NSW Trustee and Guardian v Wardy

The Estate of the Late Edmond Wardy

1. The late Edmond Wadih Wardy ("the testator") died on 19 July 2009. He was survived by his widow, his second wife Hassiba Wardy, and their three children, Anthony, Roger and Robert Wardy. The testator was also survived by the three children of his first marriage, John, William and Sam Wardy.
2. A dispute about the last will of the testator was resolved first. In the meantime, the estate's interests were preserved by the appointment on 24 June 2010 of Mr Gordon Salier as administrator pendente lite of the testator's estate. In 2013 after a contest, White J admitted the testator's will dated 7 November 1992 to probate: Wardy v Wardy & Ors; The Estate of Edmund Wadih Wardy [2013] NSWSC 244. Hassiba Wardy and all of testator's six sons are named as beneficiaries under that will. The Public Trustee was named as the executor of the testator's November 1992 will and the plaintiff. The administrator of the estate, the NSW Trustee, is the statutory successor to the Public Trustee.
3. The testator's estate is substantial. Hassiba Wardy, and two sons by the testator's first marriage, William Wardy and Sam Wardy next brought proceedings under Succession Act 2006, Chapter 3, seeking further provision out of the estate. In that litigation, White J made orders for provision for each of Hassiba (in the sum of $300,000), William (in the sum of $1,560,000) and Sam (in the sum of $1,900,000): Wardy v Salieh; Wardy v The Estate of thelate Edmond Wadih Wardy [2014] NSWSC 473. In the course of that decision White J made findings that lay the foundation for the current litigation. Some of these are referred to below.
4. In 1998 the testator had established the Edmond Wardy Family Trust ("the Trust"). Linevale Pty Limited ("Linevale") was the trustee of the Trust and is the second defendant in these proceedings. The testator was a director and the sole shareholder of Linevale. Prior to 28 March 2008, the testator was the appointer of the trust with the power to replace the trustee. John Wardy replaced his father as appointor in March 2008. At the time of White J's decision the Trust had substantial assets, to the value of some $11.5 million. In the family provision proceedings, White J found that the assets of the Trust were liable to be designated as notional estate under Succession Act, Chapter 3 and that the net assets of the Trust were to be taken into account in determining adequate provision out of the estate for the plaintiffs in those proceedings.
5. The present proceedings were commenced in 2016, raising a range of issues many which are no longer in contest. The NSW Trustee for example sought an account from Mr John Wardy of the rents that he had collected from the tenants or occupiers of the George Street property since June 2012. In prayer for relief 11 of the Statement of Claim the NSW Trustee, by then the estate's administrator, first sought judicial advice under Trustee Act 1925 as to whether it was justified in substituting the George Street property for the asset specifically devised to certain of the beneficiaries, the Cleveland Street property.
6. The plaintiff's claim for judicial advice was listed for hearing in October 2017. The Statement of Facts put before the Court on the application for judicial advice revealed a wider dispute between the NSW Trustee and Mr John Wardy. In late 2017 when the matter was listed, the Court concluded that the dispute was not appropriate merely for an application for judicial advice as, even if the judicial advice were given, the dispute with Mr John Wardy would still be outstanding, and it would likely be litigated. The Court wanted greater finality, so that the dispute with Mr John Wardy would be resolved at the same time. The Court therefore declined to give judicial advice: NSW Trustee and Guardian v Wardy [2017] NSWSC 1466.
7. The Court gave leave to Mr John Wardy to file a cross-claim in the proceedings: NSW Trustee and Guardian v Wardy [2017] NSWSC 1466. In the Cross-Claim Mr John Wardy sought relief: requiring the NSW Trustee to purchase a substitute property in lieu of the Cleveland Street property, for the Cleveland Street property devisees; a declaration that the Coogee property (with or without adjustments) was a satisfactory appropriate substitute for the Cleveland Street property; a declaration that the George Street property was (with or without adjustments) an appropriate substitute for the Cleveland Street property; and further in the alternative, if neither of the Coogee property nor the George Street property was a satisfactory substitute for the Cleveland Street property, the devisees of the Cleveland Street property would be given then a money sum equivalent to the Cleveland Street property.
8. The Cross-Claim joined the NSW Trustee as first cross-defendant and the Cleveland Street devisees as the other cross-defendants. As will be seen, the NSW Trustee contends that aspects of this Cross-Claim are not maintainable by Mr John Wardy. The issues in the reconstituted proceedings including the Cross Claim, derive from Clause 3(iv) of the testator's last will.
9. The Court directed that the matter be reconstituted as a contested hearing of Mr John Wardy's Cross Claim so that the proceedings accurately reflected the true dispute between all interested parties, and who would be bound by the result. When reconstituting judicial advice proceedings the Court should join all necessary parties and reformulate the originating process as required: RL v NSW Trustee and Guardian (2012) 84 NSWLR 263; (2012) ASTLR 149; [2012] NSWCA 39 at [58]. The Court sought to do this at directions hearings throughout 2018 as the parties were preparing their evidence for the contested hearing.
10. The current disputes comprise issues concerning the proper interpretation of clause 3(iv) of the will when making the choices now presented in the administration of the estate. The starting point for analysis is the testator's November 1992 will.

The Testator's November 1992 Will

1. After appointing the Public Trustee as his executor and trustee, the testator's November 1992 will separately dealt with his real estate and his personal estate. He dealt with his real estate in clause 3 of the will and his personal estate in clause 4.
2. In clause 3 (sub-clauses 3(i) to (v)) of his will, the testator "gave, devised and bequeathed [his] real estate" to his wife, Hassiba Wardy, and to the sons of both his marriages". The present contest arises out of decisions taken in relation to the gift in clause 3(iv) of the will.
3. The gifts in clause 3 of the will were as follows. By clause 3(i) of the will the testator gave to his wife Hassiba the real property in Kensington in which they both lived. By clause 3(ii) of the will the testator gave to his sons by his first marriage, William, John and Sam, as tenants-in-common in equal shares real property in South Dowling Street, Surry Hills. Under clause 3(iii) of the will the testator gave to his son John real property in New Canterbury Road, Dulwich Hill.
4. Clause 3(iv) of the will gives to the testator's widow, Hassiba Wardy, for her life with remainder to the testator's and Hassiba Wardy's sons, Anthony Wardy, Roger Wardy and Robert Wardy (together described as "the Hassiba Wardy interests") in equal shares as tenants-in-common a property in Cleveland Street, Redfern ("the Cleveland Street property"). This gift was in the following terms: "(iv) To my wife HASSIBA WARDY for her life with remainder to my sons ANTHONY WARDY, ROGER WARDY, and ROBERT WARDY in equal shares as tenants in common:- [address not published] Cleveland Street, Redfern: My wife shall be entitled to receive the rents and profits derived from the said property during her lifetime. My wife shall pay from the rents and profits all liabilities (such as rates, taxes, charges and other expenses) in connection with the said property. My wife must arrange and maintain an adequate fire insurance Policy with respect to the building and any contents belonging to her in the property and also arrange an adequate Public Liability Insurance cover. Upon her death the said property is to be given to my sons, ANTHONY WARDY, ROGER WARDY and ROBERT WARDY for their own use and benefit absolutely as tenants in common in equal shares provided that the youngest shall have attained the age of 21 years. NOTWITHSTANDING WHAT I HAVE STATED ABOVE IN THIS CLAUSE IN THE EVENT that any of my sons (that is ANTHONY, ROGER and ROBERT have not attained the age of 21 years at the time of my death I DIRECT that the property be held in TRUST by my TRUSTEE until the youngest [sic] of my said sons have attained the age of 21 years and immediately upon my youngest attaining the age of 21 years, if my wife is still living to deliver the said property to her for the rest of her life with reminder [sic] to my said sons for their own use and benefit absolutely. IN THIS EVENT I further direct my Trustee to pay the income derived from the property to my wife after paying all liabilities (rates charges, taxes Insurance and the like) incurred in connection with the management and maintenance of the said property. IN THE EVENT that my said wife is not living at the time my youngest attains the age of 21 years then I DIRECT MY TRUSTEE to deliver the said property to my sons for their own use and benefit absolutely in equal shares as tenants in common." [Emphasis added]"
5. The final clause 3 gift in the will, clause 3(v), dealt with the residue of the testator's real estate. The deceased directed that the residue of his real estate be given to all his children, of both marriages, William, John, Sam, Anthony, Roger and Robert in equal shares as tenants-in-common. He also directed in clause 3(v) that in the event that any of his children had not attained the age of 21 years at the date of his death, that the estate properties be held in trust until the youngest attained the age of 21 years.
6. Finally, clause 4 of the will dealt with the testator's personal property. By clause 4 he "gave, devised and bequeathed all my personal property wheresoever situated and whatsoever nature unto my wife for her own use and benefit absolutely."

Issues Arising from Clause 3(iv) of the Will

1. Although complex in places, the present contest may be defined in a relatively narrow compass. The early administration of the estate revealed that it had substantial debts to the Australian Taxation Office ("ATO"). To meet these ATO debts the administrator pendente lite, with the approval of the Court, sold the Cleveland Street property in November 2012 for $5,150,000. By the time of the hearing the residue of the estate comprised approximately $4,000,000 in cash, a property in Coogee Bay Road, Coogee ("the Coogee property") and another property in George Street, Redfern ("the George Street property").
2. Some substitution of real estate, or other property, for the Cleveland Street property is necessary to satisfy the provisions of clause 3(iv) of the will. The parties accept that the substitution must satisfy the established principle stated in Ewer v Corbet (1723) 2 P Wms 148; (1723) 24 ER 676, Joyce v Cam (2004) 12 BPR 22,231; [2004] NSWSC 621 at [48] - [49] and Wardy v Salier [2014] NSWSC 473 at [9], [34] - [37], that if an executor sells property which is the subject of a specific legacy or devise, then the legatee is entitled by a process of adjustment of the rights of beneficiaries between one another "to be put into the same position he would have been if the property the subject of the specific legacy had not in fact been sold…".
3. Upon advice, the NSW Trustee is of the opinion that the George Street property should be substituted for the Cleveland Street property, so as to satisfy the provisions of clause 3(iv) of the will. The Hassiba Wardy interests do not contest this proposed substitution, indeed in recent correspondence dated 18 and 21 November 2018 (Exhibit C) they maintain their belief and agree that the George Street property is an appropriate replacement property for the Cleveland Street property. But John Wardy contends instead that the Coogee property, or some other property yet to be acquired, should be substituted for the Cleveland Street property.
4. John Wardy sought to argue, among other contentions, that the George Street property was far more valuable than the Cleveland Street property and for that, and other reasons, the former was an inappropriate substitute for the latter. In contrast, the NSW Trustee argued that the George Street property and the Cleveland Street property were sufficiently close in value that with some adjustments, the former qualified as a proper substitute for the latter. The NSW Trustee and John Wardy each obtained competing valuations of all three properties, which will be analysed below.
5. Other matters are in issue. One of these is the date at which the estate's property should be valued for the purpose of assessing the substitution decision. One party contended the valuation should be at the date of sale of the Cleveland Street property in November 2012. And the other contention is that valuation should take place at the date of the hearing, or at least some mutually acceptable date on which valuations could be done close to the hearing. Ultimately the parties cooperatively conducted their cases on the basis that they were presenting valuations and valuation critiques around a common valuation date in October 2016. Based on the way the trial was conducted the Court has accepted that common valuation as the basis for its reasoning below. Other disputes exist about how to take account of changes in value of the estate's properties over time; and about the level of sustainable income that may be derived from the proposed substitute properties in comparison to the Cleveland Street property.
6. Finally, there is a question of whether if neither the George Street property nor the Coogee property is a proper substitute for the Cleveland Street property, whether some other property should be purchased by the estate and what property, or kind of property that should be. And if the Coogee property were going to be the substitute, there is no agreement as to the cost of works that are required to be done to make that property compliant with the Building Code of Australia (BCA), and with fire safety and Council regulations.
7. The resolution of a number of these contests required cross-examination and was likely to continue to divide the parties whatever judicial advice were given. An application for judicial advice was therefore an inappropriate vehicle to resolve these disputes.
8. The Court directed that the Hassiba parties be served with notice of the proceedings and a copy of the Court's 2017 judgment. But they did not wish to take an active role in contesting the relief that John Wardy sought on the Cross-Claim. To set up a contest on John Wardy's Cross-Claim the Court directed that the NSW Trustee act as the contradictor to John Wardy's case. This was undertaken on the following basis. First no one would contest the propriety of NSW Trustee acting in that role. And the NSW Trustee was authorized to have a full indemnity from the estate for its costs of acting as contradictor. Neither John Wardy, nor any other beneficiary would seek to have the NSW Trustee removed or disqualified on the grounds it has acted as a contradictor to John Wardy's Cross-Claim. In the event that John Wardy were successful he would be at liberty to seek his costs out of the estate. If John Wardy were unsuccessful, the NSW Trustee would be at liberty to seek the reimbursement of its costs from John Wardy.
9. It was initially thought that the reconstituted proceedings could be heard in late 2017. But the further gathering of evidence and the exchange of experts' reports and the appointment of engineering and building experts by the Court to deal with the cost of making the Coogee property compliant with the Building Code of Australia, and applicable fire safety regulations delayed the commencement of the hearing, which finally took place in December 2018. The experts were cross-examined on 11 December 2018. Written submissions were received in January 2019, when judgment was reserved.
10. The NSW Trustee brought other proceedings against Mr John Wardy in 2015 (proceedings numbered 2015/159184). But these 2015 proceeding were settled on 5 September 2019.
11. Whilst judgment was reserved the parties raised issues about the condition of the George Street property. In response to a motion brought by the NSW Trustee, the Court made various orders and directions on 4 September 2019 to make the George Street property safe and reduce fire hazards at that location, pending the Court's present decision and pending the making of further decisions by the NSW Trustee in the course of the estate's later administration. On 4 September 2019, the Court ordered and directed that the George Street property be made clear of rubbish, that fire control systems be urgently connected at the property, and that such steps be taken urgently as are practical to ensure the property is secured against unauthorised access and is not used for criminal activities. Finally, the Court ordered on that occasion that the NSW Trustee should retain someone familiar with the property, being Mr John Wardy, at an hourly rate to oversee, supervise and implement the making safe of the George Street property in accordance with the Court's orders.
12. As a result of the Court's orders made on 4 September 2019, Mr David Jackson, the solicitor for the NSW trustee filed an affidavit updating the Court about the current situation with the estate properties, including efforts that have been made since 4 September 2019 to improve the situation, in particular at the George Street property. Rubbish and building materials have been removed from the George Street property. And efforts have been made to rectify the fire control system and obtain access to flats to ensure that smoke detector systems were installed in each flat, an issue highlighted by the Court. But there are still squatters in the George Street property as at that date, although efforts were being made with Redfern police to undertake temporary works to ensure that squatters who are evicted from the property cannot re-enter. These works include the installation of a roller shutter door at the front entry to the property. As the Court indicated at the directions hearing, the parties have been given liberty to apply and are encouraged to seek the Court's further assistance from time to time, as required, to use the Court's available powers to make the George Street and Coogee properties as safe as possible, pending final administration of the estate.

Some Relevant Findings in White J's Decisions

1. In their submissions both parties draw upon the findings and conclusions concerning the estate in the previous judgments of White J. His decision in Wardy v Salieh; Wardy v The Estate of the late Edmond Wadih Wardy [2014] NSWSC 473 is of particular relevance at [34] to [37]: "34. By clause 3(iv) the deceased gave Hassiba Wardy a life interest in a property in Cleveland Street, Redfern with the remainder to the sons of his second marriage, Anthony, Roger and Robert. That property was sold by the administrator to provide funds for the payment of debts. The property was sold at auction for $5,150,000. The net proceeds of sale that were received amounted to $5,038,711. Capital gains tax payable as a result of the sale of that property was estimated to be $854,734. 35. For the reasons in paras [28]-[34] above the capital gains tax payable in consequence of the sale of the Cleveland Street property is an administration expense to be borne by those entitled to the residuary estate. The expenses of sale are also an administration expense. The executor will be required to apply the residuary estate to acquire substitute property to provide income to Hassiba Wardy for her life with remainder to her sons. (The amount to be so expended would be reduced if the residuary estate were insufficient to meet all debts, funeral, testamentary and administration expenses. In that event the specific gifts in clauses 3(i)-(iv) would bear the burden proportionately. That will not be the case.) 36. Between 19 July 2009 and 2 April 2013 the Cleveland Street property generated a total net rental income of approximately $1,055,000. The tax paid or payable in respect of this income was approximately $415,000. The net amount to which Hassiba Wardy is entitled from the rents collected on the property after payment of tax is approximately $640,000. 37. In their submissions the parties assumed that the substitute gift should be an income-producing asset or assets to the value of either $5.1 million or that sum less capital gains tax and/or selling expenses incurred on the sale of the Cleveland Street property. On the assumption that the substitute gift should be to the value of the property sold then the residuary estate would bear the burden of a substitute gift of $5.1 million. It will be a matter for the executor to determine what is an appropriate substitute investment having regard to the interests of the life tenant and remaindermen. The pre-tax annual return on the Cleveland Street property over 3.7 years between July 2009 and April 2003 (assuming a stable capital value) was approximately 5.6 per cent, and there is no basis for assuming that a like return could not be had from a substitute investment to the same value."
2. But many of the judgments that the NSW Trustee and the Court must make related to these proceedings turn upon foundations of fact about the value of the George Street property, the Cleveland Street property and the Coogee property at the commonly used valuation date of October 2016. The NSW Trustee contends that it is able to act on the basis of the valuation available to it. My view, a trustee acting properly generally can act upon such expert evidence. But in this case Mr John Wardy has put the validity of these valuations in issue, fielding a factual contest about whether the NSW Trustee is acting on proper material. In order to avoid subsequent litigation about whether the NSW Trustee had a proper factual basis for its decisions, the Court has decided to make a determination binding on the parties about the valuation of those properties.

