McCann v Coffs Harbour City Council

APPEARANCES

1. Both parties appeared at the hearing in Coffs Harbour and the application was opposed. McCann appeared by their solicitor Mr Abbott of Messrs GL Abbott & Co of Woolgoolga and CHCC by its solicitor Mr Cottom of Messrs HWL Ebsworth Lawyers of Sydney. JURISDICTION
2. This Tribunal has jurisdiction pursuant to the Civil and Administrative Tribunal Act 2013 (NSW) ("CATA") ss28 (Jurisdiction of Tribunal generally), 29 (General jurisdiction) and Schedule 4 clause 3 (Functions allocated to Division) and power to make orders pursuant to the ATA s21.

THE FACTS

1. The materials facts are set out in the following paragraphs.
2. The Property is owned by CHCC consisting of 2.075 hectares which the parties agreed was a farm within the meaning of the ATA.
3. In the years prior to 2002 CHCC was interested in promoting the use of reclaimed water in agriculture and a number of studies, trials and workshops were undertaken. McCann were aware of the CHCC activities and by letter of 28 August in 2000 expressed an interest in participating by a lease over the Property. This took some years before CHCC was ready to enter into a lease with McCann.
4. On 25 July 2002 the parties made a Deed of Agreement for Lease (the Deed) by which the CHCC solicitors were to prepare a formal lease of the Property to McCann commencing 25 July 2002: Exhibit B, tab 24, cl 2.1.
5. A lease was prepared and signed by the parties (the Lease): Exhibit B p289; with the following relevant terms: 1. Term of 10 years commencing 25 July 2002 and terminating 24 July 2012 at [G.1 to G.3]; 2. Option to renew for 10 years [G.4]; 3. Commencing rent of $16,000.00 a year by monthly instalments of $1,333.33 [item 13 cl 5, p287]; 4. McCann to pay 100% of outgoings [item 14 cl 5, p287]; 5. Annual rent reviews to variously CPI or current market rent in the renewal period [item 16 cl 5.40, p287] with CPI adjustments; 6. The permitted use is [Item 17 cl 6.1, p287]: Approved agricultural purposes, including the growing of hydroponic tomatoes, or such other uses as may be approved in writing by the Landlord. 1. By Special Condition 4.4 [p288], McCann agreed: Enter into a User Agreement with Council for the term(s) of the Lease in respect of the provision and use of reclaimed water to the premises provided that the Landlord will provide reclaimed water to the premises at no charge to the tenant during the first ten (10) years of the Lease; 1. By Special Condition 4.10 [p288], McCann agreed: Upon the termination of the Lease, if required by the Landlord, remove all structures and improvements made by the Tenant and return the premises to the condition existing at the commencement of the Lease; 1. And by clause 6.1 [p289]: The parties acknowledge that the Lease is of land only and any improvements erected pursuant to this Lease…are the exclusive responsibility of the Tenant. 1. And by clause 7.2 [p295] McCann does not have to alter or improve the property, fix structural defects or repair fair wear and tear; 2. By clause 12.1 [p298] the Lease ends on 24 July 2012, and upon that event are set out the rights of the parties: When this lease ends, unless the tenant becomes a tenant of the property under a new lease the tenant must - 12.3.1 return the property to the landlord in the same state and condition that this lease requires the tenant to keep it in; and 12.3.2 have removed any goods and anything that the tenant fixed to the property and have made good any damage caused by the removal. Anything not removed becomes the property of the landlord who can keep it or remove and dispose of it and charge to the tenant the cost of removal making good and disposal.
6. Between 3 August 2002 and 6 August 2002 CHCC approved applications by McCann to make improvements to the Property: 1. McCann Development Application for a Greenhouse and Packing Shed [ExB p249]; 2. Septic Tank [ExB p251]; 3. Construction Certificate for the Greenhouse and Packing Shed [ExB p268 ff).
7. McCann financed the improvements for their use of the Property by an advance of $390,000 [ExB p310] secured by a Trader's /Ordinary Bill of Sale with CHCC consent to a Lease Mortgage [ExB p301].
8. On 16 February 2002 CHCC agreed to provide a maximum of 18 megalitres of reclaimed water pa (1.8 megalitres per month) to McCann at no cost, continuing to date [Ex 1 p96-106];
