McDonald's Australia Limited v Transport Infrastructure Development Corporation

Arkaba Holdings Ltd v Commissioner of Highways (1968-1970) 19 LGRA 398; Boland v Yates Property Corporation Pty Ltd & Anor (1999) 167 ALR 575 ; Collex Pty Ltd v Roads and Traffic Authority of New South Wales [2006] NSWLEC 579 ; Commissioner of Highways v Shipp Bros Pty Ltd (1978) 19 SASR 215; CASES CITED: Director of Buildings and Lands v Shun Fung Ironworks Ltd [1995] 1 All ER 846 ; Feldmayr v Housing Commission of NSW (1969) 17 LGRA 307 ; McBarron v Roads and Traffic Authority (NSW) (1995) 87 LGERA 238 ; Mir Bros Unit Constructions Pty Ltd v Roads & Traffic Authority of New South Wales [2006] NSWCA 314 ; Peter Croke Holdings Pty Ltd v Roads and Traffic Authority (NSW) (1998) 101 LGERA 30 ; The Commonwealth v Milledge (1953) 90 CLR 157

12/09/2006 13/09/2006 DATES OF HEARING: 14/09/2006 15/09/2006 07/12/2006 08/12/2006

APPLICANT Mr J Webster SC SOLICITOR LEGAL REPRESENTATIVES: Hunt & Hunt RESPONDENT Mr R Lancaster SOLICTOR Clayton Utz

JUDGMENT: THE LAND AND ENVIRONMENT COURT OF NEW SOUTH WALES

30586 of 2005 McDonald's Australia Limited v Transport Infrastructure Development Corporation

JUDGMENT 1 Her Honour: The Applicant, McDonald's Australia Limited, was the sub-lessee of a tenancy due to expire on 30 January 2016 at the Chatswood Rail Interchange. This was compulsorily acquired by the Respondent, Transport Infrastructure Development Corporation (TIDC), for the purposes of the Chatswood Transport Interchange (CTI) reconstruction. The Applicant has appealed against the determination of compensation of $650,000 by the Valuer-General under s 66 of the Land Acquisition (Just Terms Compensation) Act 1991 (Just Terms Act). 2 The Notice of Compulsory Acquisition of Land was published in the Government Gazette on 28 January 2005 so that TIDC acquired the interest in land comprising shop C14, concourse level, Chatswood Central, 1-5 Railway St Chatswood at that date. 3 The Applicant has claimed compensation under the Just Terms Act on three different bases according to the Fourth Further Amended Points of Claim: (i) The first claim is made under s 55(a) for the market value of the land for $1,756,000 and under s 57 for special value of $341,000 and disturbance as agreed. (ii) The second alternative (and primary) claim is for market value and special value combined in the amount of $2,097,000 and disturbance as agreed. (iii) The third alternative is costs related to the loss of business pursuant to s 59(f), a disturbance claim, in the amount of $2,097,000 plus the disturbance items which are agreed. No market value under s 55(a) is claimed in this alternative. (iv) Disturbance pursuant to s 55(d) is agreed as follows: (a) legal costs $11,783.61 (b) valuation fees $42,843.48 (c) other disturbance items concerning equipment and decommissioning of the site $11,356.00 4 The total compensation claimed under all three alternatives is $2,162,983.09.