The George Street, Cleveland Street and Coogee Properties

1. These reasons discuss the valuation reasoning of the valuers with respect to the properties in question in these proceedings, rather than just recording the outcome of their valuations. This detail is necessary because a detailed contest as to the appropriate valuation methodology and valuation assumptions was a central question in the proceedings. In order to understand that contest, it is necessary to appreciate the central elements of the valuers' logic.
2. Rather than put on an independent valuation Mr Teale's approach was to offer criticisms of Mr Besele's and Mr Price's valuations. Mr Teale's criticisms of their valuations are adequately dealt with in a separate, later section of these reasons devoted to the nine topics which the parties advanced in the main contest between the expert valuers. As these reasons show, the Court accepts Mr Besele's and Mr Price's valuations over Mr Teale's criticisms.

The George Street Property - The Valuation Evidence

1. Mr Besele values the George Street property as at 5 October 2016 at $7,210,000, exclusive of GST. Mr Price values it at as at 17 October 2016 at $7,200,000. And upon various differing assumptions Mr Teale contends that Mr Besele and Mr Price have undervalued the George Street property by as much as $2.7 million. It is now necessary to look at the physical features of the George Street property and then to examine the valuation approach taken to it by each of the expert valuers.
2. The George Street property is located on the eastern side of George Street Redfern, which at that point is a two-lane suburban road with concrete guttering, channelling and kerbside parking. The nearest cross street is Cleveland Street, which lies a few properties to the north. The property is bounded by William Street to its rear. On the northern side of the property is Reconciliation Park, a recreational grassed area bounded on its southern side by the wall of the George Street property and bounded on its northern side by a small laneway known as James Street. Reconciliation Park is also bounded to the east and west by George Street and William Street respectively.
3. The property is approximately 2.6 kilometres south of the GPO. Surrounding it is a combination of established commercial development and low to medium density residential development. Redfern train station is approximately 550 metres to the south-west. Bus stops are within walking distance.
4. Applicable planning controls over the property require a floor space ratio of 1.5:1 and a maximum building height of 12 metres. As at the date of the valuations in October 2016, there were no existing development applications or approvals in existence over the property.
5. Mr Besele was not able to inspect the George Street property internally. He was only able to undertake a kerbside inspection. Mr Teale was able to undertake a more detailed inspection. This led to some differences between them but they ultimately did not disagree upon the fundamental structure of the improvements to the George Street property.
6. The improvements to the George Street property may be shortly described. It is a two storey (and partly a three-storey) structure, rising up from a lower ground floor area. It rises to three levels at the frontage to George Street, which comprises two levels of residential flats above a retail level. It has two levels of industrial warehouse at the rear, being the William Street frontage. The front of the George Street property comprises four shops on the ground floor, all of which have a direct frontage to George Street. This street facing retail level is, as indicated, surmounted by two levels of residential flats.
7. Mr Besele and Mr Price assumed the warehouse area of the George Street property at all three levels (including a lower ground floor area) was 420 square metres. The ground-level shops and flats are 614 square metres. The first floor and second floor flats have a floor space of 508 square metres and the roof level has a floor space of 100 square metres.
8. The experts have concluded that the George Street property was constructed in about the 1920s. At the time of valuation, and on the evidence thereafter, the improvements on the George Street property are in poor condition and require immediate repairs. They exhibit surface rust and peeling paint, cracks to internal walls, moisture damage under roof eaves, broken and damaged tiles to shopfront facades, moisture damage and possible concrete cancer, leaking box gutters and downpipes, some gutted unoccupied flats, possible non-compliant gas metering fittings and a possible white-ant infestation.
9. Considerable capital expenditure is required to bring the George Street property up to a lettable standard. An allowance for this has been made in all valuations. Mr Besele initially estimated an allowance of $346,000, which equates to $200 per square metre for these repairs and capital expenditure. The capital expenditure that all the valuers assumed was required to let the George Street property to its best advantage did not involve any structural improvement.
10. Mr Besele was of the opinion that the residential and retail component of the George Street property could achieve 100% occupancy, if repaired and refurbished. But he regarded the rear warehouse as having little prospect of achieving full occupancy, even after capital works were undertaken. Because of its overall state of dilapidation Mr Besele assessed the highest and best use of the George Street property as the complete demolition of all existing improvements and its redevelopment into residential apartments with ground floor retail fronting onto George Street. But he cautioned that any new development might encounter design difficulties as a local council was unlikely to allow residential living areas in any redeveloped property to face onto the Reconciliation Park parkland. A possible design solution to this was the creation upon development of an internal courtyard to provide a light well. But this would restrict the potential development yield of the property. Overall, he saw the property as a "short to medium term development opportunity" and he adopted the direct comparison approach on a development value basis, as his primary approach to valuation. He used the investment income capitalisation approach as a secondary check.
11. Using sales evidence in the Surrey Hills, Waterloo, Chippendale and Annandale areas, Mr Besele derived an appropriate rate per square metre of floor space area for the property in the range of $3500 to $4500 and an appropriate rate per square metre of the land of the property at $5000 to $6000. Utilising comparable property sales for other similar investment properties in other inner-city suburbs, he concluded that an appropriate gross yield range for the George Street property is 6.5% to 8.5%. Using the existing floor space area of 1878 square metres, with a floor space ratio of 1.5 and taking the midpoint of $4000 as the rate per square metre of floor space area, as developed, Mr Besele reached an assessed market value of $7,512,000 for the property. He then deducts the required demolition costs, which he assessed at $299,000, being the rate of $100 per square metre of assumed area of demolition, to produce a final valuation of $7,213,000, which he rounds down to $7,210,000.
12. Mr Besele crosschecks his valuation using income capitalisation methodology, by estimating the net maintainable income receivable from the property and capitalising this at what he judged to be an appropriate multiple to derive a final value. Using this alternative methodology he reaches a market value of $6,901,317, which he rounds down to $6,900,000, exclusive of GST.
13. The main integers of this calculation are the following. Mr Besele assumes that the residential flats and the ground-level warehouse area of the George Street property are tenanted to produce a current sustainable gross rental of $230,880. But after execution of property repairs and renovations he estimates rental income from vacant areas of $339,820, to produce total gross rental from the property per annum of $570,700. He assumes total outgoings of $205,100 per annum with a 5% ongoing vacancy allowance of $28,535 per annum to produce a net sustainable income per annum of $337,065. Capitalised in perpetuity at 5%, this produces a capitalised value of $6,741,300.
14. After deriving this figure, Mr Besele undertakes various "below the line" calculations, some involving deductions and some involving additions. From this figure he deducts initial capital expenditure of $346,000, agent's commission and other allowances. He also adds below the line a capitalised rental at the risk affected rate of 8.5%. This represents the anticipated rental from the ground-level warehouse, an area which he regards as functionally obsolescent and unlikely to generate sustainable rental. With these additions and subtractions the final valuation figure is $6,900,000, which represents an initial gross yield of 8.27%, a rate of $1,252 per square metre of land area and current gross rent per annum of $5,511.
15. Mr Besele's two methodologies produce slightly different valuation figures but he adopts the valuation derived from his application of the direct comparison method because it represents the "most appropriate method of valuation" given the demolition and rebuilding is the highest and best use of the property in his opinion.
16. Mr Price also valued the George Street property. He reached a valuation of $7,200,000 as at 17 October 2016, the date of his inspection. He was unable to gain access to the upper ground and upper levels of the warehouse building fronting William Street. But he was advised and assumed that those areas had not changed since an earlier inspection he had undertaken in April 2014.
17. Mr Price agreed with Mr Besele that the highest and best use of the George Street property was as a medium residential development site. He assessed that the residential part of the property had a mixture of 37 rooms and older style flats. He sighted a small number of vacant unfurnished rooms, which he thought were representative of the other rooms that he did not see. He estimated an average rental of $120 per week for these rooms.
18. Like Mr Besele, Mr Price regards the most appropriate valuation methodology as the direct comparison with comparable sales evidence, supported by the capitalisation of income method. The current site area of 1252 square metres and a floor space ratio of 1.5 to 1 assumes a gross floor area on development of 1878 square metres. Looking to the comparable sales evidence of property suitable for demolition and reconstruction in the inner city area he derives a midpoint rate of $3,850 per square metre developed floor space, which over 1878 square metres produces a derived valuation of $7,230,300, which he rounds down to $7,200,000.
19. Mr Price also applied as a cross-check a capitalisation of income approach. Using this approach he adopts a net rental return of $280,758 and applies a yield of 3.9% to produce a figure of $7,198,923.

The Cleveland Street Property - The Valuation Evidence

1. Mr Besele produced two reports for the Cleveland Street property. There was a controversy in the production of Mr Besele's second report, which was the one that he relied upon at the hearing. The first valuation report showed a value of $11,770,000. But as issued, it contained an arithmetic error of $6,020,000, a mistake made when in subtracting outgoings from gross income in order to calculate the net income of the property. Adjusting solely for the $6,020,000 error and making no other changes the adjusted valuation of the Cleveland Street property would be $5,750,000 (being $11,770,000 less $6,020,000). But in a valuation judgment that became controversial in the proceedings and which is discussed in more detail below, four weeks later on 29 November, Mr Besele issued a second report, which adjusted the capitalisation rate that he used in his first report from 6% to 5% (thereby increasing the valuation by $1,350,000), leading to an overall valuation of the Cleveland Street property of $7,100,000. Mr John Wardy's case attacked this adjustment and Mr Besele defended it. These reasons deal with Mr Besele's second report.
2. After the NSW Trustee sold the Cleveland Street property on 16 November 2012, its purchaser, Mr John Wardy, made improvements to the property. Therefore a valuation of the property for present purposes must be undertaken as at the common valuation date but assuming the physical state of the property as at 16 November 2012 and thereby excluding the value of and the financial benefits that might be derived from Mr John Wardy's post sale improvements.
3. In his valuation dated 5 October 2016, Mr Besele values the Cleveland Street property on this basis as at 16 November 2012 at $7,100,000, exclusive of GST. Mr Price values it at $8,000,000. And upon various differing assumptions which will be explained, Mr Teale values it at $5,810,000.
4. The Cleveland Street property comprises an older style two story structure on the south eastern corner of Baptist Street and Cleveland Street in Redfern. Baptist Street extends south from Cleveland Street at an offset intersection from which Crown Street extends to the north. The property is situated three kilometres to the south of the Sydney GPO and is surrounded by established commercial development and medium to high density residential development. The Burke Street public school is 300 metres away. A Coles supermarket lies across the street.
5. The Cleveland Street property is well situated. Cleveland Street is a major four-lane arterial road, giving access to the eastern distributor some 350 metres to the east, and which provides motor vehicle access to the Sydney CBD. Redfern train station is approximately 1.6 kilometres to the west and a bus stop is available within walking distance. The Cleveland Street property is 809.4 square metres in area. It comprises an older style (probably 1930s) two story structure accommodating a total of six commercial tenancies. Mr Besele did not have the benefit of inspecting the Cleveland Street property.
6. Mr Besele assumed a net lettable area for the Cleveland Street property of 1396 square metres as at 16 November 2012, with two vacant tenancies at that date totalling 813 square metres: these being one ground floor tenancy and the whole of the first floor level. He assumed the first floor level required some capital works as at 16 November 2012 to bring it to a more marketable state, so he adopted an estimated capital expenditure allowance of $349,000 (representing approximately $250 per square metre of lettable area) across the whole building. Upon the property receiving this amount of initial capital expenditure, he allows for full occupancy to be achieved within six months, supporting a total potential gross income from the property of $523,650 per annum. This is derived from six lettable areas of various sizes, comprised of five ground floor retail areas known as 401A, 401, 401B, 403-407, 409 and the first floor area.
7. Mr Besele considered the highest and best use of the Cleveland Street property, in its current form as retail premises. From listed sales evidence of similar investment properties in the inner South Sydney region he judged an appropriate market yield range for the property to be from 5% to 6%, which on an appropriate rate per square metre of lettable area is $5000 to $8000. Mr Besele also surveyed rental evidence in the area to identify rental rates achievable for this type of property in the inner South and concluded that an appropriate rental range was $400 to $600 per square metre for the ground floor area and $200 to $300 per square metre for the first floor.
8. Mr Besele's calculations of value involved reaching a net sustainable income per annum of $401,274 (being $523,650 less $96,194 less a 5% vacancy allowance of $26,183). This was capitalised at 5% in perpetuity to produce a capitalised value of $8,025,470. Once agent's commission in and initial capital expenditure and leasing incentives are deducted, Mr Besele's net estimated market value of the Cleveland Street property was calculated at $7,089,982, which he rounded up to $7,100,000. This represents a capital value rate of approximately $5086 per square metre of lettable area and an initial yield of 5.65%.
9. Mr Price valued the Cleveland Street property at $8 million as is, less various works undertaken and tenancies entered into since the November 2012 purchase. He reached this valuation conclusion using the capitalisation of income approach supported by direct comparison through comparable sales evidence.
10. His capitalisation of income approach used passing rental income of $211,968 per annum and market income on the vacant space of $391,568 per annum, making a total income (less an assumed 1% vacancy rate) of $597,530. Deducting outgoings of $156,975, and then adding back recoverable outgoings of $25,000, he calculated a net annual return from the property of $465,555. Before adjustments and using a yield of 4.75% he capitalised this net rental return to produce a preliminary valuation of $9,801,161. But after deducting a six-month leasing period, agents commission of 10%, incentives of 15% and rectification works and capital expenditure of $1,350,000 with a 10% 1.35 profit allowance, his result on valuation was $8,020,462. He rounded this to $8 million for an equivalent yield of 4.76%.
11. Mr Price also conducted a sensitivity analysis based upon the direct comparison rates derived from his available sales evidence. This indicated a rate per square metre of improved site area of $7,689,300 to $8,498,700 and at a similar range on a rate per square metre of building area justifying a midpoint close to $8 million, and thereby supporting his capitalisation of income analysis.
12. Mr Besele's and Mr Price's valuations produce a range of market values for the Cleveland Street property from $7,100,000 to $8,000,000. The Court has had the benefit of being both these experts defend their valuations and the way they did so is examined below. As between these two valuations, In my view Mr Besele's valuation is, if anything, conservative and Mr Price well defended his detailed calculations and valuation reasoning. It would not be a wrong judgment therefore to treat the value of the Cleveland Street property as representing the midpoint between these two valuations, namely at $7,550,000. But as will be seen NSW Trustee is prepared to accept a more conservative approach and to treat the Cleveland Street property as worth $7,300,000 at the relevant date. Such an approach is well justified within the available evidence.

