In Adam Pty Ltd v Valuer-General

Statutory context 6Sections 6A and 14G of the Valuation of Land Act relevantly provide as follows: 6A Land value (1) The land value of land is the capital sum which the fee-simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona-fide seller would require, assuming that the improvements, if any, thereon or appertaining thereto, other than land improvements, and made or acquired by the owner or the owner's predecessor in title had not been made. 14G Valuation subject to heritage restrictions under EPI (1) Land that is heritage restricted on the date by reference to which its land value is to be determined is to have its land value determined on the basis of the following assumptions: (a) that the land may be used only for the purpose, if any, for which it was used when the value is determined, (b) that all improvements on that land when the value is determined may be continued and maintained in order that the use of that land as referred to in paragraph (a) may be continued, (b1) that all improvements referred to in paragraph (b) on that land are new (without any deduction being made because of their actual condition), (c) that no improvements, other than those referred to in paragraph (b), may be made to or on that land. (2) Land is heritage restricted as at a particular date if the Valuer-General has determined that it would be reasonable to make the assumptions referred to in subsection (1) in respect of the land as at that date because of any provision of a planning instrument concerned with the heritage significance or heritage value of the land or any building, work or other thing on or in the land. 7In most circumstances, the imposition of heritage restrictions upon land will reduce its value. That effect is taken into account by the operation of the assumptions in s 14G(1). Where the Valuer-General has determined that land is "heritage restricted", as he did in this case, the land must first be valued upon the assumption it is vacant land without improvements (other than "land improvements" as defined), as required by s 6A(1). Then, in determining the use to which the vacant land can be put, the "heritage restricted" assumptions in s 14G(1) must be considered: Commonwealth Custodial Services Ltd v Valuer-General [2007] NSWCA 365, 156 LGERA 186. I shall refer to that case as Moneybox 1 because it related to an iconic heritage restricted building in Pitt Street, Sydney, known as "The Moneybox" occupied by the Commonwealth Bank. 8As a general principle, there is a relationship between the value of land and the income that the land can produce: Commonwealth Custodial Services Ltd v Valuer General [2008] NSWLEC 310 at [16] (Biscoe J). Therefore, in the valuation process, income can be a surrogate for value. Accordingly, prior to the introduction of subsections 14G(b1), the assumption in the case of heritage restricted land was that no improvements could be made to the land, other than the improvements that were actually there. This assumption could be made the basis for adjusting its s 6A value by the percentage difference between (a) the rent for the heritage restricted land with its actual improvements and (b) the rent for comparable non-heritage restricted land: Valuer-General v Commonwealth Custodial Services Ltd [2009] NSWCA 143, 74 NSWLR 700 at [5], [12]. As that case also concerned the Moneybox, I shall refer to it as Moneybox 2 . The Court of Appeal upheld my decision that account had to be taken of the actual condition, not the hypothetical new condition of the improvements. 9That decision was negated by the subsequent enactment of subsection 14G(1)(b1) by the Valuation of Land Amendment Act 2009, which mandates the assumption that all improvements are new. The amending 2009 Act inserted in Schedule 2 of the Valuation of Land Act cl 18. Clause 18 provides that the amendments to s 14G are taken to have applied, and always to have applied, to any land valuation made before the commencement of the amendment. 10Therefore, now the adjustment must assume that the improvements on the land are new.

