent a value at the higher end of the scale and would take account of the fact that the land was an actively used park. The bottom end of the scale is represented by the value determined for the Hornsby land by Bannon J at $33.23/m 2 . However, the figure arrived at by Bannon J takes account of the discount applied for the restriction on the sale of community land.

Using $40/m 2 Mr Ferdinands determined an "upfront rental premium" of $36000 per annum for four years which, discounted at 10 per cent, gave a market value of $125526. This contrasts with $715000 calculated by Mr Dundas using the same method but adopting a land value of $250/m 2 .

The Fraser Park sale took place in December 1990. Mr Ferdinands contends that there has been no appreciable change in the market value of open space land since that date. Despite the lack of evidence to the contrary, the Court finds it difficult to accept that values have not appreciated at least to some degree over the ensuing eight years.

Furthermore, the evidence discloses that the subject land is far superior to the Fraser Park land which was impacted by easements and rights of way and is surrounded by an elevated railway line which detracts from its amenity. Mr Dundas, who said he was familiar with the sale and the site, placed no value on the Fraser Park improvements in the light of subsequent events which included removal of the grandstand and conversion of the oval to another use.

In re-examination Mr Dundas expressed an opinion that, if he was forced to rely on the Hornsby case, the sale for the purposes of a recreation park from one government department to another at Bedlam Bay, and the Fraser Park sale, together with his own analysis of the Frenchs Forest sale relied upon by Bannon J, it would establish a market value for open space in the order of $150/m 2 . This was an exercise undertaken by Mr Dundas in the witness box and has not been fully explained. However, the Court accepts that the true market value of the acquired land as open space would be something between the two valuers' figures after taking into account the superior nature of the subject site and the passage of time.

When dealing with a lease, it is appropriate to adopt the notion of a lease. It is not acceptable to directly apply the principles referable to the acquisition of freehold except for the purpose of determining the market value of the land as part of the derivation of, in this case, either the premium rental or deferred value.

In Spencer v The Commonwealth (1907) 5 CLR 418 the definition of market value was stated to be the price that a willing purchaser would, at the relevant date, have to pay to a vendor not unwilling but not anxious to sell. In Pastoral Finance Associated Ltd v The Minister [1914] AC 1083 the court expounded the principle in relation to placing special value to the owner as being the price which a prudent man would have been willing to pay for the property taken rather than lose it.

These principles may be applied directly to the present circumstances where the Court is required to determine the market value and any special value of the applicant's interest in the resumed land for the term of the lease.

The definition of "special value" in s 57 of the Land Acquisition (Just Terms Compensation) Act 1991 defines it as the financial value of any advantage in addition to market value. The Court is satisfied that the council is entitled to compensation for the financial advantage it enjoyed from already owning the land rather than being forced to acquire an interest in other land at a market value not commensurate with acquisition for use as community open space.

The Court determines that there would be an element of special value to the council in that the council would pay a higher rent than market rent in order to retain the use of the land rather than lose it.

Doing the best that I can and basing my opinion on the evidence of both valuers, the Court determines that an appropriate land value for the purposes of determining a premium rental is $125/m 2 .

Utilising the first basis used by Mr Dundas in his assessment, this establishes a present value of the premium rental at $356600 including special value.

The loss in value of the land caused by deferring its availability for a period of four years shows a loss in value by resumption of the lease in the sum of $389800.

The Court adopts $400000 as the value of the interest of the council in the land over the four year term of the lease, including special value.

The parties have agreed that the applicant is entitled to compensation for disturbance in the sum of $6000.

The Court determines that the applicant is entitled to $406000 compensation made up of the following:-

Market value of the interest of the applicant in the resumed land for the term of the lease $400000 Disturbance $6000

The question of costs is formally reserved as there was no argument on that issue.

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