The Coogee Property - The Valuation Evidence

1. The Coogee property is an older style mixed retail and residential building situated within a small neighbourhood strip shopping centre in the suburb of Coogee. The retail component of the building contains two shops with a frontage to Coogee Bay Road. One of the shops was vacant in September - October 2016 when valuations were under taken on behalf of the NSW Trustee. The residential component of the building contains four self-contained flats over two levels.
2. Coogee Bay Public School is situated on the opposite side of Coogee Bay Road. Development along Coogee Bay Road in this area generally comprises residential apartment buildings with pockets of retail shopping. Surrounding development is generally older style attached or semi-detached residential dwellings and low rise apartment buildings together with some more modern development.
3. The Coogee property is a rectangular shaped lot with a frontage of 14.935 metres to the northern side of Coogee Bay Road and with an identical frontage to the southern side of Powell Lane at the rear of the property. The total land area is 600.7 square metres. In the vicinity of this property Coogee Bay Road is a two-lane bitumen sealed main road.
4. The Coogee property is accessible to a larger shopping areas, which are some 400 metres to the east along Coogee Bay Road and 1.2 kilometres to the north-west at Randwick, along Belmore Road. The nearest major shopping centre is Westfield Bondi Junction, which is some 3.7 kilometres north by road. Public transport is available by bus along Coogee Bay Road and Coogee Beach is 600 metres to the east along Coogee Bay Road.
5. Environmental planning for the Coogee property is controlled by the Randwick Local Environmental Plan ("LEP") in which the land is zoned B1 - Neighbourhood Centre, a zoning which permits shop top housing with development consent. The maximum height of buildings on the site permitted by the LEP is 12 metres and not exceeding three storeys. The applicable maximum floor space ratio is 1.5 to 1.
6. A major issue exists with a staircase at the rear of the Coogee property, which services the upper level residential flats. The staircase is dangerous and rotting due to neglect and lack of maintenance. The NSW Trustee investigated the possibility of replacing the existing staircase with a steel staircase but this was judged not to be cost-effective during the continuance of these proceedings, mainly because issues arose about the structural integrity of the wall that would be used to support the staircase. So the Coogee property has remained both unrepaired and undeveloped throughout the present contest. Challenging financial and practical issues exist in attempting to renovate the existing building on this property to make it lettable.
7. Two valuers were engaged on behalf of the NSW Trustee to value the Coogee property in late September - October 2016. A valuer from Preston Road Patterson ("PRP"), Mr Hamish Goldfinch undertook a valuation as at 29 September 2016. The valuer from MVS Valuers Australia ("MVS"), Mr Mario Paul Vrouxiou undertook a valuation of the property as at 26 October 2016. They reached similar valuation conclusions. Mr Goldfinch concluded that the highest and best use of the property was for it to be redeveloped and on that basis it had a market value of $5,650,000. Mr Vrouxiou concluded that the market value of the Coogee property as at the valuation date was $4,750,000. There was little contest about the value Coogee property. Mr Teale largely confined his criticisms of the PRP and MVS valuations to the George Street and Cleveland Street properties.
8. Mr Goldfinch of PRP used the direct comparison approach as his primary method of valuation, looking to some 5 properties in the Randwick area for his comparisons. It is not necessary to detail these comparable properties in these reasons. In Mr Goldfinch's opinion an appropriate rate for comparison is $5000 to $7500 per square metre of land area. He adopted the midpoint of this range of $6250 per square metre and applied this adopted midpoint to the gross floor area of 901.05 square metres, giving a net estimated market value of $5,631,563, which he then rounded to $5,650,000. This equates to $9406 per square metre of the land area of 600.7 square metres.
9. Mr Goldfinch crosschecked his conclusions against capitalisation of earnings methodology. On this crosscheck he adopted a net sustainable income per annum of $141,149, (being $401 per square metre), which he capitalised at 4.5% to reach a capitalised valuation of $3,136,434. After deducting and allowance for capital expenditure to repair the stairwell (of $100,000) and various other minor expenses his estimated market value was $2,991,397, which he then rounded down to $3 million.
10. Mr Vrouxiou of MVS used not dissimilar methodology. His capitalisation of income methodology used a net sustainable rental return of $141,560, which he capitalised at rates between 2.75% and 3.25% after which he deducted agents commission and leasing and other incentives and an allowance for capital expenditure ($35,000) leading to a gross yield equivalent in the range of 3.62% to 4.29% and the derived valuation range between $4,268,355 to $5,060,301, from which he adopted a mid-point of $4,700,000.
11. His cross check direct comparison methodology adopted $7750 per square metre to $8250 per square metre of land area, leading to a valuation range of $4,665,425 to $4,955,775, from which he adopted a midpoint of $4,800,000. Using similar methodology for the rate per square metre of building area, he reached a valuation based on a rate per square metre of between $11,750 per square metre to $12,250 per square metre, producing a valuation range with the midpoint of $4,750,000. He ultimately expressed the opinion that a valuation of $4,750,000 is supported by the sales evidence that is considered to be the market value of the Coogee property at the relevant valuation date.
12. Both Mr Goldfinch's and Mr Vrouxiou's valuations of the Coogee property are persuasive and the Court accepts that as at October 2016 the market value of the Coogee property was in the range $4,750,000 to $5,650,000. It is not necessary for the Court to choose between these figures, as they are both well below the market value of the George Street property. But were a choice necessary the greater consistency that is found within Mr Vrouxiou's work between the two methodologies used, reflecting the thoroughness of this approach, gives the Court greater confidence that the appropriate market value if the Court were required to choose is $4,750,000.

The Nine Contested Topics

1. In the oral hearing on 11 December 2018 the parties cross-examined the three experts, Mr Allan Teale, Mr Ronil Besele and Mr John Price who gave evidence concurrently. The parties contested nine major topics with these experts. The first six topics for the experts were raised by Mr Sneddon on behalf of Mr Wardy. The other three topics were raised by Mr Thompson on behalf of the NSW Trustee. The nine topics, recorded in Exhibit D, provided the agenda for the cross-examination of the three experts and in the order they were examined are: 1. Inspection of the properties in respect of valuations; 2. Valuer General valuations of the respective properties, informing values; 3. The appropriate capitalisation rate for the Cleveland Street property; 4. The Vacancy rate for the Cleveland Street property; 5. Highest and best use, informing value of the George Street property; 6. The George Street property residential rentals; 7. The experience and expertise of Mr Teale; 8. The independence of Mr Teale; and 9. The insufficiency of market evidence produced by Mr Teale.
2. Mr Teale's written evidence did criticise other parts of Mr Besele's evidence and Mr Price's evidence but those criticisms were not strongly material to the quantum difference between the parties in valuation and the case was conducted on the basis that these nine topics were the central issues dividing the parties. Based on the way that parties conduct of the case the Court will now deal with each of these nine topics in turn.

(1) Inspection of the Properties in Respect of Valuations

1. Mr Wardy challenged the quality of the access that Mr Price and Mr Besele had to the George Street and Cleveland Street properties, but mainly the George Street property. Put through Mr Sneddon, Mr Wardy's contention was that Mr Price and Mr Besele only had limited access to those properties, whereas it was contended that Mr Teale had much more satisfactory access, enabling him to make better valuation judgments about the respective merits of the properties.
2. The Court accepts Mr Teale's evidence that he contacted the managing agent of the George Street property and went through it extensively. The Court accepts that he inspected all common areas in the middle of the building, checked out each of the residential units, looked at the warehouse section at the rear of the property and the retail premises towards the front of the building. He says and the Court accepts, that it took him "nearly 3 hours" to do this. In short he says, and the Court accepts, that he "checked the whole building out".
3. In contrast Mr Besele admitted that before preparing his earlier reports before his formal valuation date he did not go right into all parts of the property but he walked around its perimeter. He did not go at this earlier time into any of the internal residential units. But Mr Besele did go into the internal courtyard inside the George Street property and into one of the retail shops at its northern end.
4. But before completing his final report (which was more a critique of the other previously submitted reports) in May 2018, Mr Besele did have an opportunity to look inside the George Street property. Of the 40 units in the George Street property he says and the Court accepts that he went into "quite a few" but not all of them. Some of the units were uninhabited. He could look through the windows of some of those and he had the exact floorplans of adjacent units, from which he could ascertain their layout. He took about an hour on this inspection.
5. The Court is well satisfied of Mr Besele's professionalism as a valuer. The Court judges him to be an expert who would only have offered the opinion that he did if he had sufficient understanding of the condition of the premises to do so. He felt confident from the sufficient information that he had about the units that he had inspected "to make an assumption on the condition of the rest of the units that I may not have been given information on". The Court accepts that he could "get a good idea of the configuration and of the internal quality of every room".
6. Mr Teale was critical that Mr Price and Mr Besele may not have been aware of exactly which of the rooms in the George Street property had been refurbished. But Mr Besele satisfactorily answered that criticism by saying that the quality of the PC items in the rooms were fairly standard and had little variance throughout the property so he could draw sufficiently reliable inferences about he could not see.
7. Mr Teale's criticism of Mr Price's inspection of the property also fails. Like Mr Besele, Mr Price spent time looking through the doors of the units that all face into the internal light well and he could "see most areas quite clearly". And he added "where we couldn't get in, as usual we prudently looked through the windows where we could to see what we could see". At the time of his first valuation in 2014 he looked at every level of the George Street property, taking photographs through windows and doors. Like Mr Besele, Mr Price admitted that it was not possible to gain full access to all units on both occasions that inspected the George Street property. But according to him some rooms in the property were "locked up completely with no sign of occupation". And others were "in a state of repair with what you could see inside and more units appearing vacant and occupied".
8. But he too took a professional approach to inspection with which the Court is well satisfied. The Court accepts his evidence that it is "sufficient that on each level you get a fairly sound idea of the configuration of each flat" and his opinion was that "being an hour and a half on a second inspection is not insufficient, given that I spent numerous hours the first time".
9. In short the Court accepts Mr Price's and Mr Besele's evidence that they did not regard the parts of the property that that they did not see "as likely to impact upon or be material to" their valuations. Moreover, the criticism of Mr Besele's and Mr Price's lack of full inspection of the George Street property as at the valuation date was left at a fairly high level of generality. The argument did not show that any failure to look at particular parts of the property by either Mr Besele or Mr Price Teale led to an identifiable reasoning failure in the application of valuation methodology.
10. Mr Teale attempted to be more specific. He said that he believed that a full inspection would have impacted upon valuation in a number of ways. He said that an inspection would have revealed there were 40 apartments rather than 37 which would have impacted upon the rental return on the building when fully leased, ever giving a greater capitalised value to the property.
11. But the Court accepts Mr Price's evidence in reply that the difference of three units out of 40 in the scale of a property such as this is "immaterial". The units are all potentially rentable at the "lower end of the market as well as in terms of any ability to derive rental income" and therefore there is a natural uncertainty about the rent that can be derived from them anyway. The variation in three units is just another element of the discounting factor that he used.
12. Moreover, Mr Teale's evidence on this issue was undermined to a degree by his concession after the morning tea adjournment on the day the joint expert evidence that there were in fact four units to which he himself did not have access. His solution to this challenge was the same as that Mr Price and Mr Besele had adopted: he looked at the adjoining unit on the floor plan.
13. Apart from these matters, the weight of Mr Sneddon's argument as put, was that Mr Price and Mr Besele were just left generally less well-equipped than they should have been to perform their valuations. But that argument is fully answered by the Court's judgment about their professionalism and the lack of any obvious gap in their reasoning deriving from any limitation in their capacity to inspect particular aspects of the George Street property.

(2) Valuer General Valuations of the Respective Properties, Informing Values

1. Mr Wardy advances NSW Valuer General's valuations for each of the George Street and the Cleveland Street properties in support of his contention that the former cannot be substituted for the latter in the clause 3(iv) gift. He submits that the "disproportionality" of the values of the two properties is demonstrated by the "objective third-party assessments" from the NSW Valuer General.
2. He especially cites in his argument valuations for each property as at 1 July 2015 (treated here by the parties as a valuation for the 2016 year). The Valuer General's assessment for the Cleveland Street property as at 1 July 2015 was $2,140,000; and for the George Street property as at the same date was $5 million.
3. This section of these reasons concludes that these Valuer General's valuations are of little relevance to the current dispute.
4. The "land value" of land, as defined in the Valuation of Land Act 1916, s 6A (formerly "the unimproved capital value", Valuation of Land Act section 6) of a parcel of land is its value before any improvements are made. The expert evidence tended to use both the expressions "land value" and "unimproved capital value". These reasons will use the current expression in the Valuation of Land Act.
5. The statutory "land value" of land defined under the Valuation of Land Act, s 6A fastens for taxation purposes upon the value of the underlying land, which was once granted by the Crown and ignores the improvements that subsequent owners have placed upon the property for which the Crown is not responsible. The Valuation of Land Act, s 6A (1) defines "the land value" of land as: "(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."
6. The exception to the definition, "other than land improvements" accommodates the possible inclusion from "land value" of certain changes to the land related to agricultural purposes, extractive industries, drainage and excavation. None of these are relevant for present purposes.
7. Mr Sneddon of counsel put to Mr Price and Mr Besele a table (Exhibit E) which identified the Valuer General's unimproved capital value of each of the Cleveland Street and George Street properties across the valuation years from 2012 to 2017. The area of the George Street property at 1,252 m² is approximately 50% larger than the area of the Cleveland Street property at 809 m². The formula for the calculation of unimproved capital value is in part related to land size but it is also related to the factors of zoning and location. For each valuation year, Exhibit E demonstrates that the unimproved capital value of the George Street property is greater than the Cleveland Street property. Taking for example the three 2015 to 2017 valuation years (ending on 1 July in each year) the table below shows the difference between the unimproved capital values of each of the properties. Year George St Cleveland St Difference Percentage 2015 $2,050,000 $1,650,000 $400,000 50 2016 $5,000,000 $2,140,000 $2,860,000 134 2017 $5,390,000 $3,200,000 $2,190,000 68

1. The Court accepts the evidence of Mr Price and Mr Besele that the land value of each of these parcels of land has little relevance to the market value of the improved land, which is under contested valuation assessment here. Mr Besele said, and the Court accepts, that his "methodology would be different to the Valuer General's" and that "their purpose is for taxation. It is not market value". Moreover Mr Besele pointed out that Exhibit E showed the contrary of what Mr Sneddon was submitting and that it actually tended to demonstrate that the Cleveland Street property had a higher market value, or a "stronger value rate in terms of the [per] square metre" than the George Street property.
2. Mr Price warned against overly simplistic thinking. He explained that merely because one "notes a 55% difference in land size" between the two properties that this difference "would not materialise into being a 55% difference in value". This is because the differences between them are "weighted" by other variables. In the end, even Mr Teale conceded that the statutory land value under the Valuation of Land Act "would not be the market value of the land".
3. For the most recent valuation year available (2017), the inferred difference in the rate per square metre for each property is not very great, and not so obviously clear that would allow the drawing of any conclusions about relative land values. If one divides the Valuer General's statutory land value for the George Street property for 2017 of $5,390,000 by its area of 1,252 m², one reaches a rate of $4,305 per square metre. But if one divides the Valuer General's statutory land value of $3,200,000 for the Cleveland Street property for the same year by its area of 809 m², one reaches a rate per square metre of $3,955.
4. In 2015 the rate per square metre calculated in the same way for the George Street property is $1,637 and for the Cleveland Street property is $2,039. This confirms Mr Besele's evidence that for some years the Valuer General's UCV's actually shows a higher rate per square metre for the Cleveland Street property than the George Street property and it provides the stronger valuation by that measure.
5. Mr Wardy particularly relies upon the statutory land value for 2016 (as at 1 July 2015), which when taken from Exhibit E show a substantially greater statutory land value for the George Street property ($5 million) than for the Cleveland Street property ($2,140,000). There is consequently a higher rate per square metre for George Street in the 2016 year ($3,993) than for Cleveland Street ($2,645).
6. But the variations in the relative rates per square metre evident in a survey of these three years really only illustrates the limitations in Mr Wardy's approach of using the gross difference in statutory land value as any kind of reliable proxy for the market value of these properties. The massive swings in the rate per square metre from year to year counsel caution in attributing any significance in the current debate to the statutory land values for these two properties.
7. At the end of the expert witness contest on this issue Mr Sneddon switched direction. He commenced to cross-examine on the basis that if one assessed each of the Cleveland Street and George Street properties on the basis of statutory land value plus the value of capital improvements that they are "materially different properties in terms of characteristics, commercial versus residential".
8. In answer to this line of questioning, Mr Price conceded, and the Court accepts, that they "are not like for like, they are not comparable properties". But Mr Price rejected the analysis (of statutory land value plus the value of capital improvements) being proposed and said that given the condition of the George Street property and the nature of the Cleveland Street property that both his "reports do not reflect a summation approach" of merely adding the capital value of improvements to the land value, because each property is in a different stage of its utility. Mr Price explained, and the Court accepts, that George Street is becoming "obsolete" in its present condition and may cost a certain amount to rebuild and become functional. But Cleveland Street has a different profile because of its present more immediate utility. The Court accepts Mr Price's opinion that because of the quite different stages of utility of these two properties that adding statutory land value to the value of improvements is not a valid valuation exercise.
9. Mr Teale did not accept this limitation on his summation approach. He said that there was little difference between assessing the range of PC items required to repair 40 units in the George Street property compared to one set of PC items that would be required in each tenancy in the Cleveland Street building; in both cases one would need to go back to one of the same fundamental building cost measures such as Cordells.
10. But the Court does not accept Mr Teale's counter argument. Mr Teale really failed to get to grips with Mr Price's fundamental point that the properties cannot readily be cross-referenced by identifying comparable characteristics to measure their differences. They derive their income differently: with George Street being industrial fringe retail with some residential component; and Cleveland Street being located within a recognised retail precinct with shopfronts and an office/studio and small flat. Mr Price concludes that, "it is not unreasonable for two different properties to come up with similar values" even though they have different underlying factors driving the valuation, including yield, outgoings and how they are managed and their condition.
11. The Court accepts Mr Price's analysis and rejects the idea of a simple summing of the statutory land value and the capital value of improvements for these two properties.
12. The Court does not accept that the respective statutory land values of the two properties indicate anything reliable for present purposes about the market value of the George Street and Cleveland Street properties in their developed state. Based on the evidence of Mr Besele and Mr Price, the Court has not relied upon the Valuer General's statutory land value for these properties.