Legislation 5 As stated in s 54(1) of the Just Terms Act: The amount of compensation to which a person is entitled under this Part is such amount as, having regard to all relevant matters under this Part, will justly compensate the person for the acquisition of the land. 6 Section 55 of the Just Terms Act sets out the matters which must be considered in determining the amount of compensation to which a person is entitled: McBarron v Roads and Traffic Authority (NSW) (1995) 87 LGERA 238 at 244. 7 Section 55 of the Just Terms Act provides: In determining the amount of compensation to which a person is entitled, regard must be had to the following matters only (as assessed in accordance with this Division): (a) the market value of the land on the date of its acquisition, (b) any special value of the land to the person on the date of its acquisition, … (d) any loss attributable to disturbance, … 8 Section 56(1) provides: In this Act: "market value" of land at any time means the amount that would have been paid for the land if it had been sold at that time by a willing but not anxious seller to a willing but not anxious buyer, disregarding (for the purpose of determining the amount that would have been paid): (a) any increase or decrease in the value of the land caused by the carrying out of, or the proposal to carry out, the public purpose for which the land was acquired, and (b) any increase in the value of the land caused by the carrying out by the authority of the State, before the land is acquired, of improvements for the public purpose for which the land is to be acquired, and (c) any increase in the value of the land caused by its use in a manner or for a purpose contrary to law. 9 Section 57 provides: In this Act: "special value" of land means the financial value of any advantage, in addition to market value, to the person entitled to compensation which is incidental to the person's use of the land. 10 Section 59 provides: In this Act: "loss attributable to disturbance" of land means any of the following: … (f) any other financial costs reasonably incurred (or that might reasonably be incurred), relating to the actual use of the land, as a direct and natural consequence of the acquisition.

Market value 11 There is a fundamental disagreement between the parties as to whether a claim can be made for the market value of the business under s 55(a) in the circumstances of this case. 12 Both valuers agreed that the most conceptually sound basis for measuring the loss suffered by the Applicant on an extinguishment basis was to assess the net present value of the cash flows which it had lost for the remaining 11 years of the lease as a consequence of the compulsory acquisition of the premises. While the valuers disagreed in relation to the recovered cash flow and discount rate to be applied in that analysis they both agreed that was the appropriate methodology. That methodology assessed the loss of the business as the net present value of future profits. There does not seem to be any basis on which this claim can be regarded as market value under s 56(1) of the Just Terms Act. Given that the valuers jointly agreed that the net loss of cash flow was the appropriate methodology to apply it is difficult to relate the argument focussing on market value to the Applicant as representative of the appropriate measure of compensation. Both valuers have considered that the amount of compensation should be claimed as disturbance. 13 The basis on which the Applicant argued that it was entitled to the market value of the business was unclear to me. The Applicant argued that the correct approach was the primary alternative claimed so that the Court should combine a compensation claim under s 55(a) and s 57 to determine "what would McDonald's have paid for this site rather than lose it". The value of this business to the Applicant is one which has a "financial advantage in addition to the market value to McDonald's, which was incidental to the use by McDonald's of the Chatswood outlet". If the Court determines that there is such a financial advantage peculiar to the Applicant then special value should be applied. These arguments by the Applicant's counsel are unclear and do not reflect the provisions of the Just Terms Act. The Applicant's counsel argued that The Commonwealth v Milledge (1953) 90 CLR 157 was supportive of the approach he argued for in relation to market value. That case was not dealing with a loss of a business for a sublessee's interest in land. I do not consider it has much application to the circumstances of this case. It deals with market value in relation to the compulsory acquisition of freehold land on which a business is located. 14 TIDC argued that the interest in land acquired is a sublease resulting in the extinguishment of a business. The methodology for determining the market value of the lease involves a calculation of the profit rental. The profit rental is the difference between the value of the rental under the lease at the relevant date, and the value of the rental for the leasehold interest if it was leased on the open market at the relevant date. The two valuers in the case, Dr Ferrier and Ms Exner, have both calculated profit rental attributable to the sublease as part of their calculations and that figure has been subsumed into their overall calculations under the net present value of cash flow methodology. There is no separate calculation of market value undertaken by the valuers. 15 Further support for TIDC's position may be found in Douglas Brown, Land Acquisition: An examination of the principles of law governing the compulsory acquisition or resumption of land in Australia and New Zealand (5th ed.), LexisNexis Butterworths, Chatswood, 2004, in which the author considers the extinguishment of business loss as a result of acquisition. He states that compensation provisions in resumption statutes do not directly refer to situations where the active resumption causes, or partly contributes to, the extinguishment of a business. A claimant therefore needs to rely on the provisions governing disturbance, loss or damage.