9. On 16 April 2012 McCann negotiatede the rent for the new lease and states [Ex 1, p127]: (b) The land…is vacant land. Under special condition 6.1 of the lease there is an acknowledgment by the parties that the Lease is of land only, i.e. exclusive of improvements…
10. The parties performed their Lease for the next 10 years and on 20 April 2012 McCann exercised the option to renew the Lease for a further 10 years, which was accepted by CHCC, and the new rent was the subject of negotiation to a lower amount.
11. On 24 July 2012 the Lease ended.
12. On 25 July 2012 a new lease commenced for 10 years, expiring on 24 July 2022 (the Renewal) [ExB p357] with a rent of $10,440.00 pa by monthly instalments of $870. The Renewal is on the same terms as the Lease with the variations set out [ExB p359], none of which are relevant to this matter.
13. By a letter of 13 April 2015 McCann made a demand on CHCC for compensation in the sum of $480,000 for improvements to the Property, relying on ATA ss6, 15, 17 and 18 [ExB p369 - 376] (The Demand). The Demand does not state a date on which the sum is based so I assume it is the same date as the Demand. The Demand is for $480,000.00 [p371] and is relevantly particularised the claim as follows [p372]: Value of the Improvements to an incoming tenant $390,000 and then refers to ATA s18 claims which have been withdrawn. The claim is supported by Schedule 1 [p374-5] listing each "Improvement", totalling $430,347.00 based on "Value as at date of Construction/Acquisition". The difference of $40,347.00 is not explained. Schedule 2 goes on to identify "Costs incurred in making the improvements during the Initial Term" totalling $52,491.00, and "Costs incurred in repairing the improvements during the Initial Term" totalling $61,695.00.
14. CHCC has refused to pay compensation.
15. For 12 years from 2002 to 2013, as shown in "Analysis of Income and Expenses for McCann G & R", McCann have been receiving an average gross annual income of $393,910.00 with an average annual "net income" of $101,224.00 [ExB p 364]. The gross includes average net annual salaries and wages of $134,234.00 (the photocopy is not clear but as best I can read the amount), so I assume the "net income" is actually a net profit to a partnership between Mr and Mrs McCann. This document does not include depreciation of the capital items, but evidence of depreciation is shown in a separate schedule.
16. Only one depreciation schedule was put into evidence by McCann, being a depreciation schedule for the year ended 30 June 2003, exhibit E, which shows that by 30 June 2003 McCann have fully written down the value of some items (see the schedule), and are depreciating others at various annual rates, including: 1. 40% for a computer; 2. 33.33% for Tank No 2, Drippers and irrigation No 6; 3. 30% for Spitwater heaters, Heating Greenhouse No 6, Greenhouse roof; 4. 25% for Greenhouse No 6; 5. 20% for Mower, Greenhouse Nos 1, 2, 3, Excavator, Pump & irrigation, Bore pump, Tank, Greenhouses, Plant & equipment, Electrical greenhouse No 6, Pump, 2 x heaters, Pump & irrigation, Tank, Heater, Boiler for Greenhouse, Pumps & irrigation, Heater, Irrigation controller, Concrete for greenhouse; 6. 15% for Packing shed, Shed, 7. 10% for Cupboard bench, Trolleys x 2; 8. 7.5% for Greenhouse, Pipe heating, Boiler.
17. McCann received a valuation report of Colliers International made 20 April 2015 which values the improvements as at 24 July 2012 (being the last day of the Lease) at $390,000.00 rounded down [ExB p377 - 393, at 389].
18. McCann received a further valuation report of Colliers International made 14 September 2015, this time valuing the improvements as at 20 August 2015 at $470,000.00 rounded down [ExB tab 69 at p7]. The difference apparently arises from corrections to some of the assumptions on which the valuation was based, for example, the equipment and size of the packing room.
19. CHCC received a valuation report of Herron Todd White made 14 October 2015 [Ex 2] which provides two valuations: 1. $160,000.00 as at 24 July 2012 (also last day of the Lease); 2. $140,000.00 as at 14 October 2015.
20. The parties agree that the Lease and Renewal are a tenancy within the meaning of ATA