(3) The Appropriate Capitalisation Rate for the Cleveland Street Property

1. Mr Besele's reasoning in relation to the valuation of the Cleveland Street property in his second report was attacked in Mr John Wardy's case on the basis that after the $6 million mathematical mistake in Mr Besele's first report had been discovered (discussed above), he redid his valuation only reaching a new valuation of $7.1 million by choosing to use (contrary to his good professional judgment) a more favourable capitalisation rate that he had previously selected. Mr John Wardy's criticism of Mr Besele was that in doing his revaluation in his second report he changed the capitalisation rate he had previously used, by lowering it by 1%, from 6% to 5%, thereby substantially increasing the resulting value of the Cleveland Street property.
2. Mr Teale explained that an assumed net income of $400,000 for the Cleveland Street property applying a 5% capitalisation rate produces a value of $8 million and use of a 6% valuation rate produces a value of $6,666,666, a difference of well over $1.3 million. Mr Besele was criticised for making this 1% change on the ground that he had really taken an unjustified and artificial step to inflate the value of the Cleveland Street property once the $6 million error had been revealed.
3. Mr Besele dealt with this criticism in a way which the Court finds convincing. Mr Besele explained that the reason he lowered the capitalisation rate was because there is "a correlation between yield and sustainable rents". Mr Besele said that before he discovered there was an error in the capitalisation model that he was using, the sustainable rent that was evident to him seemed to be "above market". He said that the sales evidence in his first report implied a yield in the range of 4.21% to 5.79%. So in his first report he adopted a 6% yield in recognition of the fact that the rental for the Cleveland Street property appeared to him, at that time, to be above market. His view was that the risk to rent sustainability that the above market sustainable rental represented needed to be reflected in the choice of a higher capitalisation rate, so he selected a more conservative 6% capitalisation rate.
4. He went on to explain that when the correct rental area was discovered the rent per square metre also mathematically decreased back to a more sustainable market level. Once he judged the rental to be more sustainable, he reached the view that he needed to adjust his capitalisation rate back to one which reflected the fact that the adjusted rental per square metre was a sustainable rental rate, as distinct from one where sustainability was at risk. The Court accepts that this was genuinely his reason for making capitalisation rate adjustment, simultaneously with the correction of the rental error. He explained that his approach to adjusting the capitalisation rate for these reasons also reflects the way that lenders view the assessment of commercial property security: they require a valuer to disregard whatever rent the property is actually achieving and instead to ascertain a market rent based upon market evidence and then capitalise that rental into perpetuity.
5. This explanation was compelling. The cross-examination of Mr Besele suggested that when he did his first report, reaching a valuation of $11 million, that he knew all the facts that he knew at the time of his second report and that he had merely changed the capitalisation rate to keep the property value up (to $7.1 million) to compensate for some of the reduction brought about by correcting for the earlier error that had been made.
6. To the extent this cross-examination implicitly suggested that Mr Besele had no proper basis for his adjustment of the capitalisation rate and was deliberately taking into account irrelevant considerations to construct a particular outcome, the Court rejects any such inference about Mr Besele. The Court had the advantage of seeing Mr Besele give evidence and be thoroughly tested in cross-examination. The Court took detailed notes of its impressions of all the valuers at the time they gave their evidence. The Court accepts Mr Besele as a highly professional, competent valuer of integrity. There is no basis to infer that he was attempting to manipulate capitalisation rates in his second report to advantage his client. Rather, the cross-examination really failed to make any inroads into Mr Besele's explanation of the relationship between a valuer's judgment about sustainable/unsustainable yields and the valuer's choice of capitalisation rate. The cross-examination tended to focus upon the coincidence in the time of the change in capitalisation rate with the finding of the mistake in the rental area in Mr Besele's first report. The cross-examination failed to destroy Mr Besele's evidence the mistake that was revealed in the rental area also led to him falling quite a different view about the sustainability of the rental return on the Cleveland Street property.
7. Mr Teale was invited to comment on Mr Besele's evidence. Mr Teale's response rather surprisingly failed to deal directly with Mr Besele's clear explanation as to why, at the time of his second report, that he had adjusted the first capitalisation rate he had used. So the Court asked him again in the following terms: "Mr Mr Besele, Mr Teale, has said that once you correct the other error and bring the sustainable rent down to something that looks more realistic and therefore more sustainable, that its appropriate valuation methodology to look at whether you need to adjust the cap rate and he has done that. What do you say to that? That is essentially what he is saying, as I understand it. Why isn't that an appropriate judgment? I want to see you at issue on this. Apart from saying you disagree, I want to know why."
8. The Court received an answer from Mr Teale that did not really address the issue and once again failed to address Mr Besele's explanation for adjusting his capitalisation rate. Mr Teale's answer to this question from the Court was an important moment in the Court's judgment about the overall quality of his evidence. Mr Teale's unsatisfactory answer to the Court question was follows: "Because of the strength of the tenancy and the mix in the building, and there is no justification to give it a cap rate and to discount it the way they have because going forward, looking at the building, the risks have not changed. The evidence in the building itself proves that during the - if you look at the rental history of the building and the style of the building. So if we are looking at working out if this building on its tenancy mix is going to justify a cap rate of 4.75 to five per cent, I think that could be arguable and because of the market conditions at the time which we have disagreed on but the conditions do not justify the cap rate I believe that we have adjusted on this property."
9. The Court came back to the issue, seeking further clarification and asked Mr Teale, "So you disagree that once Mr Besele found the error and reduced the sustainable rent fairly dramatically, that he should revisit the cap rate at all?" Mr Teale then gave another equally unsatisfactory reply as follows: "Well, I believe that he done all of that research prior to it and it would have been taken into consideration in his initial assessment. In a four week period I would - if I had an arithmetic error in a valuation report, which I hope I don't do, I would expect that I wouldn't be looking at hey, I have now got to adjust my cap rate."
10. Mr Price immediately pointed out in his evidence in response that he agreed with Mr Besele's approach to adjusting the capitalisation rate, which had been a holistic judgment. Mr Price said: "Whenever you have to review, all factors have to come into play again and the yield is something you have to revisit. You have to determine then how that risk has changed and if your sustainability factors have reduced then the cap has to be reviewed."
11. The Court accepts that such a holistic view needs to be taken when one of the valuation factors changes. Mr Teale was forced back to an answer for why he defended no change to the capitalisation rate by saying, "Your Honour, I don't think the risk did change, the tenancy mix has not changed in the building."
12. But this explanation fails to deal with Mr Besele's fundamental logic that the removal of the risk of an unsustainable rental yield from the valuation process, should lead to a re-examination of the capitalisation rate. The plaintiff submits that Mr Teale's responses show that he could not accept that Mr Besele had made a judgment about the relationship between the security of a future income stream and selecting an appropriate capitalisation rate, when undertaking this valuation.

(4) The Vacancy Rate for the Cleveland Street Property

1. The expert witnesses disagreed about the proper vacancy rate for tenancies that should be used in the valuation of the Cleveland Street property. The principal contest on this issue took place between Mr Teale and Mr Price. In Mr Teale's judgment the vacancy rate for the Cleveland Street property should be assessed at 5%. He had some support in this conclusion from Mr Besele. Whereas Mr Price judged that the appropriate vacancy rate was the lower figure of between 1% and 3%. Mr Teale's judgment, with a higher vacancy rate, would produce a lower valuation than Mr Price reached for the Cleveland Street property. This issue became the subject of cross examination of each of the experts, which assisted the Court to decide the issue.
2. Mr Price was cross-examined to suggest that a 1% vacancy rate was "an extremely low vacancy rate". The cross-examiner's proposition at first had intuitive appeal: a 1% vacancy rate appears to allow little scope for vicissitudes in marketplace rental demand. But Mr Price defended his position persuasively.
3. Mr Price explained that he inspected the Cleveland Street property after its 2012 sale and after it had been redeveloped. He explained that upon his inspection of the property that out of the whole of the Crown Street and Cleveland Street immediate neighbourhood of the property there was only one other vacant shop observed and that the area was a "fairly well occupied retail strip" and the Cleveland Street property was "an occupied mixed-use property rented out in a steady good retail precinct".
4. His approach to the valuation of the Cleveland Street property was to look at the property "as we saw it at the date of inspection" but then to allow for the capital works that had been done since the date of its sale 2012, when it was vacant and run down. He deducted allowances for the capital works that had been done in the period since 2012. He reached a resultant present core value of $10 million for the Cleveland Street property based upon his assumptions. Then he worked backwards deducting required rectification costs and capital expenditure.
5. The Court accepts that Mr Price had at inspection made a sound and accurate assessment of the retail district in which the Cleveland Street property was located. He said of the rental prospects of that district in answer to the cross-examined "I believe that [5%] is too high from what I saw". He was prepared to concede that going to 3% is "not unreasonable" but he considered that 5% was too high for what he had seen, given "the quality of the property".
6. Although submissions put on behalf of Mr John Wardy cited Mr Besele as supporting the 5% vacancy rate figure for the Cleveland Street property, Mr Besele himself sought to explain and qualify that apparent support under cross-examination. Mr Besele did not agree with Mr Teale's approach of adopting a 5% vacancy rate together with Mr Teale's other assumptions. Mr Besele pointed out that the precise reasoning behind the selection of a vacancy rate for the Cleveland Street property was important. He explained that Mr Teale had based his selection of vacancy rate on a standard industry average, whereas he, Mr Besele, had judged that a centre like this in a good location should not have a very high vacancy rate, one which he would normally have assessed only at about a 2 ½% vacancy rate. But Mr Besele had cause for hesitation concerning the Cleveland Street property because at the time of his inspection of the property there was an actual 4.25% vacancy rate, which had existed for some time. He thought that extra expenditure would be required to ensure more rental demand for the property. But his valuation approach was not the same as Mr Price's, which was to bringing to account, and deduct, the expenditure of additional capital works and then attribute more rental capacity to the property. Rather, without deducting the necessary additional capital works, Mr Besele made the judgment to "adopt a higher vacancy rate than I would normally for a property like this". Thus, Mr Besele's higher 5% vacancy rate was specific to this situation and did not bring to account the capital works that had been brought to account to generate the lower vacancy rate used by Mr Price.
7. And Mr Besele made clear that if he had had the benefit of inspecting the Cleveland Street property internally in its current condition and had known the condition of the property "I would not have put a vacancy rate that high". Mr Besele did not agree with the "standard 5%" that Mr Teale was adopting. He thought that the factors that influence the selection of a vacancy rate, being location, improvements, centre management would warrant a lower rate here than 5%. Thus, Mr Besele was not an unequivocal supporter of the 5% figure for which he was being cited in support of Mr John Wardy's case.
8. Mr John Wardy's submissions invited the Court to find that the vacancy rate for the Cleveland Street property should be 5%. But the Court did not find that submission persuasive. When the differences between the experts are analysed, Mr Price's vacancy rate of 1% to 3% is based upon his actual observations of the area around the Cleveland Street property and a logical reasoning process. And he has allowed for the higher vacancy rate that would have been reflected in the Cleveland Street property at the time it was sold, by deducting from his valuation the capital expenditure required to bring the property to the lower vacancy rate that he inferred from the property that he inspected. Whereas Mr Teale's rate is based upon "industry standards", Mr Besele rejected this, saying: "I don't agree with the standard 5%. That is just not right".
9. In the Court's view Mr Price's logical approach to the assessment of an appropriate vacancy rate for the Cleveland Street property should be accepted and the vacancy rate of 1% but up to 3% is accepted but in the context of a present inspection.

(5) Highest and Best Use, Informing the Value of the George Street Property

1. In his criticism Mr Teale advances redevelopment for affordable housing as the highest and best use for the George Street property. Mr Teale identified that the George Street property can take advantage of the provisions of State Environmental Planning Policy (Affordable Rental Housing) 2009 ("the SEPP" or "SEPP 9"). Mr Teale valued the George Street property on this basis in his supplementary report at approximately $11 million.
2. Mr Price and Mr Besele dispute the validity of Mr Teale's assessment of value based on the redevelopment of the property as affordable housing. They accept that an application for redevelopment as affordable housing is an option for the George Street property but they dispute Mr Teale's valuation on this basis.
3. The SEPP affords more favourable, or bonus, floor space ratios (FSRs) to the developers of affordable housing than might be obtained under a local council's Local Environmental Plan. But in order to attract the SEPP the percentage of the gross floor area of the development to be used for affordable housing in the proposed development must be at least 20%. Once that 20% threshold is reached, the higher the gross floor area of the proposed development that is used for affordable housing, generally the more generous is the floor space ratio that is applied to the development approval.
4. Also under the provisions of the SEPP, once a certain site area is reached for a proposed affordable housing development, councils are prevented from applying stricter standards in relation to landscaped area, deep soil zones and solar access thresholds, as a basis for refusing development consent. And the requirements for parking spaces and dwelling sizes are relaxed under the SEPP, if the relevant thresholds for affordable housing development are met. But the SEPP also allows the imposition of a broad range of conditions on development approval, including in some cases the making of financial contributions to affordable housing in the local area.
5. The valuation dispute between the parties about the SEPP centered upon a single valuation judgment Mr Price made to reflect uncertainty in obtaining development approval for affordable housing at the George Street property site. In a supplementary report Mr Price undertook a valuation, which accepted the application of SEPP 9. Using methodology with which Mr Teale does not substantially disagree, Mr Price came to a primary valuation of the George Street property for redevelopment as affordable housing at $10.6 million. But Mr Price then applied a 25% discount which brought the value of the George Street property down to $7.2 million. Mr Price's application of this discount was in his judgment largely related to the risk of not obtaining development approval under SEPP 9 for the property. The debate between the experts on topic 5 related to the various sub-factors feeding into Mr Price's 25% discount and whether or not those sub-factors were significant when valuing the George Street property as a redevelopment site for affordable housing.
6. To value the George Street property on this basis both parties looked at the market price of the sale of a number of comparable properties. Particularly prominent among these comparable properties were two properties, one in Abercrombie Street, Darlington that was being prepared for affordable housing development and another property in Marsden Street, Camperdown. Comparisons between the George Street property in these other sites produced separate controversies between the parties.
7. For the reasons which follow, the Court finds Mr Price's reasoning persuasive on this issue. An appropriate starting point for analysis is Mr Price's own words, explaining the basis of his approach to valuing the George Street property for affordable housing at $10.6 million before applying his discount. Mr Price said that in reaching this valuation he assumed the obtaining of conditional development approval consistent with the comparable Abercrombie Street, Darlington sale. He went on to explain that in contrast to the Abercrombie Street property, the George Street property, "…without development consent, requires considerable resources to develop the application, professional fees, and related costs which we estimated at $500,000, which brought the value to $10.1 million. Within that then we have to anticipate a typical time period to gain the consent. There are considerable professionals involved from surveyors, architects, consultants and the like including heritage, Aboriginal study, historical sites and the like. Over that time we have to then state that we have a typical discount rate to cover risk, profit, and that would then give us our residual value, so within that 25 per cent that will take one and a half years to satisfy all of that." "So when a developer goes to buy a site he may see it and say that is 10.6 million dollars approved but I am not going to pay 10.6 because I still have to take out the costs to get to that value. So he will work backwards to the raw value he is prepared to pay to ensure he is still, after 18 months work, has a profit for his risk."
8. Thus Mr Price really applied a 25 per cent discount to represent the inherent uncertainty, inbuilt delay and associated costs in realising that highest and best use for the George Street property. He believes that these significant factors will only be overcome or incurred with an appropriate financial incentive in the expected profitability of the development and so the discount that he applies to provide that incentive is 25%.
9. Mr Price particularly emphasised the uncertainty associated with achieving all the development approval conditions being sought by an applicant to achieve the full value for the posited affordable housing project here. He explained the particular uncertainty associated with projects on the site of boarding houses such as the George Street property, is an inability to achieve the precise site design proposed; as he said "you may only achieve 50 per cent of that." And he explained that there are "plenty of examples in council areas, with boarding houses where they have not achieved" the required design ratios that mesh well with car parking, site access, and lighting. So, as Mr Price put it "potential does not lead to value".
10. Mr Teale put the opposing case. He pointed out that the rate per square metre for boarding houses that he had used in his report was for achieved sales. He agrees that some risk can be assumed. But he summarised his confident approach to the application of SEPP 9 here as having the following major elements, "I have a Masters in planning - under this SEPP it overrides the council control because it is a SEPP and where there is a conflict in a SEPP with an LEP, the SEPP has the ruling position, so the opportunity to get the approval for this is very minimal". In context the Court interprets Mr Teale's final words here as meaning that the opportunity of not getting the approval "is very minimal".
11. Mr Teale emphasised that the delay in getting some approvals under the SEPP was not 18 months to 2 years, as stated by Mr Price, but in his opinion will be more like a period of eight months. He identified that the properties in question here would be generating income which would cover some of the costs while the development approval process was occurring. And he disputed that the consultants required to assist in applying for development approval would be as expensive as Mr Price believed they would be; for example he said, that heritage consultants would not be required, as there is no heritage order on the George Street property. In summary he disputes a delay of a "18 months to 2 years or a longer period". And he also disputes that the risk of failing to achieve the desired planning outcome "is minimal to none, because it is overridden by the SEPP".
12. For a number of reasons, the Court prefers Mr Price's evidence over Mr Teale's evidence on this subject. These reasons are dealt with below.
13. Relative Experience. The Court prefers Mr Price's experience. Notwithstanding that the Court rejects the sharpest of the criticisms advanced by the NSW Trustee about Mr Teale's professional background and independence, (see topics 7 and 8 below) the Court obtained the clear impression that Mr Price had more practical hands-on experience with applications under the SEPP than did Mr Teale. The more academic approach of Mr Teale appeared to the Court to show lower practical appreciation of the kind of problems that Mr Price had actually encountered in development applications under the SEPP. As Mr Price said, "A theory is different to what is in practice." Mr Price was able to cite his deep experience in building under the SEPP since 2003. And he assisted with other groups in developing the current version of the SEPP in 2009.
14. Delay. The expert's opinions on likely delay were also a distinguishing factor between them. Mr Price was of the view that the potential for delay in development approval could not be ignored here. He pointed out, for example, that the first development consent for the Abercrombie Street site had taken 12 months and then another four months after sale, subject to a development application, was needed for the development consent for that site to be amended so something could be built at that location. In his analysis of the record for the comparable Abercrombie Street site, and the Court accepts his analysis, many steps had to be taken at the site to take advantage of the SEPP.
15. Supported by Mr Teale's evidence, Mr Sneddon's cross-examination of Mr Price maintained the contention on behalf of Mr John Wardy that delay in development approval for the Abercrombie Street site had not been as great as Mr Price had indicated. And Mr Teale pointed to two other sites in the area that he believes led to development application approval under the SEPP within an eight months period.
16. But Mr Price was able to point to the significant delays in obtaining the development approval for the Abercrombie Street project. He did not solely rest his opinion about likely delays on that particular comparable property: he in part based his opinion upon his general experience. A combination of the experience of the Abercrombie Street project, the general complexity of the SEPP and the authority of Mr Price's long history in applying the SEPP and its predecessor, strongly incline the Court to accept his evidence over Mr Teale's on the subject of the likely delay that it is likely to or can be anticipated to be encountered in obtaining development approval under the SEPP.
17. Site Flexibility for the SEPP. The site flexibility of the George Street property to adapt to any development conditions that might be imposed under the SEPP, was another issue dividing the experts. In Mr Price's opinion, the comparable Abercrombie Street site had better characteristics than the George Street property that allowed more flexibility to adapt to conditions that might be imposed under the SEPP, for example in relation to demolition and in the use of light and aspect in designing affordable housing and the rest of the development.
18. Mr Teale responded. He emphasised: that the George Street property has positive sunlight attributes, with an open park area beside it which happens to face north, the best aspect for direct sunlight into a building; and that the building has two street frontages. Mr Teale contends: that light will not be an issue upon a redevelopment; that because of the park, a developer will not facing the challenges of bringing sunlight to a site with a building next door to it. Having looked at the photographs of the site, the Court agrees with this part of Mr Teale's opinion.
19. But Mr Price has already pointed out the difficulties of gaining council approval for a residential development on the George Street property to have residences facing Reconciliation Park. But in any event this factor was to a degree outweighed by other factors of uncertainty. Mr Price warned generally from his experience against overconfidence in the application of the SEPP. He argued that there were many unknown factors in play at the George Street property. The Court accepts the force of that warning. Mr Price's opinion suggests and the Court accepts that, even the very perception of such unknown factors is likely to add downward pressure to its value and be a basis to substantially discount Mr Teale's postulated value of the George Street property.
20. Mr Besele added to this debate on Mr Price's side, by mentioning a subterranean factor of some importance. The Court accepts Mr Besele's evidence, based on his inspection and research, that the building on the George Street property "is directly adjacent and above Sydney airport railway link". In his view any demolition and rebuilding of the building and basement excavation as part of an affordable housing project, or otherwise, will need to be done under strict guidelines imposed by the State Rail Authority, and probably at considerable cost to the developer.
21. Apart from the threat of lack of site flexibility to project viability, it may add to delay and unpredictable contingencies in development approval. Mr Besele is of the opinion that a developer of the George Street property will need to allow significant funds for contingencies for development risk. The Court accepts that this is a significant factor which supports a robust discount to the value of an affordable housing development on the George Street property. The Court accepts Mr Besele's opinion that retaining and refurbishing the existing building is a low risk and low cost option relative to a redevelopment.
22. To answer these issues and overcome the NSW Trustee's claims of associated uncertainty, Mr Teale emphasised the commonly beneficial application of the SEPP by the City of Sydney Council. But Mr Price still observed, "On many occasions boarding houses do not achieve the [FSR] bonus [afforded under the SEPP]". The Court accepts that opinion.
23. Moreover, even when an approval is given the conditions of approval under the SEPP may impose significant viability constraints on development. Mr Price points out, and the Court accepts, that near the George Street property another boarding house on Cleveland Street has a DA approved by the local council but the development had still not been built at the time of the hearing, because Mr Price's opinion is that "the conditions in the consent mean it is not viable".
24. Heritage issues. Heritage issues also feature in the redevelopment of the George Street property, although the parties had strong differences about whether there really were any heritage issues at all. The George Street property has a mural on its northern external wall facing onto and providing a colourful backdrop for "Reconciliation Park". The mural in part commemorates the high number of first nations people residing in Redfern since the 19th century. This is commonly said to be as a result of their unusually high rates of employment in the early years of the Eveleigh Railway Workshops. Mr Price was of the view that this background history implied that the mural was likely to carry with it some heritage uncertainty for any redevelopment of the George Street property.
25. Mr Teale is an aboriginal man. In the Court's view he is able to speak with particular authority about this subject. Mr Teale points out that the mural is neither listed nor protected nor declared as a heritage item. But he did agree that the mural had "some repute" in the local community, including the local aboriginal community. But Mr Teale said that he was confident that "there will be no issue with the mural."
26. Despite Mr Teale's heritage, the Court does not share Mr Teale's confidence that no heritage issue will arise about the mural. The fact that it faces onto a public park and is well known locally, and that it symbolises important local history and efforts at reconciliation with Australia's first nations peoples, suggests more than a slight possibility that a heritage issue may be raised about the mural upon any application for redevelopment of the George Street property. The Court does not accept that heritage issues about the mural could be so readily discounted, as Mr Teale suggests.