16 Reference was made to Peter Croke Holdings Pty Ltd v Roads and Traffic Authority (NSW) (1998) 101 LGERA 30 in which Bignold J upheld a claim for disturbance in relation to the extinguishment of a business. While the Applicant argued that the decision reflected the fact that the claim in that case was made for disturbance, the principles applied by his Honour appear applicable to the circumstances of this case. That case concerned one of the first claims for business losses based on extinguishment under the Just Terms Act. His Honour undertook a comprehensive analysis of the cases decided before the Just Terms Act was enacted in arriving at his decision. To that end, while his conclusions were founded on the effect of the express provisions of s 59 of the Just Terms Act, he was assisted in his analysis by the decision of Lord Nicholls in the majority of the opinion of the Privy Council in Director of Buildings and Lands v Shun Fung Ironworks Ltd [1995] 1 All ER 846 (see p 59 - 61 of judgment). Applying the principles that Lord Nicholls enunciated Bignold J concluded that a claim based on loss of business profits was maintainable. That case supports TIDC's argument and is reflected in the approach of the valuers in this case. 17 I consider there is no claim available for market value to the Applicant. Any claim for business loss is appropriately made as a claim for disturbance

Special value 18 The Applicant also made a claim for special value arguing that the business in the Chatswood railway station concourse was very profitable due to very high pedestrian traffic in the area. This was argued to represent special value within the meaning of s 57 of the Just Terms Act (par 9). The Applicant relied on Commissioner of Highways v Shipp Bros Pty Ltd (1978) 19 SASR 215 at 219-224 to support its claim for special value. 19 Given that I have held that no claim for market value is available it is debatable whether special value is claimable at all. TIDC argued that a claim for special value is only maintainable where there is some special advantage that no other purchaser of the land could avail itself of relying on Arkaba Holdings Ltd v Commissioner of Highways (1968-1970) 19 LGRA 398, and Boland v Yates Property Corporation Pty Ltd & Anor (1999) 167 ALR 575 at [80] - [81]. In Arkaba Holdings, Bray CJ stated at 404 that special value is: …the value to the owner which must be paid, even if that value exceeds the market value…But this special value must in my view arise from some attribute of the land, some use made or to be made of it or advantage derived or to be derived from it, which is peculiar to the claimant and would not exist in the case of the abstract hypothetical purchaser. Would a prudent man in the position of the claimant have been willing to give more for this land than the market value rather than fail to obtain it or regain it if he had been momentarily deprived of it?

20 In Boland v Yates, Callinan J, in obiter, stated at [292] that:- The special value of land is its value to the owner over and above its market value. It arises in circumstances in which there is a conjunction of some special factor relating to the land and a capacity on the part of the owner exclusively or perhaps almost exclusively to exploit it….There will in practice be few cases in which a property does have a special value for a particular owner. Obviously neither sentiment nor a long attachment to it will suffice. The special quality must be a quality that has an economic significance to the owner…

21 In Mir Bros Unit Constructions Pty Ltd v Roads & Traffic Authority of New South Wales [2006] NSWCA 314 Spiegelman CJ (Handley and Tobias JJA concurring) held at [84] that: Where there is no difference between the value of the land in general, and its value to the owner, there is no special value: Turner v Minister for Public Construction (1956) 95 CLR 245. That principle is now enshrined in the statutory definition of "special value" which requires such value to be "in addition to the market value".