The decision below 11The Commissioners decided the land value as at 1 July 2006 on the basis that the land value as at 1 July 2007 and 1 July 2008 would follow automatically. I am invited by the parties, and am content, to do the same in these appeals. 12The parties' valuers and the Commissioners followed the methodology which I applied in Commonwealth Custodial Services Ltd v Valuer-General [2008] NSWLEC 310 and which was upheld on appeal in Moneybox 2, but taking account of the new s 14G(1)(b1). 13Accordingly, the Commissioners determined the land value by first determining the value under s 6A(1), ignoring any heritage restrictions, at $1,656.75 per m2 of net lettable area ( NLA ). They then adjusted that figure for the heritage restricted assumptions in s 14G(1) by the percentage difference between (a) the rent for a hypothetical entirely new building on the land unconstrained by heritage restrictions ( new non-heritage restricted building ); and (b) the rent for the actual heritage building on the land, though in a hypothetical new condition because of the requirement of s 14G(1)(b1) ( new existing heritage restricted building ). This yielded the following: (a)the rental for the new non-heritage restricted building was $380/m 2 NLA; (b)the rental for the new existing heritage restricted building was $300/m 2 NLA. 14The difference was 21.05% ($80÷$380 x 100/1). 15The difference of 21.05% was then deducted from the s 6(1A) figure of $1,656.75/m2 NLA and multiplied by the actual NLA (an agreed figure). To that was added an agreed figure for the "land improvements" referred to in s 6A. 16This process left only one step, a deduction of a "heritage cost penalty", which the appellant proposed and the Commissioners rejected. It is against that rejection that the appeals are brought.

Costs of a notional renovation 17The rental for the hypothetical new existing heritage restricted building referred to at [13(b)] above was calculated by taking the actual current rental of the heritage building on the land at 1 July 2006 and adding "an uplift factor" of about 14 per cent. The uplift factor is referred to at [49] of the Commissioners' judgment as follows: Mr. Dempsey's uplift factor of ~ 14% takes into account not only the very small extent of the vacancies in the tenancies of the building as at 1 July 2006 but also makes an appropriate allowance for an uplift factor that reflects the costs of a notional renovation to bring the building back to the condition that it would have been if it were to be newly constructed in exactly its present form. This "newly constructed as it is" uplift factor is that which is required, by s 14G(1)(b1), in order to negative of the approach taken by the Court of Appeal in Moneybox 2. 18The Valuer-General's Notice of Contention referred to at [5] above aims to knock out the reference to "the costs of a notional renovation etc" on the basis that it is legally and factually erroneous. 19The parties agree on two matters. First, there is an error in [49] where it states that the uplift factor allowed for the costs "of a notional renovation to bring the building back to the condition that it would have been in if it were to be newly constructed in exactly its present form". Secondly, in lieu of that statement, the judgment should have said that the uplift factor allowed for the additional rental for a new existing heritage restricted building (compared with the rental from the existing heritage restricted building). I agree. That was the effect of the valuation evidence. Indeed, this correction is consistent with the Commissioners' judgment at [29] where they correctly identified the "uplift" by noting that the valuers had considered a hypothesised rent applying "an uplift factor to regard the building as being in the condition required to be assumed by" s 14(1)(b1). 20Nevertheless, the Commissioners' decision should be upheld on the basis that the decision was sufficiently founded on a rental differential which reflected the assumptions in s 14G(1), subject to consideration of the heritage cost penalty issue. This is consistent with the position taken by the parties on these appeals.

