Kemp Investments (NSW) Pty Ltd & Flaherty v Valuer-General

Land and Environment Court (NSW)|2013-02-15|Before: Biscoe J

Judgment 1These are two appeals pursuant to s 37 of the Valuation of Land Act 1916 against the Valuer-General's separate determinations of the land value of two adjacent parcels of land in common ownership. They are 98 and 100 Yarrara Road, Pennant Hills. The appellants who are the owners have the onus of proving their cases: s 40(2). 2The following separate and preliminary questions are before the Court for determination and the parties agree that if they are answered in the affirmative then the appeals must be dismissed: (a)Apart from any "land improvements" within the meaning of s 4 of the Valuation of Land Act 1916, were all or any of the structures erected on land known as 98 Yarrara Road, Pennant Hills as they stood at 1 July 2011, "improvements" within the meaning of s 6A(1) of the Valuation of Land Act? (b)Apart from any "land improvements" within the meaning of s 4 of the Valuation of Land Act 1916, were all or any of the structures erected on land known as 100 Yarrara Road, Pennant Hills as they stood at 1 July 2011, "improvements" within the meaning of s 6A(1) of the Valuation of Land Act? 3The "structures" referred to in the questions comprise a two storey commercial building which straddles the width of both parcels and about half their depth. On the ground floor of each parcel is a shop. On the upper floor of each parcel is an office suite. There is a staircase accessed from the street leading to the upper floor. It appears that the staircase is located approximately on the boundary of Nos 98 and 100. But in the absence of a relevant survey it is difficult to reliably and precisely locate where the stairway and the utility services are. 4Section 6A(1) and (2) of the Valuation of Land Act provides: 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. (2) Notwithstanding anything in subsection (1), in determining the land value of any land it shall be assumed that: (a) the land may be used, or may continue to be used, for any purpose for which it was being used, or for which it could be used, at the date to which the valuation relates, and (b) such improvements may be continued or made on the land as may be required in order to enable the land to continue to be so used, but nothing in this subsection prevents regard being had, in determining that value, to any other purpose for which the land may be used on the assumption that the improvements, if any, other than land improvements, referred to in subsection (1) had not been made. ... [emphasis added] 5The Valuer-General determined that the land value of each of Nos 98 and 100 was $518,000 as at the base date of 1 July 2011. Those determinations were on the basis that the building was an improvement and therefore it was assumed, as required by s 6A(1), that it had not been made. 6The appellants, Kemp Investments (NSW) Pty Ltd and Timothy John Flaherty, contend that the s 6A(1) assumption is inapplicable because the building was not an improvement and that it was not just worthless but a worsement that should have been taken into account thereby reducing the land value of each of the parcels to $300,000. 7The appellants are the registered proprietors as tenants in common of both parcels. No 98 is Lot 5 DP 12419. No 100 is Lot 4 DP 12419 and Lot 1 DP 343266. The three lots appear together in Auto Consol 15454-185. Auto Consol (a commonly used abbreviation of "Automatic Consolidation") is a convenient way of recording lots in common ownership but does not change the separate status of each lot. 8"Improvements" within the meaning of s 6A(1) are human operations of persons on land which have the effect, as at the date of valuation, of enhancing its value compared with its natural state: Commonwealth Custodial Services Ltd and Trust Company of Australia Ltd v Valuer-General (NSW) [2006] NSWLEC 400, 148 LGERA 38 at [42] per Biscoe J; approved on appeal Trust Company of Australia Ltd v Valuer-General [2007] NSWCA 181, 154 LGERA 437 at [20] - [31]. 9The appellants' case proceeds on the basis that the question whether the structures on each parcel enhanced the value of each parcel in its natural state may be approached by valuing the structures by reference to their notional sale as at the base date between a willing but not anxious vendor and purchaser in accordance with the principles in Spencer v Commonwealth of Australia (1907) 5 CLR 418 at 440-441. The Valuer-General does not appear to dispute that this is an available approach in principle, however the Valuer-General contends that the evidence referred to below [10] suffices to establish that the structures did enhance the value of each parcel in this case. 10The Valuer-General called unchallenged expert valuation evidence, which I accept, from Mr Thomas Stephen Webster. He inspected the leases for the shop in No 98 and the shop in No 100 and ascertained that each produced a substantial positive net rent. He concluded that each shop adds value to the parcel on which it is located. I agree. In addition, Mr Michael Flaherty, who has no formal lease, pays a monthly rental of $2,310 for the occupancy of his legal office on the upper level of No 98. In my opinion, this also adds value to No 98. 11The appellants called no valuation evidence and do not dispute the evidence to which I have referred. However, the appellants submit that if it establishes enhanced value, that enhanced value is negated upon a notional sale - indeed much more than negated because they constitute a worsement to the land value - by the cumulative effect of the following three matters, or at least by uncertainties arising from those matters in the minds of the parties to the notional sale: (a)compensable encroachments; (b)the need to obtain subdivision development consent; (c)the leases of the shops.