22 I agree with TIDC's submission. There is no evidence that the premises had any particular financial advantage to the Applicant that could not be enjoyed by another operator on the same premises. The physical feature of the premises being in an area of high pedestrian traffic was a feature that any retail operator could have exploited. No claim for special value is maintainable. 23 It follows from my conclusions above that the only basis on which a claim for compensation for loss of business can be made by the Applicant is as a claim for loss attributable to disturbance under s 59(f) of the Just Terms Act. Valuation evidence 24 As outlined above at par 12, the two valuers called by the parties, Dr Ferrier (TIDC) and Ms Exner (Applicant), agreed on the appropriate methodology to adopt. The two major areas of disagreement between the experts in relation to this methodology are: (a) what is the amount of lost cash flow likely to be recovered through increases in sales of other McDonald's outlets, and (b) what is the appropriate discount rate to apply to lost cash flows. 25 The two valuers prepared their principal reports and also prepared a comprehensive and useful joint report (Exhibit C). 26 Separate to the net present value of cash flows lost as a result of the compulsory acquisition, TIDC also argued that there were two other possible bases for recovery of compensation which they had Dr Ferrier value. The primary alternative related to a net loss of cash flow attributable to "location goodwill". The second option argued by TIDC to apply in the alternative was a net loss of cash flow allowing for the possibility of further recovery of cash flow at a future time within the remaining 11 year term of the sublease held by the Applicant. The third alternative argued by TIDC was that adopted by the valuers as their primary approach in their evidence, being the net present value of cash flow ignoring the possibility of further recovery at a future time. I will now consider the first alternative argued by TIDC because if successful there is no need to consider any other alternative approach.

Location goodwill 27 TIDC argued that the Applicant retains all the value associated with the name and system of McDonald's so that it suffered no loss on this basis due to the cessation of trading of the Chatswood railway outlet. The personal goodwill associated with McDonald's was not diminished by the acquisition. That the closure of the business would not impact on the value of intangible assets attributable to McDonald's was agreed by both the valuers in their joint report. 28 Location goodwill, as agreed by the valuers, refers to a component of the total intangible assets of the business and arises as an advantage of carrying on a business at a particular site (joint report Exhibit C par 8.2 p 16). 29 TIDC submitted that all the Applicant had lost as a result of the acquisition is whatever proportion of lost cash flows are directly attributable to the location of the premises, known as location goodwill. While there was no specific case in which such an approach had been taken the approach in cases such as Feldmayr v Housing Commission of NSW (1969) 17 LGRA 307 were argued to apply. Justice Else-Mitchell had to consider the loss of business of a bakery. He attributed an amount of compensation based on a loss of goodwill. Support was also said to arise from Boland v Yates Properties where Callinan J held in obiter at [294] on the issue of disturbance that: By contrast the Australian Law Reform Commission report defines, correctly in my opinion, disturbance as "cover[ing] economic losses which result naturally, reasonably and directly from acquisition. It may include such items as removal expenses, costs of necessary replacement of furniture and fittings, legal and other costs of purchasing [an alternative site] and loss of local goodwill."

30 TIDC argued these observations could apply by analogy to support its argument. 31 Dr Ferrier was asked to undertake an analysis which considered the Applicant's business for the 2004 year to determine what sales were attributable to location goodwill. He concluded that ten per cent of total sales was attributable to location ($83,200), the remainder being attributable to the McDonald's name and system, that is, personal goodwill. Ms Exner did not express a particular view on this approach, as she did not consider it was an appropriate approach. I also note that Dr Ferrier considered the primary valuation methodology that should be applied was the net present value of loss of cash flow. 32 The Applicant argued that it had suffered a loss of profits due to the extinguishment of a business and should be compensated for that. Further, there was no proper attempt made to assess goodwill in the case. I agree and will not adopt the first alternative argued by TIDC.

Discounted cash flow 33 The second alternative argued by TIDC concerned a reduction in the net loss of cash flow because of another McDonald's outlet opening in the Chatswood area, for example on the Pacific Highway within the 11 year lease period remaining, and therefore earning the Applicant additional "replacement" cash flows for the business lost at the Chatswood railway outlet. Before considering this approach I should deal with the primary approach adopted by the valuers. As identified at par 24, there are two outstanding issues between the valuers in relation to the approach to the net present value of cash flows lost by the Applicant as a result of the acquisition assuming there is no recovery of lost sales.