(6) The George Street Property Residential Rentals

1. Mr Wardy's case challenged Mr Price's valuation of the George Street property on the basis that it had understated the actual rents received from the lodging rooms in the property and consequently understated the value of the George Street property.
2. This challenge emerged from the following passage in Mr Price's first report of 17 October 2016: "We were not provided with current tenancy schedules for the lodging rooms within the central area of the building and above the George Street - fronted shops. We have estimated that there are approximately 37 single and double scale lodging rooms with an average room rental of $120 per week. Current market rental for each commercial and residential area is difficult to determine with a number of uses operating under existing use rights."
3. Based on a series of rental schedules of actual rental that were being received from the lodging rooms in the George Street property, Mr Sneddon contended that higher rates than $120 per week during the valuation period were appropriate. These schedules were not agreed between the parties. But they had been prepared by Mr Wardy when he was assisting the estate's administration by collecting rents from the George Street property up until about 2012. In this role he gave the schedules, which qualify as business records under Evidence Act 1995, s 69, to the then administrator of the estate, Mr Salier. The Court infers from these circumstances that the accuracy of the schedules cannot really be disputed by either party. That being said, Mr Price, whose report was under criticism, did not have access to these schedules at the time of his October 2016 report. But he nevertheless dealt with the schedules in cross-examination.
4. In contrast to Mr Price's estimated room rental of $120 per week, Mr Teale's analysis of the schedules indicated, as Mr Sneddon submitted, that studio/bedsitter units in the George Street property collected rents ranging from $200-$300 per week and one bedroom units collected rents in the range of $300-$320 per week. Notwithstanding Mr Teale's analysis the Court's examination of the schedules shows that when the George Street properties lodging rooms are occupied most rentals fall in the range $175 per week to $240 per week.
5. Mr Price accepted in cross-examination that the schedules demonstrated that actual rental receipts for the lodging rooms in the George Street property were in many cases greater than $120 per week and some ranged between $190 per week and $200 per week. But Mr Price explained: that "we saw a lot of vacant rooms"; that he had not had the opportunity to match the agreed schedule to the rooms inspected; and although schedule may nominate a rental for a particular room, the next question to be asked is whether the room is occupied or vacant.
6. The administrator's rental schedules cover each of the rooms in the George Street property. The schedules indeed disclose that many of the rooms in the George Street property were vacant for periods of many months. For the 2012 financial year only nine of the 37 units and car parking spaces were rented on a full-time basis without significant periods of vacancy and some 13 units had no income at all during that period. Vacancy is clearly a significant factor in the valuation of this building. The Court infers at least that caution should be exercised before calculating the rental return from the George Street property by simply multiplying the nominal rental in the schedule by the number of rooms in the George Street property.
7. The Court accepts Mr Price's judgment in the circumstances that $120 per week was a suitable rental for that kind of room in that area at that time. His judgment was based on a number of both local and general factors.
8. First, he had reference to other properties near the George Street property that were actually being let out at rents of $190 per week or more and he could compare them with the state and quality of the George Street property. His evidence, which the Court accepts, is that some of these comparable properties showed rental at the rate of $200 per week but unlike the George Street property they had ensuite bathrooms and were in good condition compared to the George Street property. To achieve these rentals substantial expenditure would need to be undertaken on the George Street property. Mr Price said and the Court accepts that there was nothing in as poor a condition as the George Street property for him to directly compare with at the time of valuation. So the $120 per week that Mr Price used was, as he explained, "basically benchmarking as there is nothing of this poor condition on the market".
9. Secondly, Mr Price said, and the Court accepts, that it may be possible for a higher weekly rental return than $120 to be obtained for the rooms in the George Street property for specialised renting, such as for emergency accommodation. But to achieve rental as emergency accommodation Mr Price explained that additional costs would probably need to be incurred to reflect the higher level of management required to qualify for that sort of accommodation offering.
10. Thirdly, on examination, these administrator's schedules relate to periods as far back as 2009 to 2011. This estate has been administered for a long time after that. There is little evidence before the Court that any substantial investment has taken place in the George Street property since 2009 to 2011. Even if the higher rates cited by Mr Sneddon from the schedules were achieved in those early years, the probable natural depreciation in the condition of the property since that time make them an unreliable guide to later returns at the time of valuation.
11. Mr Teale's response to this evidence was unconvincing. He reaffirmed in his assessment, "I would use the evidence… of the actual units, so I can't see that it's not correct". But this did not allow for the various factors Mr Price had mentioned that would require some kind of discount, at the very least for the substantial vacancies that appear in the schedules.
12. The Court accepts Mr Price's use of $120 per week as an appropriate figure for measuring the rental return on the lodging rooms of the George Street property.
13. The next three of the topics of the nine topics were matters raised in the NSW Trustee's case. The first two of these, topics seven and eight, challenged the quality and independence of Mr Teale's expert evidence. NSW Trustee's case in this respect largely failed although it did identify some weaknesses in Mr Teale's experience and background as an expert. But from the analysis above and as will be seen below, the Court has decided the valuation issues in this case upon the relative persuasiveness of the valuation evidence, rather than on a simple contest about the relative authority of the experts.

(7) The Experience and Expertise of Mr Teale

1. The NSW Trustee submits that the valuation evidence of Mr Besele and Mr Price should be preferred where it differs from Mr Teale's opinions because Mr Teale lacks relevant expertise and experience.
2. The NSW Trustee contested Mr Teale's claim that he was a qualified valuer. But the Court accepts that Mr Teale is able to give expert valuation evidence by reason of both his qualifications and experience. The Court reaches this view in part because of Mr Teale's competent answers to the questions asked of him, the quality of his reports and in the way that he dealt with the contest of valuation issues in the witness box. In that forum he was not out of his depth. He spoke with facility in the language of valuation. With some omissions he was generally able to grapple with the valuation issues being raised by the Court, Mr Price, Mr Besele and by cross-examining counsel.
3. Although these reasons have generally preferred Mr Besele's and Mr Price's evidence over that of Mr Teale on contested valuation issues, this preference was not based upon any view that Mr Teale lacked relevant expertise. The Court's preference for Mr Besele's and Mr Price's evidence, as the previous reason show, is based upon the valuation contest on each issue. On some aspects of these contests Mr Teale's views have been preferred. But in no part of these contests did the Court judge that Mr Teale lacked sufficient expertise adequately to address the valuation issues being raised.
4. The plaintiff's first challenge addressed Mr Teale's primary qualifications. Mr Besele's evidence and the NSW Trustee's submissions cited as authority the Australian Property Institute (API) definition of the various elements that make for a Qualified Property Valuer. This definition provides as follows: "In Australia, a property professional who is certified or accredited by the Australian Property Institute as having the appropriate academic qualification and practical experience and who has the applicable professional indemnity insurance and is bound by the API Code of Professional Conduct".
5. The NSW Trustee contended that Mr Teale lacked these elements. But upon closer examination, Mr Teale has achieved more professionally accepted qualifications than NSW Trustee acknowledges.
6. Mr Teale originally undertook and completed a course at TAFE Ultimo, an "Advanced Diploma of Property Valuation" and in 2008 was registered as a valuer under the then applicable legislation for the registration of valuers, the Valuers Act 2003.
7. His registration under that legislation is evidence that he has relevant valuation expertise. The next question is whether that expertise is current. Under the Valuers Act 2003, s 8 (1) a person was eligible to be registered as a valuer only if the Director-General was relevantly satisfied that the person "is a fit and proper person to be registered" and has "the qualifications approved by the Director-General for registration as a valuer". The Director-General had the power to "approve qualifications for registration as a valuer" from time to time: Valuers Act 2003, s 8 (2). The Director-General could approve qualifications for the purposes of section 8 "by reference to any one or more (or a combination of any one or more) of the following, "the completion of a course of study", "the completion of a period of training in valuing property", and "the attainment of a standard of competency in valuing property": Valuers Act 2003, s 8 (3).
8. The Court infers that Mr Teale achieved his registration under that legislation by reference to one or more of those qualifications, which are also sufficient to qualify him as an expert under the Evidence Act s 79.
9. On 1 March 2016 the Valuers Act 2003, was repealed by the operation of the Regulatory Reform and Other Legislative Repeals Act 2015 ("the 2015 legislation").
10. The 2015 legislation replaced the pre-existing regime for the qualification of valuers and instead gave primacy to membership of the Australian Property Institute and other similar institutes as a fundamental qualification to undertake valuation work.
11. But as might be expected, the transitional provisions of the 2015 legislation grandfathered the position of qualified valuers under the previous legislation, such as Mr Teale. The 2015 legislation, cl 42 defined "relevant valuer" as "a person who was registered under the Valuers Act 2003 as a valuer immediately before the repeal of that Act". The 2015 legislation cl 43 provides that "(1) Subject to the regulations, a reference in any Act or regulation to a qualified valuer is taken to include a reference to a relevant valuer." The only "relevant valuers" who are not to be taken as a "qualified valuer" under clause 43 of those who are disqualified at the time of enacting the 2015 legislation, which is certainly not Mr Teale's case.
12. The 2015 legislation appears to have been part of a process of deregulating the valuation profession and permitting decisions about who was a "qualified valuer" to be determined by the rulings of individual government departments and statutory officers made for the purposes of their particular legislation. An example of such a ruling is that of the Chief Commissioner under the Duties Act 1997 who made a ruling on 24 February 2016 for the purposes of Duties Act, s 307 that a "qualified valuer" was someone who was "a member of the Australian Valuers Institute (other than as an associate or student member), or was "a member of the Australian Property Institute (other than as a provisional member), who has acquired membership in connection with his or her occupation as a valuer, or a member of the Royal Australian Institution of Chartered Surveyors who holds the designation "chartered valuer" or "chartered valuation surveyor".
13. The operation of clause 43 is not unlimited. The clause only applies for a period of three years after the repeal of the Valuers Act 2003, presumably to give valuers practising as at 1 March 2016 some the capacity to use their existing qualifications for a transition period but requiring them ultimately to requalify to undertake valuations under other New South Wales legislation concerning the acquisition or taxation of real estate and other property. The 2015 legislation, clause 45 does this by providing that "Clauses 43 and 44 cease to have effect 3 years after the day on which the Valuers Act 2003 is repealed."
14. The evidence in these proceedings is a basis to infer that Mr Teale was registered under the Valuers Act 2003 and had not ceased that registration at the time of the commencement of the 2015 legislation. Exhibit H was material provided by Mr Teale after the conclusion of the hearing and relating to his professional qualifications. It shows that he was registered under the Valuers Act 2003 from 24 December 2008 until 23 December 2011. This material was not able to be tested or explored further and there is therefore no satisfactory evidence that he gave up his Valuers Act 2003 registration. So the Court is prepared to infer in these circumstances that he continued to hold that registration until 1 March 2016.
15. He therefore comes within the definition of "qualified valuer" in other legislation from that date for a period of three years from 1 March 2016. He was therefore qualified as a valuer under these grandfathering provisions both at the time he gave his reports and when he gave evidence to the Court in December 2018. The NSW Trustee's criticism of Mr Teale overlooks these grandfathering provisions. But even without these grandfathering provisions the Court accepts Mr Teale as relevantly qualified.
16. The NSW Trustee submits that Mr Teale must meet the qualifications for a "Qualified Property Valuer", as defined by the Australian Property Institute set out above from Mr Besele's report. Those qualifications include being certified or accredited by the Australian Property Institute as having the appropriate academic and practical experience and having the applicable Professional Indemnity Insurance. The NSW Trustee submitted that at the time of the hearing Mr Teale had not produced any certification or accreditation document from the Australian Property Institute to the effect required under that definition. So he was at liberty to provide material after the hearing which he did and it was marked as Exhibit H.
17. The NSW Trustee submitted that thereafter his academic work appears from his curriculum vitae to have been focused on Property Development (2011), Town Planning (2012) and Transport Infrastructure Delivery (ongoing from 2013). Further the NSW Trustee submitted that Mr Teale does not carry professional indemnity insurance.
18. Mr Teale's evidence, which the Court accepts, was that he does not need professional indemnity insurance for the work he does, and that being an Associate Member of the Australian Property Institute he meets the requirement for certification or accreditation.
19. Against Mr Teale's direct evidence is a submission based upon incomplete inferences about what the Australian Property Institute actually requires for a person to be a "qualified valuer". Any contention that an expert is not qualified to give expert evidence should be grounded in reasonably clear evidence. The certificate of membership in Exhibit H that Mr Teale produced subsequent to the hearing identified him as a "member" of the Australian Property Institute with "associate membership" since 27 May 2018 with a renewal date for that associate membership on 1 January 2019. But he was an associate member when he gave evidence and may possibly have been a full member when he did his valuation work for this case in February and April 2018: the certificate is unclear as to when the level of associate membership began. But it says Mr Teale has been a member of the Australian Property Institute since 11 May 2005.
20. The NSW Trustee makes the point that if Mr Teale's associate membership status exempts him from holding professional indemnity insurance, then it is surprising that the membership details that he has furnished do not mention what restrictions on his activities as a "Qualified Property Valuer" exempt him from the requirement to take out professional indemnity insurance. The NSW Trustee submits that Mr Teale's associate member status and the lack of Professional Indemnity insurance point to Mr Teale's membership of the Australian Property Institute as being as being merely in the category of a non-practising valuer.
21. But whether such a category even exists is unclear on the evidence propounded by the NSW Trustee. Mr Teale denied that the number of valuations he did was insufficient to warrant his holding professional indemnity insurance and the Court accepts his denial. Moreover, the numbers of valuations that he cited that he had done, which the Court accepts that he had indeed done, included for example some 50 valuations for an Aboriginal Land Council in the Murrumbidgee area in 2017.
22. The NSW Trustee made much of Mr Teale's failure to emphasise real property valuation work among his working history set out in his curriculum vitae. Mr Teale lists his responsibilities as being a property consultant. He says that he has worked as a sales agent at various residential and commercial estate agencies from 1985 until 2004 and that since 2004 he has been a property consultant. And it can be accepted that valuation work is not mentioned in the curriculum vitae or in his lists of the publications or his account of his professional development.
23. Mr Teale explained his failure to mention his valuation practice. He does refer to his Advanced Diploma in Valuation. The Court accepts his explanation that the curriculum vitae he used with his valuation report was prepared "some time ago…and was created "for a job that I was doing". The Court does not find this explanation "unconvincing", as the NSW trustee submits. Mr Teale's curriculum vitae does not obviously appear to have been constructed for the purposes of his valuation reports and his giving evidence on this occasion. Court does not accept that Mr Teale was on the one hand somehow falsely claiming to be a valuer but on the other hand putting in a curriculum vitae that truthfully showed he had no relevant valuation experience. This inference is a stretch and is not consistent with the candid and direct witness that the Court assesses Mr Teale to be.
24. The Court accepts Mr Teale's evidence that he does undertake valuations amounting to a professional valuation practice, and a number of them for an aboriginal land council. And he explained that he had recently done valuations in Melbourne and in Mascot and Alexandria. Although when pressed to explain why he did not put all his valuation experience in his curriculum vitae, Mr Teale answered "I'm sorry, I don't know". But this was not as unhelpful as it sounded because in substance he had already provided an answer: namely that his curriculum vitae had been tailored for a different purpose than this particular valuation exercise.
25. The NSW Trustee's submission concedes that Mr Teale's evidence is sufficient to establish that he has done occasional valuation exercises for "selected clients" as an adjunct to his work as a property consultant. The Court accepts his evidence that he has done more than that.
26. The NSW Trustee also takes issue with Mr Teale's performance of this valuation. It argues that on Mr Teale's own admission he never carried out what Mr Teale called a "full talking valuation" of either the George Street or Cleveland Street properties and that his report was merely prepared in response to a letter from Bartier Perry dated 22 December 2017, asking him to commenting on aspects of the reports of Mr Price and Mr Besele. This is certainly the way he was instructed.
27. But this criticism is not persuasive. A valuer can deploy his or her expertise to give evidence in that form. It is quite permissible for a valuer to answer a series of questions by reference to his or her expertise without necessarily doing a full talking valuation. And Mr Teale is quite open that his report was not intended to be a full talking valuation.