The compensable encroachments issue 12The appellants submit that: (a)The notional sale of No 98 and No 100 at the base date destroyed their unity of title. (b)Two encroachments would then be apparent: to the extent that the building is owned by the registered proprietor of No 100 it is an encroachment upon No 98, and to the extent that the building is owned by the registered proprietor of No 98, it is an encroachment upon No 100. (c)The encroachments are not curable by the assumption of any necessary easements because the land must be valued as it exists: Tooheys Ltd v Valuer-General [1925] AC 439 at 443. Easements and other encumbrances are to be ignored when determining land value: Royal Sydney Golf Club v Federal Commissioner of Taxation (1954-55) 91 CLR 610. (d)The encroachments are compensable under the Encroachment of Buildings Act 1922. (e)Therefore the building does not enhance the value of either parcel of land and, consequently, is not an improvement. 13An "encroachment" under the Encroachment of Buildings Act is an encroachment of a building that traverses the boundary between contiguous parcels of land in different ownership: Amatek Ltd v Googoorewon Pty Ltd [1993] HCA 16, 176 CLR 471 at 478. A notional sale of two adjacent properties in common ownership destroys the owner's unity of title and, if there is an encroachment by a building that traverses the boundary, there arises a claim under the Encroachment of Buildings Act: Wherry v Trustees of the Sisters of Charity of Australia [2000] NSWLEC 252, 111 LGERA 216 at [26]. Compensation is not necessarily ordered for an encroachment because the Court has a discretion whether to grant relief and, if it does so, may make such orders as it may deem just with respect to prescribed matters, only one of which is the payment of compensation: s 3(2). 14I do not accept the appellants' submission. In the first place, the two parcels were in common ownership at the date of valuation and therefore there was not in fact an encroachment. 15Secondly, if the matter is approached through the prism of a notional sale of either parcel and on the assumption that the purchaser has a compensable claim for an encroachment against the vendor, then the vendor also has a compensable claim for an encroachment against the purchaser. The claims must offset each other and would not affect value. Indeed, in those circumstances I do not think the Court would exercise its discretion to order compensation under the Encroachment of Buildings Act. 16Thirdly, Mr Craig Lockhart, a property lawyer called by the Valuer-General, gave expert evidence, which I accept, that it would not be a difficult task in a notional sale to create cross-easements and covenants (which are very common) to enable the owner of each parcel to enjoy and access facilities and utilities that might be wholly or partly on one parcel. If there was any question about this in the minds of the notional vendor and purchaser, I consider that they would be likely to provide for such cross-easements and covenants in the notional sale contract with little, if any, effect on the notional sale price. They would also be aware that under the Encroachment of Buildings Act the Court may make such orders as it may deem just with respect to (among other things) granting to the encroaching owner an easement right or privilege: s 3(2)(b).