(i) Recovery of lost cash flow 34 The extent to which the Applicant has lost cash flow as a result of the loss of the Chatswood railway outlet depends on the extent to which sales at other McDonald's' stores are estimated to increase because customers loyal to McDonald's would go to other outlets, hence the possibility of recovered sales. 35 The primary evidence relevant to this issue is that of Mr Lowe, a senior business analyst of McDonald's, who swore an affidavit dated 1 June 2006 in which he estimated the proportion of customers who visited the Chatswood railway outlet who were likely to go to another McDonald's restaurant to purchase their meals. The figures in his affidavit suggested that 17.1 per cent of customers who use the McDonald's Chatswood railway outlet were loyal to McDonald's and were likely to go to McDonald's restaurants at Wynyard railway station, St Leonards railway station and Chatswood Food Court. In a table in par 5 he estimated the amount of recovered sales at these outlets as: Wk 1-18 Wk 19-41 Prior to store closure Sales Growth After store closure Sales Growth Difference Total impact Additional sales from transfer per week Chatswood Food Court NSW 2.2% 12.4% 10.2% 5.1% $1,850 Chatswood R'way NSW 8.5% St Leonards NSW -2.2% 13.4% 15.6% 10.5% $2,589 Wynyard Ramp NSW 0.1% 10.6% 10.5% 5.4% $2,496 Sydney Local Mkt 2.9% 8.0% 5.1%

36 He concluded the following (a) There was a sales increase at St Leonards, Wynyard Ramp and Chatswood Westfield McDonald's when benchmarked to the Sydney Local Market (b) However, other factors occurred at the same time that have also impacted on the sales at these stores. Therefore, I cannot conclude that the sales increase is a result of the closure of Chatswood Railway. (c) It is my opinion that the increase in sales to Chatswood Food Court resulting from the closure of Chatswood Station Store is a maximum of 5.1% but this will only be temporary until the new station is built and another food court is available for train travellers. (d) My opinion is that a maximum impact of 5.1% is a generous allowance in the circumstances. 37 Dr Ferrier considered the increased sales of $6,935 per week at locations proximate to the premises showed an increase of 19.6 per cent ($360,620 per annum). He relied on the table at par 5 of Mr Lowe's affidavit to reach this conclusion. Dr Ferrier's opinion was that it would be reasonable to reduce the identified increase in sales by 15 per cent per annum ($306,000) representing approximately 17 per cent of the estimated annual sales of $1,843,018.00. 38 In oral evidence Mr Lowe sought to qualify the evidence in his affidavit to the effect that the total of likely recovered sales was in the order of 5.1 per cent taking into account all McDonald's outlets not just the Chatswood Food Court outlet. This opinion was not based on any particular market analysis but was his opinion based on experience. When pressed in cross-examination he was unable to attribute any particular percentage change to any market research or surveys undertaken, his view being a general one based on his experience. 39 Ms Exner assumed that the recovery of sales was 5.1 per cent of the gross profit of the business from increased sales of other outlets because she was instructed to adopt that figure. She criticised Dr Ferrier's analysis at 9.12 of the joint report because he assumes the amount of recovered sales will continue at the same rate until 30 January 2016. This is unlikely as Mr Lowe considers the increased sales will reduce once the new railway station is built with a new food court. Further, Mr Lowe is not able to conclude that the increased sales at other outlets are a result of the closure of the Chatswood railway outlet.

Finding on recovery of lost cash flow 40 I consider Dr Ferrier's explanation and opinion should be accepted based on the sworn affidavit evidence of Mr Lowe. While Mr Lowe sought to qualify his affidavit evidence in oral evidence his opinions were imprecise and I consider it is appropriate that Dr Ferrier relied on his affidavit evidence in reaching the conclusions that he did. It is likely that there will be recovered sales at McDonald's outlets elsewhere as a result of the loss of the Chatswood railway outlet. While it is difficult for any party to determine a precise figure Dr Ferrier's approach is based on Mr Lowe's sworn affidavit evidence. I will adopt the figures calculated by Dr Ferrier for recovery of lost cash flow.