(8) The Independence of Mr Teale

1. The NSW Trustee contended that Mr Teale's evidence was not truly independent and that he was an apologist for Mr Wardy's case. This serious attack on Mr Teale's integrity and professional reputation failed. But because it was made, it needs to be dealt with. Mr Wardy's response was that Mr Teale's evidence was that of "an extremely knowledgeable professional" and that his reasoning was "compelling" and there is no basis for the allegation of partiality.
2. The NSW Trustee's partiality case against Mr Teale had several elements. In the first element the NSW Trustee was critical the way Mr Teale was retained. Mr John Wardy retained Mr Teale through Mr Wardy's solicitors, Bartier Perry (Mr Philip Brand) to reply to Bartier Perry's specific questions posed in their 22 December 2017 letter to Mr Teale. These reasons have already found above that there was nothing remarkable about Mr Teale's retainer by that letter to undertake that task rather than performing a full talking valuation. Nothing in the form of, or the nature of the questions in this Bartier Perry letter, or in the answers that Mr Teale gave to it, gives the slightest indication of any commercial relationship between Mr Wardy and Mr Teale, or that in the execution of his role as a valuer Mr Teale was partial toward Mr Wardy's interests.
3. Next the NSW Trustee's partiality case focused on alleged dealings and conversations between Mr Teale and Mr John Wardy that it was said prevent Mr Teale being an arm's length expert for this case. But as shall be seen, the allegations made were speculative and were firmly denied, in a way that the Court accepts.
4. The NSW Trustee's contention was that Mr Teale had a close commercial relationship with Mr Wardy by reason of Mr Teale's prior engagement by a real estate agency, Silver and Co. It was not contested that some personnel in this real estate agency, including a Mr Richard Perry, did undertake commercial real estate property management work for Mr John Wardy, or for his late father, the testator, over many years. And it is undoubted that the opportunity to undertake the valuation work in these proceedings came through that connection, but a more detailed examination of the connection does not show any ground for concern about bias on Mr Teale's part.
5. Mr Teale's early career, starting in the late 1980s, was in real estate sales. He was a partner and was involved in sales in Raine & Horne Commercial - South Sydney between 2000 and 2004. After Mr Teale left Raine & Horne Commercial he set up a private consultation practice, "Teale Consulting" and made a commercial arrangement with Silver & Co, through its principal Mr Richard Perry, to use that firm's office. Mr Teale says, and the Court accepts, "I wasn't there [at the Silver & Co office] all the time." This arrangement was convenient to Mr Teale because it furnished him with an office so he could continue his then continuing valuation and real estate work for the State Transit Authority. Mr Teale derived his State Transit Authority work through the then Property Manager for the Department of Transport, Mr Ron O'Connor. Mr Teale arranged leases for the State Transit Authority out of the Silver & Co office. Mr Teale became involved in this case when Mr Richard Perry recommended him to Mr John Wardy. Mr Teale has known Mr Perry professionally for thirty years and regards the association with Mr Perry as professionally valuable to him.
6. It was put to Mr Teale in cross-examination that he knew that the Silver and Co, office "had commercial arrangements with John Wardy or his father". The Court accepts the correctness of Mr Teale's answer to this question. Mr Teale said in his answer that "I didn't know anything about his [Mr Wardy's] commercial arrangements." In fact Mr Teale says, and the Court accepts, that he did not even know that Mr John Wardy was one of Silver & Co's clients. Mr Teale had a general knowledge that the testator had been in the office in years past, but that is the extent of his acquaintance with the Wardy family.
7. Apart from Mr Teale's denial of knowledge of any commercial arrangements between Mr Perry and Mr John Wardy or Mr John Wardy's father, his response is inherently probable. Mr Teale stressed in his testimony, and the Court accepts, the very limited nature of his being hosted at the Silver & Co office. He did not physically use the office on a day-to-day basis, socialise with its employees, practise out of the office, take enquiries through the office, or lease any space there. He occasionally made phone calls from there but he has used the offices of other well-known agencies such as Jones Lang Lasalle for similar purposes. He denied, and the Court accepts, that he could be characterised as "a part of that [Silver & Co] office" and could in a sense be treated as a member of their staff.
8. There was nothing sinister in the referral of this valuation to Mr Teale. All that seems to have happened here is that someone that Mr Wardy trusted and with whom he had a continuing commercial relationship, Mr Perry, recommended Mr Teale to Mr Wardy to undertake this engagement. Just because Mr Teale had a commercial relationship with Mr Perry does not mean that Mr Teale was biased in favour of Mr Wardy's interests.
9. Mr Teale did not have direct conversations with Mr John Wardy about his role in these proceedings. Once the recommendation for his engagement came from Mr Perry, the matter was taken up by Mr Wardy's solicitors.
10. Next the NSW Trustee contends that Mr Teale's approach to the valuation both of the Cleveland Street and the George Street properties demonstrated his partiality. On this the NSW Trustee submitted: "Mr Teale's reports take the form of responding to specific leading questions based on Mr John Wardy's instructions that were put to him by Mr John Wardy's solicitors. Remarkably, those responses unanimously supported the points being agitated by Mr John Wardy through those leading questions and suggestions". And again the NSW Trustee contended, "rather than prepare a 'full talking valuation' Mr Teale has allowed himself to be straight-jacketed by his instructions to adopt an exceptionally low valuation of Cleveland St that is out of line with the market evidence".
11. The Court is not persuaded of this contention with respect to either property.
12. First, with respect to Mr Teale's valuation approach to the Cleveland Street property, the NSW Trustee further contended as follows: "In respect of Cleveland St, the specific questions put to Mr Teale by Mr John Wardy's solicitors for response took the form of stating specific 'contentions' of Mr John Wardy in respect of the Plaintiff's valuations, and requesting Mr Teale's response. He was then requested to complete a spread-sheet style formula purporting to value Cleveland Street on a "Capitalisation Approach," which included as critical factual assumptions comprising unproven and unverified numbers specified by Mr John Wardy, all of them calculated to suppress the derived capital value of Cleveland St including reducing the assumed Market income from $391,598 to $305,075 (22%); increasing the Land Tax from $21,135 to $35,783 (+69%)."
13. The NSW Trustee's submission here assumes bad faith on Mr Wardy's part and assumes that Mr Teale actively participated in a scheme to give effect to Mr Wardy's illegitimate purpose. But as Mr Teale himself carefully explained, he was not providing a full "talking" valuation but was asked to do a valuation based upon certain assumptions and the question put to him. The resultant valuation of course is highly dependent upon the validity of those assumptions, but Mr Teale was in a position to defend their validity in many cases, where issues arose. But it is also clear that to the extent that he was constrained by his assumptions that were challenged and when he could not defend them the Court has not agreed with those assumptions and his valuation has not been preferred. But provided the limitations of his resultant valuation are kept in mind, it is quite permissible for a valuer to give the kind of opinion that Mr Teale did here on the basis of assumptions stated to him.
14. The NSW Trustee put a similar submission with respect to Mr Teale's valuation of the George Street property: "In respect of George St, he was also requested to respond to specific contentions of Mr John Wardy and to plug those responses into a spread-sheet style formula purporting to value George St on an "Investment Income Capitalisation Approach. Again, Mr Teale was told to assume that the components of this calculation were as re-stated by Mr John Wardy's contentions calculated to inflate the derived "valuation." The re-stated contentions included increasing the assumed gross rental from $570,700 to $753,580 (+32%), reducing Council Rates by 31%. He was also instructed that Mr John Wardy contended that "repair and re-use" is the highest and best use of George St, and that allowance for rental income comparable to the ground floor warehouse for the other vacant warehouse areas above and below it."
15. The answer to this is the same as it is for the Cleveland Street property. This is a permissible approach for a valuer to take, provided the vulnerability of the resultant valuation to errors in the assumptions provided is borne in mind.
16. The NSW Trustee accuses Mr Teale of unprofessional conduct in relation to his two reports with respect to the George Street property (of 12 February and 12 March 2018): "[of] follow[ing] the script that was prescribed by the terms of his instructions. He explained in detail the factors relating to the site that would discourage developers to purchase the property for redevelopment rather than opt to "repair and re-use the existing buildings." However in his further report dated 12 March 2018 Mr Teale ignored all those issues and the absence of development consent for redevelopment of the property, to derive a value for George St as a development site significantly higher than any previous estimate."
17. The Court's reasons above demonstrate that the Court has preferred Mr Price's and Mr Besele's evidence on the question of the likely future development of the George Street property (see topic 5). But Mr Teale explained his change of approach in his two reports about the highest and best use of the George Street property, and his change of position is not evidence of bias. It is far too glib to say that Mr Teale was "following the script" and was not exercising independent judgment. Mr Teale gave a good account of himself in oral evidence which together with his reports evidences detachment and independent analysis of market evidence. The Court did not regard him as an advocate for the contentions of Mr John Wardy. But to the extent that the assumptions upon which he acted are not independently established, his ultimate valuation conclusions are assessed as only as good as his assumptions.