CONTENTIONS

1. McCann contends that ATA s6(4) entitles them to demand and receive compensation for improvements from CHCC at an earlier time than the end of the tenancy.
2. CHCC contends that compensation cannot be claimed before the end of the tenancy.

The legislative scheme

1. The purpose of the ATA is set out in the Long Title which relevantly provides for regulation of the rights of agricultural landowners and tenants and sets out the Objects in ATA s3 and defines terms in s4.
2. A claim for compensation for improvements arises under ATA Part 2 - General rights of tenants and owners, s6 (Improvements carried out by tenants with consent) which provides: (1) It is a term of a tenancy that the tenant may carry out any improvement on the farm with the consent of the owner. (2) If an amount of compensation to the tenant for the improvement is fixed by agreement, the owner must pay the tenant the fixed amount, unless the agreed amount is unfair. (3) If compensation is not fixed by agreement at a fair amount, or is not fixed at all, the owner must pay fair compensation to the tenant. (4) Compensation payable under this section is payable at the end of the tenancy or at such earlier time as may be agreed or determined by the Tribunal. Division 1 of Part 3 sets out the way compensation is to be determined for the purposes of this Part.

Understanding ATA s6

1. The ATA is concerned with the respective rights of landlord and tenant are determined, starting with ATA s12 (Record of condition of farm) by creating an ingoing condition report and periodic condition reports.
2. There are two counter balancing obligations in ATA: the tenant's covenant of good repair in ATA s19A (Compensation for deterioration) which provides for the tenant to compensate the landlord for any deterioration of the farm, ascertained either at the end of the tenancy ATA s19A(1) and (2), but also at an earlier time "when the deterioration is evident": ATA s19A(3).
3. The reciprocal right of the tenant is improvement compensation ascertained at the end of the tenancy, or at an earlier time: ATA s6(4).
4. The trigger for the landlord's compensation for deterioration is when the deterioration is evident, based on the ATA s12 conditions reports.
5. There is no equivalent trigger for improvement compensation in ATA s6 as the words to the effect "when the improvements exist" are missing. In the absence of a similar trigger what creates the tenant's right to compensation for improvements? McCann contends it is the Demand. CHCC disputes that the demand can trigger the obligation to pay compensation.
6. In addition, the way in which fair compensation is determined is set out in ARA s15 which refers to the value of the improvement to an incoming tenant. This supports the proposition that improvement compensation is to be determined at the end of the tenancy.