(ii) Discount rate 41 The valuers do not agree on the appropriate discount rate to apply. Ms Exner applied the weighted average cost of capital (WACC) as the appropriate discount rate. This was calculated using an established formula (see Sch 2 of her report, Exhibit B). She derived a discount rate of 14 per cent in part from the use of publicly available market data for McDonald's Corporation (US). She did not use data available for McDonald's Australia Ltd, the Applicant, because it is not a publicly listed company and therefore the necessary data was not available to her. Part of the approach required use of a figure known as the beta, which measures the "riskiness" of a business. McDonald's Corporation US has a beta of 0.95 according to Bloomberg financial analysts. A business with a beta less than 1 is considered less risky. 42 Ms Exner considered that the Applicant would not be willing to relinquish its rights under the sublease to operate a business at the site unless a third party was prepared to pay an amount at least equal to the value of the business of $2,383,743 applying a discount rate of 14 per cent for the remaining 11 years of the lease (as calculated in Sch 1 of her report, Exhibit B). 43 Ms Exner considered it was reasonable to adopt a discount rate equal to the WACC of McDonald's Corporation US as this reflected the risk associated with the assets being valued. This risk was different to and lower than the risk faced by a hypothetical franchisee operating a business which she considered was Dr Ferrier's approach. She considered a discount rate of 14 per cent was correct. To support her approach Ms Exner compared the WACC of three McDonald's competitors, Starbucks Corporation, Restaurant Brands NZ Ltd and Yum Brands Incorporated. All of these businesses yielded a similar result (Sch 12 of her report, Exhibit B). 44 Dr Ferrier did not agree with Ms Exner's approach in deriving the WACC because: (i) no prospective arm's length purchaser would have reasonably expected to generate the same cash flows without the use of the McDonald's system and name; (ii) even if a specific prospective purchaser could have expected to generate the same cash flows by using their own system and name (such as Pizza Hut, KFC or Subway), such a purchaser would not have reasonably been willing to pay for the goodwill attributable to the McDonald's system and name (which they would not acquire), but only for the goodwill attributable to the location; (iii) no prospective arm's length purchaser would be likely to have the same cost of capital as the Applicant; and (iv) McDonald's Corporation US WACC does not adequately allow for the risks associated with the expected cash flows of the particular business at Chatswood railway station. 45 Consequently Dr Ferrier's opinion was that a reasonable approach to determine the amount an arm's length purchaser would be prepared to pay for the business in light of the profitability of the site, was to assess the amount which the Applicant would reasonably pay for the business. Dr Ferrier applied the figures obtained from the McDonald's Franchise Accounting Manual 2005 in a section entitled "The sale and purchase of an existing restaurant". The manual identifies three types of transactions as follows: (i) Company sells store to an operator or registered applicant (ii) Operator sells store to the Company, or (iii) One operator sells store directly to another operator or to a registered applicant 46 The manual states that while the procedures are the same for each type of transaction, for the purposes of that section the focus is on one operator selling directly to another. In the sample borrowing guideline calculation a multiple of five is used as the relevant factor to apply. Dr Ferrier considered that it was apparent the multiple of five used by the McDonald's manual to assess the value of a business to a franchisee was applied to EBIDA (Earnings Before Interest, Depreciation and Amortisation) and not to EBIT (Earnings Before Interest and Tax). He therefore calculated that the equivalent cash flow discount rate should be 22.3 per cent based on a period of 11 years remaining in the lease, resulting in a value of $1,180,882. This was the amount likely to be paid by a prospective franchisee for the business before recruitment and training. 47 Ms Exner also undertook a calculation of the loss of profits on the basis of the cash flows generated to operate the business by a third party franchisee, Dr Ferrier's approach. Her revised calculations based on this approach was $2,047,177 (Sch 5(i) of her report, Exhibit B). 48 The approach of Dr Ferrier was criticised because it was not correct to apply the analysis in the manual which concerned the sale to franchisee. Dr Ferrier also failed to take into account the extra income derived by McDonald's from its franchisees in the form of ongoing rent and system fees and a royalty fee which amounted to $907,781 over 11 years (see Sch 5(ii) of her report, Exhibit B) which amount Ms Exner took into account hence the higher figure ($2,047,177). 49 Ms Exner stated (at par 9.18 of the joint report) that Dr Ferrier's approach assumed a capitalisation rate in perpetuity and was not limited to a finite period which ends on 30 January 2016. The corrected figure would be 17.7 per cent if the correct period was applied. Dr Ferrier disagreed that his figure was calculated incorrectly but rather related directly to the remaining lease period of 11 years.