(9) Insufficiency of Market Evidence Produced by Mr Teale

1. The NSW Trustee attacked the sufficiency of the evidence that Mr Teale used to value both the George Street and the Cleveland Street properties. The parties dealt with the issue of the sufficiency of the market evidence supporting Mr Teale's valuations and related subjects as a separate contested topic, their topic 9.
2. Unlike topics 7 and 8, this topic is not an attack upon Mr Teale's expertise or independence. Rather takes issue with the quality of his logic and the assumptions he has used. The analysis here will deal first with the issues that the NSW Trustee raised concerning Mr Teale's valuation of the Cleveland Street property.
3. Mr Besele's expert opinion is the source of criticism in relation to Mr Teale's use of evidence and his logic. Mr Besele lists four deficiencies in Mr Teale's expert report of 12 February 2018. The Court accepts the validity of some of these deficiencies, which are set out in the subparagraph below, substantially in Mr Besele's own words: 1. Although Mr Teale is of the opinion that different value metrics from the MVS (Mr Price) and PRP (Mr Besele) assessments are applicable to the subject properties, Mr Teale does not provide any sales evidence or comparison with any sales evidence to justify his opinion; 2. Mr Teale makes strong judgments about the direction of the property market in Redfern and surrounds, but then fails to provide any market research or statistical evidence to support his opinion; 3. Mr Teale provides a valuation assessment of the subject properties in an annexure, based on a capitalisation of investment approach. However Mr Teale fails to provide a basis for his underlying assumptions or detail the sources of his information or provide copies of the sources of his information; and 4. Mr Teale had provided an opinion of value on the subject properties that is different from the MVS (Mr Price) and PRP (Mr Besele) valuation assessments. However he then failed to provide a reconciliation showing that his values are within market parameters, as indicated by the available sales evidence.
4. Cleveland Street. In relation to Cleveland St, Mr Besele notes that comparing the sale of the Cleveland Street property for a consideration of $5,150,000 in November 2012 with Mr Teale's assessment of $5,810,000 as at October 2016, implies year-on year (YoY) growth of approximately 3.14%. Mr Besele's opinion is that such YoY growth is too low. He says that "the YoY growth rate suggested by Mr Teale's assessment is unrealistic, when considering the direction of [Sydney's] inner city property investment market since November 2012, and the yield compression that has occurred since that time due in part to" a number of factors. He mentions among the factors that have tended to increase the demand for assets in this price range: the general sharp increases in land values in inner city areas; the increase in foreign demand for assets in this price range; the changes to self-managed superannuation funds facilitating such investment; and increased activity by property syndicators.
5. Mr Besele provided evidence of a markedly different pattern of year-on-year in the city real property growth in those four years. He gave a statistical analysis of sales evidence showing gross year-on-year growth in 6 similar inner city properties in the Surrey Hills/Chippendale/Newtown area in the range 8.47% to 15.59%. Mr Besele's list included 69 Abercrombie St Chippendale, which showed YoY growth over 4.2 years, based on two sales in December 2011 and February 2016 of 9.72%. This price evidence covers a period that substantially overlapped with the relevant dates to be compared for the valuation of the Cleveland Street property (November 2012 and October 2016). Mr Besele then adjusted the growth figures revealed by the sales evidence for each of the six properties to account for differences between each of those properties and the Cleveland Street property with respect to the following factors: the period considered, capital expenditure on the property, development potential of the property, location and exposure of the property and the particular value bracket of the property. These adjustments represent individual factors that may have influenced the sales of the six properties apart from their representation of the growth in the market that can be directly applied to the Cleveland Street property. The sales evidence, so adjusted, shows markedly higher YoY growth in the range of 8.97% to 9.84%, with a midpoint of 9.40%. The PRP (Mr Besele) valuation shows YoY growth of 8.58%, which is close to and only slightly below this range.
6. The NSW Trustee submits that this additional analysis of Mr Besele shows that the PRP/Besele valuation closely approximates true market growth over the relevant period, and may indeed be slightly conservative. The NSW Trustee further submits that based on this data analysis, Mr Teale's implied YoY growth of 3.14% is well below a realistic YoY growth range.
7. The Court accepts this submission and concludes that the rate of growth in the value of the Cleveland Street property since November 2012 is much closer to Mr Besele's opinion (8.58%) than that which would be implied from Mr Teale's valuation opinion (3.14%). Mr Besele's analysis of the rate of market growth in the six properties (including adjusted comparative sales evidence for the relevant period) is persuasive: because of the range of properties it uses for sales data comparison; and because of the comprehensive adjustments that it undertakes for all likely factors that may cause the growth to be implied from the sales evidence of the six properties to differ from the growth in market value of the Cleveland Street property.
8. In his oral evidence Mr Teale sought to answer Mr Besele by identifying the market research evidence he relied upon to support his "strong judgments about the direction of the property market in Redfern and surrounds". The material to which he pointed is a list of sales, cited in valuations from the plaintiff's valuers. But this material does not on its own account for how he used these sales to check that the 3.14% year on year sales growth implied by his Cleveland St valuation corresponded with evidence of the growth in market value in the area, or contradicted Mr Besele's reasoning.
9. At the oral hearing, Mr Teale was given leave subsequent to the hearing to identify any other evidence upon which he also relied to justify his opinion about the slow rate of market growth in the inner city area between 2012 and 2016. The material to which he referred was sales evidence of a similar character in relation to the Coogee property. But this was no more informative than the material that he had referred to during the oral hearing.
10. Mr Besele's conclusion as to the growth in the market value of the Cleveland Street property between November 2012 and October 2016 is further confirmed by Mr Price's opinion on the same subject. Mr Price's opinion is based both on identified general market research and anecdotal evidence that "average market growth in this location over this four year period since the 2012 sale had an average minimum of 10% per annum". From this, Mr Price's conclusion is that if one adopts Mr Price's average market growth figure and applies it to the original sale price, the market value as at October 2016 would be of the order of $8 million. Mr Price says that this is also in line with his 16 September 2016 valuation.
11. In the Court's view it is important that the valuation of the Cleveland Street property fit with the evidence of the actual sale of the property in November 2012. Mr Price's and Mr Besele's conclusions as to value fit well with what the Court judges to be a more realistic historical growth pattern than does Mr Teale's conclusions on the value of the property.
12. The Court found Mr Besele's analysis especially persuasive, in part because his 17 April 2018 report cross-checks its logic using Mr Teale's valuation of the Cleveland Street property as a platform from which Mr Besele adjusts for a series of flaws that Mr Besele says can be identified in Mr Teale's report. When Mr Besele undertakes this exercise and individual adjustments are made, Mr Besele's valuation of $5,810,000 becomes an adjusted valuation of $7,340,000. A short analysis of Mr Besele's crosschecking approach follows.
13. Mr Besele's report isolates five "contentions and assertions" in Mr Teale's report that Mr Besele contends are a basis for Mr Teale disregarding the market value implications of the sales evidence that the plaintiff's valuers have used. In the Court's opinion, these criticisms are valid and a basis for preferring Mr Besele's opinion over Mr Teale's opinion.
14. First, Mr Teale contends that the Cleveland Street property does not have any development upside as there is no unutilised permissible floor space area within the existing structure on the property. But as Mr Besele points out and the Court accepts, Mr Teale's opinion does not take into account the value of amalgamating the Cleveland Street property with adjoining sites.
15. Secondly, Mr Teale further contends that the property at 232 Cleveland Street Chippendale, which Mr Price used as a comparable property, is not in fact a suitable comparable without substantial adjustment. He contends that the 232 Cleveland Street sale is superior and that the Cleveland Street property should be heavily discounted before it is used as a comparable.
16. The Court accepts Mr Besele's opinion that the 232 Cleveland Street property, which has a larger land area but a slightly smaller floor space area, is a suitable comparable property. Mr Teale's claim is that the 232 Cleveland Street property has superior tenancies on long term leases, including to an ASX listed company, Dulux. But Mr Besele points out, and the Court accepts, that 232 Cleveland Street has the disadvantage of being structurally improved, so as to be purpose-built for Dulux and consequently it is less marketable to other potential tenants, a matter which is evidenced by the recent departure of some tenants. In contrast Mr Besele points out that the Cleveland Street property has a tenant that is no less financially stable than Dulux, namely Chemist Warehouse. And Chemist Warehouse is also well suited to the retail strip on which the Cleveland Street property stands and is likely to renew its lease (or indeed be quickly replaced by a similar tenant), such that a prudent purchaser would judge the Weighted Average Lease Expiry (WALE) of the two properties as being fairly similar.
17. In my view, the two properties do provide comparable investment assets. The Cleveland Street property probably has a more appealing longer-term interest investment horizon than does 232 Cleveland Street. Mr Teale claims that 232 Cleveland Street is superior because of its B4 mixed-use zoning, allowing a wider range of uses compared with the Cleveland Street property's B2 zoning. The Court accepts Mr Besele's opinion that the difference between the B4 and B2 zonings is not a significant driver of value, because both zonings provide for shop-top housing, which Mr Besele explains, "would be the main development potential value capture for the properties". And the Court observes that the two properties otherwise have the same floor space ratios, with the Cleveland Street property having a higher height limit of 12 metres as against that for 232 Cleveland Street of 9 metres.
18. Thirdly, Mr Teale further contends that the strength of the tenancy mix for the Cleveland Street property would not support a stronger capitalisation rate for it; the key tenant there being price driven with a low investment fit out in its tenancy and with no other national strength tenants in the mix.
19. But Mr Besele answers this to the satisfaction of the Court. He explained that current tenancy mix is not the main value driver for the Cleveland Street property. Rather he says, the intrinsic attributes of that property will drive its retail value: namely as an inner-city location, its position in a retail strip precinct, its Corner Road commercial exposure to 2 major roads, the functionality of its existing improvements for its current highest and best use, and a reinforcing mix of large and smaller retail tenancies, where each will attract custom to the other.
20. Fourthly, Mr Teale contends that the industry standard to allow for profit and risk is 25 percent of capital expenditure. He says "I believe that an astute developer looking at this property site [the Cleveland Street property] would require a margin between 20 % to 30 % to cover the profit and risk component of any due diligence to the site due to its location and tenancy mix". Making allowance for a margin of this order (25%) for capital expenditure will depress the market value of the Cleveland Street property.
21. But the Court accepts Mr Besele's analysis that a capital expenditure allowance of this order is required to reflect risk, where capital expenditure is being undertaken to alter or increase the revenue stream from a property, rather than merely to undertake the capital expenditure necessary to maintain an existing revenue stream. Maintaining an existing revenue stream by refurbishment of a building, rather than enhancing a revenue stream by more major capital works is not what is being assumed in Mr Besele's analysis. Rather, as has been explained in these reasons, Mr Besele has assumed the deduction of initial capital expenditure as a "below the line" adjustment to arrive at an initial yield of 5.65%. And this yield has been reached after any risk to the future income stream has already been taken into account.
22. Moreover, Mr Besele points out, and the Court accepts, that there is a contradiction in Mr Teale's position: on the one hand Mr Teale justifies a capital expenditure allowance of 25% to reflect the risk associated with expenditure decisions to alter or increase the revenue stream from a property. But he makes no additional valuation allowance for an increase in the revenue stream for the Cleveland Street property.
23. Fifthly, Mr Besele calls into question a number of the assumptions Mr Teale uses in applying the investment income capitalisation approach for the Cleveland Street property, to arrive at a valuation of $5,810,000 at an initial yield of 6.27%. Mr Teale challenges five of Mr Teale's assumptions: in relation to (a) recoverable outgoings, (b) leasing period, (c) incentives, (d) capital expenditure, and (e) profit on works undertaken. Each of these assumptions requires analysis, and as will be seen below, the Court agrees with Mr Besele's criticism of Mr Teale's assumptions.
24. Mr Besele then adjusts Mr Teale's figures to correct for what Mr Besele claims are these errors in Mr Teale's assumptions. Adjusting Mr Teale's valuation method for those errors, derives a valuation for Cleveland Street of $7.34 million. This implies YoY growth of 9.51% for the Cleveland Street property. This conclusion is also broadly consistent with Mr Besele's other analysis of the market evidence, showing valuation growth over the relevant period of 8.58%. The contest about errors in the individual assumptions can be very shortly summarised.
25. (a) Recoverable Outgoings. Mr Teale's calculations of return from the Cleveland Street property allow for "recoverable outgoings" of $25,000 per annum. Recoverable outgoings represent those property taxes charges and expenses that can be recovered under the lease from the tenant pursuant to the landlord's lease indemnity. If recoverable, they should not be brought to account as a landlord's expense, deductible from the landlord's gross rent. And if they are recoverable, they will not reduce the landord's net income.
26. Water rates for the Cleveland Street property are $28,500 per annum. But that amount would include a tenant water usage, which is the financial responsibility of the tenant. A landlord is normally only responsible for water connection charges, which Mr Besele estimates for the Cleveland Street property at approximately $2,500. Electricity in common areas is said to be $4,647. But Mr Besele says, and the Court accepts, that "this is a cost that is usually fully recovered from the tenants in an asset of this type (usually based on area occupied)". Therefore, Mr Besele estimates the landlord is only responsible for 4.2 percent of that cost - relating to the vacancy in the building, which would only amount to $195.
27. And the annual cleaning costs for the building are stated to be $16,705. For similar reasons that apply to the electricity outgoings, Mr Besele's opinion, which the Court accepts, is that cleaning costs are usually recovered from tenants in an asset of this type. So, the landlord would only be responsible for 4.2 percent of the annual cleaning cost, amounting to $702.
28. (b) Leasing Period. Mr Teale adopts a leasing period of 12 months. But the subject property had a vacancy rate of 4.2 percent (in respect of the floor space of shop 401). But Mr Besele says that a vacancy for 12 months for a ground floor retail shop, fronting onto Cleveland Street, appears excessive. He would only allow for a vacancy of three months for a retail tenancy of that type. Given the high traffic exposure of this property at a busy intersection, the Court accepts that opinion.
29. But there is a question as to whether there is a vacancy in shop 401 at all. The title to the Cleveland Street property indicates that a a registered lease to the same tenant exists over shops 401, 403 - 405. Mr Besele questions whether even if shop 401 was vacant as at October 2016, the vacancy may have been for a sublease, the head lease of which was still providing income to the landlord. So far as the Court can see, this issue has not been satisfactorily resolved in Mr Teale's favour.
30. (c) Incentives. Incentives by way of deductions or discounts from rent or expenses of various kinds are often offered to prospective tenants. Mr Teale adopts incentives of 25% for the Cleveland Street property. Mr Besele criticises this as an unexplained figure. And on the evidence that appears to be the case: the logic behind Mr Teale's 25% figure is not clearly explained. Mr Besele's evidence is that in such a location an incentive of around 10 percent would be usual market practice, an opinion supported by objective evidence and one with which the Court agrees. But even if an incentive of the order of 25 percent were to be applied, Mr Besele says as at the date of valuation in October 2016 that the incentive would only relate to the vacancy of shop 401, which represents 4.2 percent of total income. Over a three-year lease term the incentive based on 25 percent of the rent from shop 401 represents $21,000 of gross lease income. And an incentive based on 10 percent of gross lease income over the same term only represents a figure of $8,400.
31. (d) Capital Expenditure. To renovate the Cleveland Street property to make it fit for purpose for leasing, Mr Teale is of the opinion that a capital expenditure amount of $1,475,181 is required. This equates to approximately $1,057 per square metre for the stated building area of 1,396 square metres on the site of the Cleveland Street property. Mr Besele contends that this amount of capital expenditure per square metre is excessive. Using Rawlinson's Australian Construction Handbook (relevantly the 2016 addition), Mr Besele says that constructing a basic fit out for a two story structure of suburban neighbourhood shops would only cost $805-$870 per square metre of building area in Sydney at that time. But including the costs to complete construction with a higher quality level of finishes for the building, the overall costs would rise to $1,026-$1,091 per square metre of building area.
32. The Court accepts that for renovating the existing Cleveland Street property capital expenditure of that order, expenditure of a $1,057 per square metre, is high. Given that any renovations that are assumed to be taking place, are for the purposes of making the property more lettable, in the Court's view the Mr Besele's/ the PRP's valuation of capital expenditure allowances of $250 per square metre for the existing improvements is the more realistic. The Court accepts Mr Besele's capital expenditure estimate for the building of the order therefore of $349,000.
33. (e) Profit on Works Undertaken. Mr Teale's calculations deduct a profit margin of 20 percent on 60 percent of his estimated capital expenditure, amounting to an overall sum to be deducted of $177,022. This deduction is said to be made on the basis that 60 percent of the scope of these capital works is "value enhancing". The Court accepts Mr Besele's criticism of this part of Mr Teale's work: what is "value enhancing" has not been explained and why 60 percent of the capital works are said to be "value enhancing" rather than some other percentage is unclear. In the Court's assessment, Mr Besele's judgment is correct that any works that need be assumed to be undertaken at this building, are works that are required to maintain an ageing building erected in the 1930s, so that it can continue to generate the same rental investment income that it is either already generating, or is capable of generating for its current retail usage. The Court does not accept that if the works undertaken are merely to maintain the continuance of the subject property as an income producing asset that they should be classified as "value enhancing", or risky in a way that is not already taken into account in setting an appropriate capitalisation rate for the investment income stream derived from the property. Thus the Court agrees with Mr Besele's opinion that Mr Teale's deduction of a profit margin on 60% of the estimated capital expenditure is flawed.
34. Adjusting for each of these errors in Mr Teale's reasoning, would reach a value for the Cleveland Street property in October 2016 of $7,340,000, a figure that represents year on year growth of 9.51% and is close to Mr Price and Mr Besele's valuations.
35. The George Street Property. Mr Teale's valuation of the George Street property assumes a proposed development involving a similar density of affordable housing to that which was achieved under a development approval at a nearby property, 267-269 Abercrombie St, Darlington. Mr Teale infers that the price paid for the Abercrombie St, Darlington site (which at the time of its sale had development consent for a component of affordable housing) may be applied to the larger George Street property, even though the George Street property does not have development consent.
36. But the question is whether the Abercrombie Street, Darlington site can legitimately be used as a comparable property in valuing the George Street property. Mr Price strongly doubted that it could. He said of the use of the Abercrombie Street Darlington property as a comparable: "The subject property [the George Street property] does not have approval and therefore is not considered a reliable comparable for direct comparison purposes on a like-for-like method, without adjustment for the differences."
37. Mr Price argued that the difference between his and Mr Teale's valuation of the George Street property can be explained by Mr Teale's discount rate failing to make allowance for the "time, costs and profit/risk associated with gaining a conditional development consent for the subject property" and that Mr Teale's valuation did not make an adequate allowance for "any differences with regards to the different site configuration, subject heritage constraints, rail tunnel considerations and the likely final development consent proposal." Mr Price's conclusion was that once these "typical allowances" were taken in to account, that "a prudent developer would pay considerably less than [Mr Teale's] determined figure of $11,268,000." Mr Price assumes the Abercrombie Street Darlington property can be used as a comparable to reach a rate per square metre of gross floor area but that a discount of 25 % must be applied to account for the George Street property being a larger development than the Abercrombie Street property, leading to an adjusted value of $10.1 million after the deduction of development application fees, professional fees and related costs.
38. Mr Price then reasons, and the Court accepts, that a further period of approximately 1.5 years would be required to achieve affordable housing development approval under SEPP 9 in accordance with Mr Teale's assumptions and that therefore a further discount of 25 percent must be applied to adjust for the time delay and the costs and profit risks associated with seeking such an affordable housing development approval. Once this further discount is applied, the Court accepts Mr Price's resulting valuation opinion: that a developer would only be willing to purchase the George Street property for a consideration of the order of $7,200,000 at the relevant date.
39. Mr Besele is critical of Mr Teale's use of the Abercrombie Street, Darlington property as in effect the sole foundation of Mr Teale's reasoning. Mr Teale does take into account the broader range of evidence but his reasoning appears to be based principally on this Abercrombie Street, Darlington property. Mr Besele contends, and the Court accepts, that Mr Teale's heavy reliance upon a single comparable property, does not reflect good valuation practice: "Relying on one [piece of] sales evidence to support a valuation assessment, when it is evident that there [is] more available sales evidence, in our opinion does not follow the process of undertaking a valuation as prescribed by API [Australian Property Institute] and the International Valuation Standards (IVS) 2017."
40. Mr Price regards it as an error in valuation principle for Mr Teale to infer potential value principally from the Abercrombie Street, Darlington property for the George Street property because all the other comparable properties have the potential to apply for the FSR bonus associated with an affordable housing SEPP 9 development approval. As Mr Price explained in his oral evidence: "So potential does not lead to value. The example in that is that every sale within the report for George Street, Redfern has the ability to apply for the FSR bonus and they sold to the market, as they were, with that same potential. So when we are applying our rate and determining the site, the value of the property against the sale, they all had the same potential benefit."
41. Mr Price elaborated the same point in his report of 17 April 2018. He explained that the SEPP 9 FSR bonus is available to all holdings that permit the construction of boarding houses. But he made clear that, "Sites without development consent only gain the bonus via conditional approval on an application. Without an approval in place, valuation principles dictate that this speculative potential cannot be quantified as additional value above the value already assessed."
42. In summary and for these reasons the Court prefers Mr Price's and Mr Besele's valuations of the George Street property and Cleveland Street property over the opinion of Mr Teale as at the October 2016. And the MVS and PRP valuations of Coogee property set out are also accepted. These findings provide a basis for the Court now to proceed to its final reasoning.