Further consideration of ATA s6 - the Second Reading Speeches

1. I am thankful to Mr Cottom for his research in identifying the Legislative Assembly Second Reading Speech material as an aid to finding the mischief to be remedied, on 28 March 2001 concerning the Agricultural Tenancies Amendment Bill 2001 [1] , (emphasis added): Mr SLACK-SMITH (Barwon) [10.04 am]: The background of the bill starts with the Agricultural Holdings (Scotland) Act 1883. It was the first Act to enable tenants to secure compensation for capital works or other improvements they had made on land that they had to leave. Sometimes tenants who know that their tenure is almost over will allow the land to be degraded. If tenants do not apply fertiliser or good farming practices the fertility and production of the soil may be degraded to the extent that a massive capital injection is required after the property is vacated. The Act of 1883 provided for this situation. In 1916 the Rural Tenants Improvements Act virtually restored the balance. The Agricultural Lessees Relief Act 1931 and the Agricultural Holdings Act 1941 improved the original Act. The Agricultural Tenancies Act 1990 streamlined the provisions of the previous legislation that did not cover the whole gamut of agriculture in New South Wales. Today there are many different methods of agricultural production. Instead of just grazing and broadacre farming there is intensive agriculture, aquaculture, hydroponics and the lot. The Act was reviewed in 1988 and 1999 with a view to streamlining processes, reducing red tape, making processes cheaper and protecting land from exploitation prior to tenants ending their lease or agreement. The bill protects both parties. Mr PRICE (Maitland) [10.11 am]: I support this bill. As the Opposition spokesman said, it will improve the existing arrangements. It is fair to say that the purpose of the Agricultural Tenancies Act 1990 was to regulate the relationship between the parties to agricultural tenancies but seek to do so only when the parties do not make fair and adequate provision in their agreement. The days of handshake deals are well and truly past. Unfortunately, when these cases occur-they do not occur on many occasions, but when they do, they finish up in a fairly significant adversarial situation-it is a problem for both parties, and to determine the justice of the situation is not necessarily simple. The bill provides for compensation to be paid to an outgoing tenant for improvements made to the land when provision for such compensation has not been made in the lease agreement. That gets back to the type of agreement made and, as I said, the days of handshake deals are gone. Compensation for an owner for deterioration of the farm due to an outgoing tenant's failure to cultivate the farm in accordance with good farm management practices is also a consideration. The removal of tenant's fixtures, a landowner's right of entry, and requirements for the parties to keep records on condition of the farm and proper accounts are also considerations. Provision is also made for the rights of each party to inspect each other's accounts, the service of documents and other rights and procedures not provided for in the lease agreement. (emphasis added) Mr R. W. TURNER (Orange) [10.20 am]: The Agricultural Tenancies Act 1990 moved the emphasis from grazing to other forms of agriculture such as intensive farming. Most forms of agriculture such as orchards and vineyards provide long-term returns and, therefore, cash crops are an important part of the agricultural scene. The Agricultural Holdings Act 1883 was the first Act to enable tenants to secure the value of improvements. That is also important because at times disputes arise quickly and the owner may impound the buildings and equipment of share farmers. A process is needed by which the improvements and equipment can be identified and there can be quick resolution of the matter.
2. The relevant speeches refer to compensation after the tenancy has ended: Mr Slack-Smith and Mr Price. There is nothing which supports the McCann contention that improvement compensation can be claimed before the end of the tenancy.

Elements of ATA s6 in this matter

1. The material facts establish that CHCC gave consent for McCann to make improvements to the Property carried out by McCann for the purposes of ATA s6(1).
2. The Lease and the Renewal do not provide for any amount of compensation so that ATA s6(2) does not apply, and is to be determined by the Tribunal as fair compensation pursuant to ATA s6(3).
3. ATA s6(4) refers to the time at which compensation is payable. This is the substantive issue in dispute.

Time for claiming improvement compensation

1. ATA s6(4) relevantly identifies the times at which improvement compensation is payable: "at the end of the tenancy"; or "at such earlier time as …determined by the Tribunal."
2. The Application does not state the date relied on for the claim for improvement compensation. It is either the end of the Lease on 24 July 2012 or later, being during the Renewal.
3. If the claim is based on the end of the Lease, it is out of time. By ATA s20 (Applications to tribunal relating to disputes), a claim must be filed in the Tribunal not later than 3 months after the relevant dispute arises or the end of the tenancy, whichever is the later: ATA s20(2). The Lease ended 24 July 2012 but no claim was made for improvement compensation until the Demand was sent 13 April 2015, almost two years later.
4. That leaves a claim for improvement compensation arising from the Renewal. The end of the Renewal will not occur, in the usual course, before 24 July 2022, which means that the current claim for improvement compensation is brought during the currency of the Renewal.

Can improvement compensation be claimed before the end of the tenancy?