Finding on discount rate 50 TIDC criticised the approach of Ms Exner in deriving the WACC from figures based in part on McDonald's Corporation US. I agree with these criticisms. The key risk factor to consider in this case is the risk associated with the business of a single takeaway food operation at Chatswood railway station. The WACC adopted by Ms Exner assumes that that risk is the same as the risk of investing in a very large US-based corporation. While Ms Exner stated in cross-examination that she considered this approach was appropriate and gave reasons for it, such as the incorporation of Australian data as part of her analysis, I cannot agree with her approach in these circumstances. The WACC she adopts is for a business which has a huge portfolio of assets. It would only be relevant when McDonald's was purchasing a business from itself and cannot apply to other purchasers. Her approach assumes that a hypothetical purchaser of the business is the same as McDonald's Corporation US operating in a global market. That is not a sound assumption in my view. I do not accept that the risk of continuing a single business is the same throughout the world if a hypothetical purchaser is to be considered. 51 The risk of investing in McDonald's Corporation US with assets of US $40 billion (see Sch 2, Exner Report, Exhibit B) market capitalisation and the assessment of the risk of operating a single McDonald's business at Chatswood railway station is simply not synonymous.

52 The Applicant argued that Collex Pty Ltd v Roads and Traffic Authority of New South Wales [2006] NSWLEC 579 in which Talbot J considered the application of the discounted cash flow methodology in a compulsory acquisition of land supported the approach of Ms Exner. Talbot J considered the valuation evidence before him at [90] - [92] and the approach of the experts in that case included the calculation of the beta for the operations being valued. The valuers also considered the beta of companies carrying on comparable or related activities to the applicant in that case. Each case must be decided on its own facts. Collex is simply a case where the discounted cash flow approach was also accepted by the Court. It has no direct application to the analysis of the valuers using that approach in this case. I do not consider the case provides particular support for Ms Exner's approach. 53 I consider that Dr Ferrier's approach more accurately determines the discount rate likely to reflect the normal business risks associated with the cash flow of this business, which has been acquired. It is therefore more reflective of the risks to a purchaser that the cash flow from the business may not be maintained. The discount rate he derived from the McDonald's franchise manual is intended to apply beyond that of a franchisee purchase of a business and is also applicable to an arm's length purchaser situation. Further, an arm's length purchaser would be unlikely to have the same cost of capital as McDonald's Australia Ltd. 54 The Applicant's counsel argued strenuously in reply that another failure of Dr Ferrier's approach was that he had derived a capitalisation rate "in perpetuity" because it was not limited to an 11 year period identified by Ms Exner. His approach was said to be faulty compared to Ms Exner's because in her table in Sch 1 of her report she applied the discount rate of 14 per cent on an annual basis over the 11 year period. It was argued that Dr Ferrier had failed to do this. However on close examination of his first report it appears that he also undertook a similar analysis over an 11 year period, albeit with different figures, at the time his report was prepared. Information on which he now relies has since become available so that the figures applied have changed, but not the underlying methodology. It is also clear from the joint report at par 9.14 that Dr Ferrier's analysis commences with the valuers' agreed amount which a prospective franchisee would pay for the remaining 11 year period of the lease so that the limitation of 11 years is clearly factored in from the outset of his calculations. 55 I do not consider there is any validity to this criticism of Dr Ferrier's approach. Consequently I consider I should adopt Dr Ferrier's approach and the amount he calculates in relation to this alternative is $1,112,000 being the net loss of cash flow of the business. It is not relevant to add in the extra income the Applicant would derive from a franchisee through ongoing rent and system fees as that is not relevant to a hypothetical purchaser situation. 56 While the Applicant's counsel filed in Court a Fifth Further Amended Points of Claim which was said to reflect changes needed because of different figures adopted by the valuers in oral evidence in relation to the amount recovered for stock, plant and equipment, this was not agreed by TIDC and was contrary to figures provided by the two valuers jointly in Exhibit J. In the absence of that agreement by TIDC that the changes are necessary purely because of mathematics, I consider I should adopt the revised figure in the agreed evidence of the valuers in Exhibit J for Dr Ferrier, which is $1,112,000.