Heritage cost penalty 21The appellant submits that the Commissioners erred in not deducting a "heritage cost penalty". The amount of the "heritage cost penalty" is the difference between the costs to construct a new existing heritage building and the costs to construct a new non-heritage building. The amount for each year was agreed by the parties' quantity surveyors at the hearing. They agreed that the amount of the heritage cost penalty for the 2006 year was $1,666,203, representing the difference between the agreed costs to construct a new existing heritage restricted building for $12,246,203 and the agreed costs to construct a new non-heritage restricted building for $10,580,000 . 22The Commissioners explained why they disallowed the heritage cost penalty as follows: HERITAGE COST PENALTY - A CASE OF DOUBLE DIPPING? 55 As we understand the position, the postulated heritage cost penalty included by Mr. Dempsey and included by Mr. Ferdinands (although rejected by him as inappropriate) is, in our view, a case of double dipping. The only basis upon which an allowance can be made, as a consequence of the operation of s 14G(1)(b1), is to apply an uplift factor that reflects the cost that would be incurred in returning the building to its "as new" state as required by the section. 56 To adopt a proposition that says that, in addition to that uplift factor, some further allowance should be made for the reconstruction of the building in modern style and materials is, in our view, a fallacy. 57 The requirement of s 14G(1)(b1), to counter the decision of the Court of Appeal in Moneybox 2 and to give effect to what is required by the new provision, merely means the incorporation of the uplift factor that has been incorporated by both Mr. Dempsey and Mr. Ferdinands and the rate for which, calculated by Mr. Dempsey, we have adopted. 23The double dipping with which the Commissioners were concerned was, first, the "uplift factor" and, secondly, the heritage cost penalty. 24The appellant submits, and the Valuer-General does not dispute, that there was no double dipping. I accept the submission. The "uplift factor" referred to at [55] is the approximate 14 per cent "uplift factor" referred to at [49] of the judgment. However, as analysed above, that is not an "allowance". The requirement of s 14G(1)(b1) to assume a building is in new condition generally means, on the comparative rental methodology adopted in this case, that the building for valuation purposes is earning more rent than it in fact does. Far from being an "allowance", the "uplift factor" has the consequence of penalising the owner of the building. Therefore, it is not a case of double dipping. 25The question remains whether the heritage cost penalty should be allowed in the valuation methodology adopted in this case. 26The appellant submits, without contest by the Valuer-General, that the Commissioners at [56] of their judgment misunderstood the heritage cost penalty because it is not an allowance for the reconstruction of the building in modern style and material. That is so because, as stated at [21] above, and as the parties agree, the heritage cost the penalty is the difference between the costs to construct a new existing heritage building and the costs to construct a new non-heritage restricted building. 27The Valuer-General submits that once the value of the unrestricted land is known under s 6A(1) (by the comparable sales method), the difference in rental of the heritage restricted land and the non-heritage restricted land accounts for the difference in land value. 28In my opinion, the heritage cost penalty should be deducted in the methodology employed in this case on the following reasoning, along the lines submitted by the appellant: (a)as a general principle, there is a relationship between the value of land and the income that land can produce. The valuers agreed that was so and the agreement was reflected in the approach used by the Commissioners, namely, a comparison of the rent from a new non-heritage restricted building with the rent from a new existing heritage restricted building. (b)To earn that rental income (used to derive the differential) there must be buildings. The quantity surveyors agreed upon the cost to build a new non-heritage restricted building (with the same NLA), being the building that would generate the rent of $380 NLA. (c)The quantity surveyors also agreed upon the cost to build, new, the existing heritage restricted building, being the building that would derive the $300 rent NLA (after applying the uplift factor). (d)The quantity surveyors agreed that it costs $1,666,203 more to build a new existing heritage restricted building than to build a new non-heritage restricted building (each with the same NLA). (e)Thus, a new existing heritage restricted building is more expensive but derives less rental income than a new non-heritage restricted building. This is a counterintuitive approach to valuation in that no prudent party would build the more expensive new existing heritage restricted building to derive a lower income. However, that is the approach that must be taken because of the s 14G(1)(b1) assumption. (f)It results in a lower land value for the heritage restricted land on the uncontroversial economic principle (to which the appellant's valuer referred) that if costs increase to derive the same return, the land value goes down. If a building on land is more expensive and derives less rental income than a building of the same size on identical land next door, its land value will be less than the land value of the land next door. (g)The assumption is allowed for by deducting from land value the agreed difference in the costs associated with providing the income generating buildings (that have otherwise been used for the purposes of deriving land value). (h)If no adjustment is made for those costs, the assumption implies an inappropriate penalty which would be unjust and which would require clear language (which is absent). (i)By failing to make any allowance for the heritage cost penalty, the Commissioners erred in the interpretation of s 14G and in the application of valuation principles. 29Accordingly, I propose to allow the appeals. The land value as at 1 July 2006 determined by the Commissioners at $6,240,000 should be reduced by the heritage cost penalty of $1,666, 203 to $4,573,797. The parties are to do the calculations as at 1 July 2007 and 1 July 2008 consistently with my decision. I will make orders accordingly.

Orders

1. The appeals are allowed.
2. The parties are to bring in draft orders in each matter within two working days to reflect my decision.
3. The exhibits may be returned. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 12 April 2011