1. McCann contends that improvement compensation is payable at any time and even if the Renewal will not come to an end until 24 July 2022. Mr Abbott has not been able to cite any authority to support this contention. Mr Cottom has also been unable to find any authority for or against the McCann contention, and I have found no authority.
2. It seems that this question arises for the first time.
3. I find that in this matter, improvement compensation is not payable until the end of the tenancy in the Renewal.
4. However, if I am wrong in that, I find that there is no basis on which the Tribunal should determine that fair compensation is payable in this matter at an earlier time before the end of the tenancy in the Renewal; or if it should be so paid, the amount of fair compensation is determined at $nil. The reasons for this determination are discussed in the following paragraphs.

Fair compensation

1. ATA s6(3) is concerned with "fair compensation". Both Mr Abbott and Mr Cottom agree that ATA is concerned with fairness between the parties, though they disagree how fairness is to be determined.
2. There is a recurrent theme of fairness referred to in ATA, for example ss6, 8, 9, 10, 17, 18, 19 and 19A. This theme appears in the Second Reading Speeches above, in the context of balancing the interests of the parties, which is reinforced by ATA s27 (Contracting Out) making void any agreement purporting to wave, abrogate and right, power or duty, or otherwise defeat the purposes of the Act.
3. The note to ATA s6 sets out the way compensation is to be determined by application of Part 3 - Compensation, Division 1 - Determination of compensation for improvements, ss15 to 17. RTA s15 (Determination of compensation payable for tenants' improvements) relevantly provides: (1) For the purposes of determining the compensation payable under Part 2 for an improvement carried out by a tenant, the amount of compensation is the value of the improvement to an incoming tenant, taking into account the value of any consideration or benefit given by the owner to the tenant for carrying out the improvement. (2) The value of an improvement to an incoming tenant is to be calculated by taking into account the financial returns that might be expected to accrue to a (hypothetical) incoming tenant on account of the improvement or product, if the farm were to be subject to a further tenancy (not being a sharefarming arrangement).
4. This section returns to the question of when is improvement compensation to be determined and makes this clear as being referrable to the end of the tenancy in both ATA s15(1) and (2) by the references to "incoming tenant". McCann are not an incoming tenant for the Renewal and in the usual course of the tenancy there will be no incoming tenant until 25 July 2022.
5. Even if that is incorrect, McCann has the onus of proof and the relevant date for valuation of the improvements is 24 July 2022. There is no evidence of any such valuation.
6. The claim for fair improvement compensation on this basis must fail.
7. That leaves determination of improvement compensation pursuant to RTA s17 (Fair compensation) which provides: In determining what constitutes fair compensation for the purposes of determining the compensation payable under Part 2 for an improvement carried out by a tenant or an owner, regard may be had to the financial resources of the parties, the financial returns that might be expected from the improvement and other factors.
8. The same problem as for RTA s15 exists as McCann has provided no evidence of fair compensation based on the financial resources of the parties, or the financial returns that might be expected. RTA s15 provides for consideration of unspecified "other factors", which in my opinion are unlimited, but require a balancing of all the facts and circumstances of the parties. I have considered a number of other factors at determining "fair compensation", set out in the following paragraphs.