Possibility of further recovery of sales at future time 57 The second alternative argued by TIDC was that there was a likelihood that another McDonald's store would open in the Chatswood area within the remaining 11 year period of the lease. This would result in a recovery of sales within the remaining lease period which would reduce the amount of loss. 58 The Applicant relied on the evidence of Mr Gude, the New South Wales real estate manager for McDonald's, that if a property became available on the Pacific Highway at Chatswood suitable for a restaurant the Applicant would open a new outlet. In his affidavit sworn 31 May 2006 he detailed the investigations undertaken by the Applicant into the availability of alternative sites in the Chatswood business district. The Applicant concluded that there was no viable comparable site to the existing railway concourse site. He stated that McDonald's identified gaps in the market for its restaurants. A gap in the Chatswood market for a freestanding store along the Pacific Highway has been identified. In oral evidence Mr Gude stated it was highly unlikely and/or there was no possibility of a McDonald's outlet opening in the Chatswood area in the future. 59 Dr Ferrier's opinion was that the Applicant should be adequately compensated for the loss actually suffered. The Applicant should only be awarded the lost cash flows for the whole 11 year period up to 30 January 2016 if there was no reasonable possibility that it would not recover any of that lost cash flow. Dr Ferrier considered that there was a possibility of some recovery of lost cash flow in that period. He identified an additional ten per cent as an appropriate amount to allow. He accepted that this was an entirely subjective calculation because of the uncertainty about what may happen in the future. Because of additional information received Dr Ferrier revised his first estimate from ten per cent to five per cent as the appropriate discount rate which should be allowed. He therefore concluded that the appropriate discount rate was 27.3 per cent which reflects the possibility that the Applicant will recover additional lost cash flows by reopening or relocating the business sometime before 30 January 2016. This resulted in an amount of $832,000. 60 Ms Exner did not agree with this approach as she considered it was unreliable in the absence of an actual alternative scenario to consider. It is impossible for experts to determine with sufficient certainty when a restaurant may open and what cash flows would result from such an event.

Finding on further recovery of sales 61 Given the subjective nature of Dr Ferrier's evidence in that what is being assessed is the likelihood of another McDonald's store opening before January 2016, in the absence of any specific proposal I do not consider I should take this factor into account in reducing the valuation amount.

Conclusion 62 The Applicant is able to claim loss due to the extinguishment of its business of $1,112,000 as disturbance under s 59(f) of the Just Terms Act. An additional amount of disturbance is agreed of $65,983.09 (par 3(iv)). Total compensation is therefore determined at $1,177,983.09.

Orders 63 The Court makes the following orders:

1. The Court determines the amount of compensation to which the Applicant is entitled pursuant to s 55 of the Just Terms Act is $1,177,983.09.
2. Costs are reserved.
3. Exhibits are to 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.