The subdivision development consent issue 17The appellants submit that subdivision development consent would be required on a notional sale of either parcel because: (a)Development consent for a subdivision is required under the Hornsby Shire Local Environmental Plan 1994. (b)The division of No 98 and No 100 from their shared Auto Consol title is a subdivision of land in accordance with s 4B(1) of the Environmental Planning and Assessment Act 1979 (EPA Act), which provides: 4B Subdivision of land (1) For the purposes of this Act, subdivision of land means the division of land into two or more parts that, after the division, would be obviously adapted for separate occupation, use or disposition. The division may (but need not) be effected: (a) by conveyance, transfer or partition, or (b) by any agreement, dealing, plan or instrument rendering different parts of the land available for separate occupation, use or disposition. (c)In addition, the notional sale would effect a division of the building straddling both parcels, which would effect a subdivision because s 4 of the EPA Act defines "land" to include buildings. They cite Peter Butt, Land Law, 6th ed (2010) Lawbook Co at [3.35]: "A transfer of land upon which the encroachment exists is a 'subdivision' for which development consent is normally required", referring to s 4B. (d)The consent of the owner of the other parcel of land to a subdivision would be required: clause 49(1)(b) Environmental Planning and Assessment Regulation 2000. 18The appellants submit that the subdivision development consent requirement, or uncertainty as to whether it would be obtained and if so on what conditions, contributes to the conclusion that the structures do not add value to the land in its notional state. 19I do not accept the appellants' submissions. As to their point concerning the Auto Consol, the evidence of Mr Lockhart, which I accept, confirms that an Auto Consol is just a convenient way of recording the ownership of lots with a common owner or owners. It does not change the status of each lot as a separate parcel of land that can be dealt with separately from the other lots in the Auto Consol. In my opinion, the mere fact of a sale of a lot in an Auto Consol does not mean that there is a subdivision of land. 20The appellants' point concerning the subdivision of the building is answered by s 4B(3)(d) of the EPA Act, which provides that a subdivision of land does not include a division of land effected by means of a transaction referred in s 23G of the Conveyancing Act 1919. Section 23G(f)(ii) refers to "a transaction that relates to an existing lot that is owned by 2 or more persons in severalty where...all of the owners of the lot dispose of the lot to some other person". 21The Valuer-General also submits that a further answer is provided by s 6A(2) of the Valuation of Land Act, which tells the valuer, when determining land value, to assume that the land may continue to be used for any purpose for which it was being used at the date to which the valuation relates, and that such improvements may be continued on the land as may enable the land to continue to be so used. Therefore, the appellants' contention that this cannot happen without subdivision development consent and the vendors' consent cannot be accepted. It is unnecessary to rule on this submission. I note that I considered s 6A(2) in Commonwealth Custodial Services Ltd and Trust Company of Australia Ltd v Valuer-General (NSW) at [18]. 22Even if I am in error and the value of the structures had to be determined on the basis that subdivision development consent was required, I do not consider that it has been established that that consideration would outweigh the value of the building measured by reference to the net income stream to be gained by its ownership. Furthermore, I think it is likely that all the parties to the notional sale would take into account is the cost of obtaining the development consent, which would not significantly effect the value of the building in their eyes, and that they would provide for the consent of the vendors to a subdivision in the sale contract.

The leases issue 23The appellants submit that as the lease of each shop refers to its address as 98-100 Yarrara Road, a notional sale of either parcel would have the consequence that the parties to the sale thereafter would share the rental income from the shop on that parcel. Alternatively, the notional parties would be uncertain as to whether this would be so, and this would contribute to the conclusion that the building does not have an enhanced value compared with its natural state. 24I do not accept the submission. The lease of the shop on No 98 describes it as "shop 1, Ground Floor, 98-100 Yarrara Road, Pennant Hills consisting of a lock-up shop". The relevant part of the lease of the shop on No 100 describes it as "shop 2, Ground Floor, 98-100 Yarrara Road, Pennant Hills consisting of a lock-up shop". As there is no doubt that shop 1 is located on No 98 and shop 2 is located on No 100, in my view there is no reasonable doubt that upon the notional sale, the registered proprietor of No 98 would be entitled to the rental from shop 1 and the registered proprietor of No 100 would be entitled to the rental from shop 2. Lest I am in error and the owners of both parcels had to share rental income from the shop on the parcel notionally sold, it would follow that they would also notionally share the rental income from the shop on the other parcel. One would offset the other, at least substantially, with no effect, or insignificant effect, on the sale price.

Conclusion 25For these reasons, I conclude that the appellants have not discharged their burden of proof in establishing that the structures on each parcel were not improvements at the base date of 1 July 2011. Indeed, in my opinion, the evidence establishes that they enhanced the value of the land compared with its natural state as at the base date, and therefore were improvements. 26The orders of the Court are as follows: (1)(a) The separate question in the No 98 proceedings is answered as follows: Apart from any "land improvements" within the meaning of s 4 of the Valuation of Land Act 1916, were all or any of the structures erected on land known as 98 Yarrara Road, Pennant Hills as they stood at 1 July 2011, "improvements" within the meaning of s 6A(1) of the Valuation of Land Act? Yes (b) The separate question in the No 100 proceedings is answered as follows: Apart from any "land improvements" within the meaning of s 4 of the Valuation of Land Act 1916, were all or any of the structures erected on land known as 100 Yarrara Road, Pennant Hills as they stood at 1 July 2011, "improvements" within the meaning of s 6A(1) of the Valuation of Land Act? Yes (2)The appeal in each matter is dismissed. (3)No order as to costs. (4)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: 22 February 2013

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