Depreciation

1. McCann contends that depreciation is not a relevant consideration in this matter. CHCC contends for depreciation and relies on Lismore City Council v Green Gro Pty Ltd (2003) 56 NSWLR 204; [2003] NSWCA 19 at [11] to [15] per Meagher JA, which concerned a share-farmer joint venture. The principles are relevant and I follow Lismore City Council: 12 The point may, I think, be illustrated by reference to the shed, which was one item in respect of which his Honour ordered the appellant to pay compensation. The entirety of his Honour's reasoning on this item is contained in the following paragraph: "Insofar as the shed is concerned the claim is for four thousand five hundred dollars and that was in fact the cost of the shed, it may be that that should be depreciated but the cost of building a new shed would obviously have been, at the time of the vacation of the premises, more than four thousand five hundred dollars so I am prepared to allowed (sic) the amount claimed by the plaintiff of four thousand five hundred dollars." By clause 3.4 of the Agreement it was the sharefarmer's obligation "to provide and erect on Council land and in an agreed position, a shed...", and it was in consideration of this and other obligations that the rent was reduced from whatever was a fair market rental to the nominal rent of $1.00 per annum. So that, on his Honour's view, the sharefarmer gets paid for erecting the shed once, by way of reduction of rent, under the Agreement, and a second time under the Act. This is a result so inequitable as to be hardly within the contemplation of the Act. (emphasis added) 13 I would uphold the appellant's contention in this regard. I note also that in Scotland the Court of Session came to a similar conclusion in Earl of Galloway v M'Clelland (1915) SC 1062, a decision which has subsequently been followed by the Scottish Courts. 14 If that were not enough, the Act requires that if an "improvement" exists consideration should be given to the "value of the improvement to an incoming tenant" (s 15 (1)). As can be seen from the extract of his Honour's judgment which I have quoted, there was no attempt to grapple with this problem, either in respect of the shed or in respect of any of the other alleged "improvements". 15 Nor in determining the "value" of the "improvements", did his Honour allow his attention to be deflected to "the value of any consideration or benefit given by the owner to the tenant for carrying out the improvement." (s 15 (1)) Indeed if this question were raised at all it would have the curious result of deducting from the amount of compensation awarded by his Honour (i.e. the sum of $40,000) the cost to the Council of the obligations it performed (i.e. also the sum of $40,000). (emphasis added)
2. In addition, to date, the majority of capital items have been fully written down by McCann and allowed for in depreciation, see Ex E.
3. McCann contends that depreciation is not relevant, as I understand the argument, because they have fully maintained the capital items as shown by the Analysis of Income [ExB p364]. However, a depreciating asset is an asset that has a limited effective life and is expected to decline in value over the period it is used. The depreciation rates claimed by McCann on the various items indicates the expected life of each item. Notwithstanding that principle, McCann contend that the capital items have the same value as when installed. ExB p364 shows an average annual expenditure of $3,308.00 to 2013, to which can be added further expenditure (Ex D) in 2013 of $2,407.10; in 2014 of $3,171.50; and in 2015 of $2,272.05; giving a total cost of repairs and maintenance over 13 years of $47,457.65 or an average of $3,650.59 pa (ExB p364 plus ExD). This is considerably less than depreciation claimed by McCann who for the year ended 30 June 2003 claimed net depreciation of $36,331.00. This expenditure on repairs and maintenance does not support the McCann argument that the capital items are being maintained. And there is no satisfactory evidence of re-investment in the capital items.
4. In determining what is fair compensation, the material facts show that although McCann have made a substantial capital investment in 2002 of $390,000 for capital items including the greenhouses, packing shed and other items set out in the Depreciation Schedule (Ex E) with ongoing repair and maintenance costs, they have been receiving a commercial return on their investment of a net average profit from 2002 to 2013 of $101,224.00 pa.
5. A relevant consideration is that CHCC have provided McCann with benefits having a commercial value to McCanns' tenancy during the Renewal: 1. The rent has been reduced: during the Lease rent was $1,333.33 per month for 10 years and during the Renewal is currently $870.00 per month; 2. CHCC has provided an annual supply of 18 megalitres of water since 2002 during the Lease and also the Renewal without charge.
6. I find that the position contended for by McCann is a result so unfair as to be outside the contemplation of ATA s15. If nevertheless McCann are entitled to improvement compensation I determine the fair amount at $nil.

CONCLUSION

1. The Orders are made in the interests of justice as between the parties. J Levingston General Member Civil and Administrative Tribunal of New South Wales 16 December 2015

Endnote

1. CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408; [1997] HCA 2. I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar 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: 28 January 2016