Applicable Legal Principles

1. The applicable law in relation to the entitlement of a legatee to be put into the position the legatee would have been in if the property the subject of a specific legacy had not in fact been sold has been clearly stated. Most recently it has been restated in this Court in Joyce v Cam [2004] NSWSC 621, per Campbell J, where his honour said at [49] - [50]: "49 An illustration of the way in which the law about the order of application of assets does not affect the power of an executor to sell for purposes of administration whatever asset is most convenient, arises if an executor sells or retains, for purpose of administration, property which has been the subject of a specific legacy or devise. Property subject to a specific legacy or devise is a late class of property to be encroached upon for payment of debts, under the general law concerning administration of assets, when the will did not make that property available for payment of debts. It has long been established that if an executor sold property which was the subject of a specific legacy or devise, or kept such property in case it needed to be sold for payment of debts, then the legatee is entitled, by a process of adjustment of the rights of beneficiaries between one another, to be put into the position he would have been in if the property the subject of the specific legacy had not in fact been sold, or kept in case it needed to be sold. In Ewer v Corbett (1723) 2 P Wms 148; 24 ER 676 Sir Joseph Jekyll MR said (at 149 of P Wms; 676 of ER), of a situation where an executor had sold a specifically devised leasehold term: '... an executor, where there are debts, may sell a term, and the devisee of the term has no other remedy, but against the executor, to recover the value thereof, if there be sufficient assets for the payment of debts.' 50 In Chaworth v Beech (1799) 4 Ves Jun 555; 31 ER 285 Sir Richard Arden MR said (at 567 of Ves Jun; 291 of ER): 'It is no more than the case, that was put in the argument, of a legacy of a horse, which the executor refused to let go, least there should be a deficiency of assets, and having used and worked the horse a considerable time, afterwards offered to return him: the legatee then may insist upon the value.'"
2. The core ideas in this statement of the law are that the legatee: has an equitable entitlement, to a process of adjustment of the rights of beneficiaries between one another, "to be put into the position he would have been in if the property the subject of the specific legacy had not in fact been sold".
3. Mr Wardy contests the way the NSW Trustee proposes to apply those principles in this case. The NSW Trustee says that it proposes to exercise discretions that are available to it as an administrator of the estate and that Mr Wardy is not entitled to attempt to control the exercise of those discretions through proceeding such as these. Those principal positions and related supporting arguments are considered in the next section of these reasons.

Consideration

1. The NSW Trustee's case is relatively straightforward. It submits there is a strong case that it has a sound basis to exercise its discretion to apply here the principles stated above in Joyce v Cam. The NSW Trustee says that the outcome of the valuation contest clearly shows that the George Street property is an obviously appropriate substitute for the Cleveland Street property in the application of Joyce v Cam principles and that neither the Coogee property nor any other property is an appropriate substitute that complies with those principles. The NSW Trustee's case is persuasive and the Court accepts it after considering Mr Wardy's counterarguments. The Court now outlines that case and why it was accepted and then deals with the counterarguments advanced by Mr Wardy.
2. There is no contest between the parties that in the circumstances which have occurred in the administration of this estate it is appropriate for the Court now to apply Joyce v Cam principles. The real issue in these proceedings is what kind of property substitution and what kind of adjustments the application of those principles now requires.
3. The NSW Trustee contends that if Mr Besele's and Mr Price's valuations were to be accepted, as the Court has now accepted them, their valuations of the George Street property both come in almost identically for October 2016 at about $7,200,000 and their valuations of the Cleveland Street property range between $7,100,000 and $8 million. Moreover, the Court has also accepted the MVS and PRP valuations of the Coogee property at $4,750,000 and $5,650,000 respectively and if the Court were required to choose between them for the reasons earlier given it would select $4,750,000 as the market valuation of the Coogee property at the relevant date.
4. The NSW Trustee argues that the Coogee property is far less valuable (by at least $2 million) than the Cleveland Street property at the relevant date and on that basis alone, apart from difficulty in earning income from the Coogee property in the short term, it is not an appropriate substitute for the Cleveland Street property. And the NSW Trustee further argues that the George Street property is an appropriate substitute at an equal exchange market value of $7,300,000 at the relevant date.
5. In my view, $7,300,000 is an appropriately conservative market value to be chosen as the basis for making the proposed substitution. It is not overly generous to the Hassiba Wardy interests, nor does it disadvantage the residuary beneficiaries. But for the substitution the residuary beneficiaries would otherwise receive the market value George Street property, which the Court has determined at the relevant time was $7,200,000. But under the proposed substitution the residuary beneficiaries are receiving with the consent of the Hassiba Wardy interests value which is arguably $100,000 greater than their existing entitlement.
6. And the Hassiba Wardy interests are content to receive the George Street property at an exchange value of $7,300,000, which they regard as sufficiently putting them in the position they would have been in if the Cleveland Street property had not in fact been sold. In my view it does that in circumstances in which they do not seek any further adjustment in their favour. On the valuation evidence considered they could perhaps have argued for an adjustment beyond $7,300,000 but the Court well understands the counterarguments and the judgment that has clearly been exercised by the NSW Trustee that such further contests are likely to be unproductive and to further delay the final administration of this estate.
7. In light of the ready substitution of the George Street property for the Cleveland Street property, the Court considers there is no basis for considering the purchase by the estate of other substitute properties.
8. Mr John Wardy's various arguments to the contrary of these conclusions are now considered. These arguments were set out in a combination of written and oral submissions but may be condensed into a number of main points. Mr John Wardy has already failed on his principal argument, which was that substitution of the George Street property for the Cleveland Street property should not occur because the George Street property is far more valuable than the Cleveland Street property. But Mr Wardy had a number of other arguments
9. First, Mr John Wardy is critical of the process the NSW Trustee has adopted to lead to this proposed substitution, on the basis that somehow the Hassiba Wardy interests are controlling the NSW Trustee's exercise of its discretion. Mr John Wardy submits that it is not acceptable for a beneficiary, even in the context of this case with the apparent concurrence of the executor, to seek to "elect or choose the property of their liking". Mr John Wardy submits that this is "not the appropriate mechanism by which substitution, marshalling or the process of adjustment of the rights of beneficiaries between one another… is to be achieved".
10. This argument is not persuasive. There is no evidence that in the exercise of its discretion that the NSW Trustee has been dictated to by the Hassiba Wardy interests. Correspondence such as Exhibit C in November 2018 rather shows the NSW Trustee exercising its independent discretion but doing so in a consultative way that is designed to reduce future conflict by seeking the agreement of the Hassiba Wardy interests to the course proposed. That does not mean the the Hassiba Wardy interests are "choosing" property of their liking. And even if it was their choice, as by their expression of agreement it clearly is, that does not invalidate the NSW Trustee' exercise of discretion which is engaged for proper purposes, within power and on the basis of factually correct valuation evidence.
11. Second, Mr John Wardy argues that the proposed substitution is inappropriate based upon the testator's intentions. Mr John Wardy submits that if the testator "thought that the George Street property was the most appropriate property for Hassiba (with the gift over to their three children), one can readily infer the deceased would have given her the George Street property rather than the Cleveland Street property".
12. This argument is also not persuasive. It is little more than a restatement of what was in the will, which the subsequent administration of the estate, recognising its tax debts, has proved to be unachievable without the sale of the Cleveland Street property. In the assessment of his estate the time of making the will the testator plainly did not anticipate the events which have occurred. It is unhelpful speculation and would be the source of endless argument were it legitimate to try and infer what the testator would have done had he realised at the time of making his will that the Cleveland Street property would have to be sold.
13. And the argument is based on a false premise inconsistent with Joyce v Cam. The Court does not have to enquire whether or not the testator thought that the George Street property "was the most appropriate property" for the Hassiba Wardy interests. All the Court has to do is to satisfy the principles in Joyce v Cam, which require the executor/administrator by a process of adjustment of the rights of beneficiaries, to put the Hassiba Wardy interests "in the position they would have been in if the property the subject of the specific legacy had not in fact been sold". The application of these principles does not require the court to ascertain the testator's intention.
14. Third, Mr John Wardy argues that In light of the "complete disparity" of rental yields between the George Street property and the Cleveland Street property that the former should not be substituted for the latter. This submission should not be accepted. The Court's findings above do not show there is a "complete disparity" in rental yields between the Cleveland Street property and the George Street property, whatever that expression is said to encompass.
15. But more importantly the argument contains a fundamental error of principle concerning the valuations which the Court has now assessed. The capital market value of commercial and industrial properties of the kind the subject of these proceedings are assessed by one methodology on the basis of a capitalisation of maintainable earnings; and by another methodology, the direct comparison method, which also relies upon implicit judgments about maintainable earnings. Rental yields are one component of valuation methodology and the choice of capitalisation rate to be applied to those rental yields is an equally essential factor to derive the market value of a property.
16. In approving whether the NSW Trustee can proceed with the proposed substitution to put the Hassiba Wardy interests "into the position [they] would have been in if the property the subject of the specific legacy had not in fact been sold" the Court has used comparative market values of the George Street and Cleveland Street properties. This is a more comprehensive comparator or which includes a judgment about maintainable earnings and capitalisation rate. Merely to point to actual earnings, as distinct from maintainable earnings, is to use an incomplete and inappropriate measure to determine what position the Hassiba Wardy interests would have been in if the Cleveland Street property had not been sold.
17. Fourth, Mr John Wardy argues that the Hassiba Wardy interests are so far as is possible and subject to adjustments, to be put in the same positon as if the Cleveland Street property had not been sold. He argues that they "are importantly not - to the prejudice of competing beneficiaries (including Mr Wardy) - to be placed into a better position or receive a windfall". In my view the simple answer to this argument is, as the Court has demonstrated in the calculations above, that far from receiving a "windfall" the the Hassiba Wardy interests have to a degree compromised their potentially arguable entitlements to an adjustment upon the substitution in order to avoid unnecessary argument. The valuations which the court has accepted clearly show they will not receive a "windfall" upon the substitution being proposed.
18. Fifth, Mr John Wardy argues that neither the George Street property nor the Coogee property, having regard to income potential, capital value and potential repair costs, may be an appropriate substitution for the Cleveland Street property. And as a result Mr John Wardy argues that the NSW Trustee should acquire a property for substitution for the Cleveland Street property. To illustrate this, he points to other properties available in the market at the time of the hearing, properties in Redfern, Sydney and Camperdown. But to isolate income potential, repair cost or any other factor suffers from the same defects as the Court has exposed in dealing with Mr Wardy's third argument above: it is to judge substitution by an incomplete rather than a complete measure. And for the reasons already given, it is not necessary to look at the possible purchase of these alternative properties.
19. Sixth, Mr Wardy argues that the fact that Hassiba Wardy and her children are beneficiaries in two different "capacities", Hassiba having a life interest in Cleveland Street and also being a residuary beneficiary of personalty; and her children's remainder interest in Cleveland Street and one-half residuary beneficiaries of realty, "does not mean that they are exonerated from contribution pari passu with Mr Wardy, he being the other one-half residual beneficiary of realty". Mr John Wardy points out that evidence has not been led by either Hassiba or any of her children as to their respective financial positions, so that the Court can infer that such evidence if led would not assist their position for the George Street property being the appropriate substitute property.
20. The difficulty with this argument is that in applying the test in Joyce v Cam, the Court can assess the substitute property for the one of which the Hassiba Wardy interests have been deprived then compare that with the interest of all the residuary beneficiaries who are affected by the proposed substitution. The Court does not have to go into the kind of analysis of the position of individual residuary beneficiaries that Mr John Wardy suggests here. And White J has already determined the respective interests of Hassiba Wardy and her children within the envelope of the Hassiba Wardy interests and further sub- analysis is not required here.
21. Seventh, Mr John Wardy makes a number of related points that the NSW Trustee's valuation evidence does "not warrant substituting the George Street property for the Cleveland Street property". This is said to be for various reasons that have been covered in the detailed analysis of the valuations above. He raises issues such as Mr Besele's and Mr Price's quality of inspection, the contest about the "highest and best use" for the George Street property, the contest about the relative occupancy rates in the buildings on the two properties, the degree of capital expenditure required to be undertaken on the properties and the relative residential and commercial mix of the buildings. But these matters have already been considered adequately in the course of the discussion above of the valuations and have been factored into the Court's conclusions about the market value of the properties as a basis for substitution.
22. The NSW Trustee raises a number of other arguments against those deployed by Mr John Wardy. It is not necessary to consider them any further in light of the Court's conclusions. Among those was an argument that residuary beneficiaries in this as yet not fully administered estate, such as Mr John Wardy, have no standing to assert control over discretions being exercised by the administrator exercised bona fide for the purposes of administering the estate. The submission pointed out that a beneficiary such as Mr John Wardy has no proprietary interest in the George Street property: Commissioner of Stamp Duties (Queensland) v Livingston[1965] AC 694. But it should be observed that a residuary beneficiary such as Mr Wardy at least has an interest in ensuring that the estate is properly administered and he at least has standing to do that and the Court has considered this contest on that basis.
23. There was also debate about how debts, testamentary and administrative expenses should be borne by the beneficiaries in the estate. But all that needs to be observed here is that is White J has already found that the expense of providing the substitute gift is to be borne as to 86.5% by the residuary real estate beneficiaries and as to 13.5% by the residuary personal property beneficiaries. Otherwise the scheme provided for in the Probate and Administration Act, s 46C will be applied and the Court does not need to consider such issues further.

Rent Earned on Cleveland Street Up To the Substitution

1. The NSW Trustee claims the rent for derived from the Cleveland Street property up to the date of the substitution be paid to Hassiba Wardy. As a life tenant she is entitled to that rent. The only contest between the parties appeared to be as to its quantum. The amount claimed is based on the amount which Mr John Wardy contends is the net rental return on Cleveland Street, namely $349,080 per annum. But although the amount is unproven it is considerably less than the assessed rentals for the Cleveland Street property made by of the valuers called by the NSW Trustee, which are in the range of $427,000 to $465,000. The Court is prepared to adopt this figure and will make a declaration to that effect. But the net result will need to be checked by the parties, as it cannot exceed White J's finding at [36] in Wardy v Salieh; Wardy v The Estate of the late Edmond Wadih Wardy [2014] NSWSC 473.
2. There may be residual issues of costs and other adjustments that are required consequent upon these reasons. The plaintiff cross-defendant has been largely successful in proceedings that became contested and they may wish to seek a cost order against the defendant cross claimant, Mr John Wardy. Such an order has not yet been made in the orders below. Also one or other party may seek a special costs order, for example. The proceedings will be adjourned for mention to the date nominated below, but if it is not convenient they will be adjourned to a date to be agreed between the parties and notified to my associate, to allow the parties to put any motions to deal with any such matters as may arise. At that adjourned date, and before the Court finally disposes of these proceedings it wishes to hear short updated evidence as to how the fire safety and security issues are presently being addressed in relation to the George Street property.

Conclusion and Orders

1. For these reasons, the Court makes the following declarations, orders and directions: 1. Declare that the Plaintiff as Administrator of the estate of the late Edmond Wadih Wardy who died 19 July 2009 ("the testator") is entitled and authorised to appropriate the property at and known as "the George St Property" [address not published] by holding and/or conveying the same upon trust for the beneficiaries who would have been entitled to the bequest of "the Cleveland St Property" [address not published] provided for in clause 3(iv) in the will of the testator dated 7 November 1992 (had the Cleveland St Property not been sold in November 2012 for the purpose of administering the estate) as a gift in substitution for the Cleveland St Property, such appropriation to be made to the said beneficiaries upon the same trusts and interests as the Will provided in respect of the Cleveland St Property, namely: for Mrs Hassiba Wardy for her life with remainder to Anthony Wardy, Roger Wardy and Robert Wardy. 2. Declare that for the purpose of such appropriation and substitution the current value at the date of such appropriation and substitution of each of the Cleveland St Property and the George St property shall be treated as equal, with each of the Properties having a current value of $7,300,000. 3. Declare that the Plaintiff as administrator of the estate of the testator is entitled and authorised to offer and pay compensation ("the Net Rental Compensation Amount") to Mrs Hassiba Wardy for net rents and profits that she has not received because the Cleveland St Property was sold, calculated on the basis that Cleveland St Property was able to earn net rental income of $350,000 per annum for the period between the sale of the Cleveland St Property and the appropriation of the George St Property in substitution as contemplated in declaration 1. 4. Declare that the cost of the said substitution and appropriation, being $7,300,000 and the Net Rental Compensation Amount, is an "administrative expense," the cost of which is to be allocated in accordance with Part 2 of the Third Schedule as required by section 46C of the Probate and Administration Act 1898. 5. Declare that as between the two gifts of residue provided for in clause 3(v) and clause 4 of the testator's will (as adjusted under orders of White J in Proceedings 2010/226874; 2010/233072 and 2010/237742 - see [2014] NSWSC 437), the burden of the said administrative expense is to be allocated as to 86.5% against the residuary gift of realty in clause 3(v) and as to 13.5% against the residuary gift of personalty in clause 4. 6. Order that the Plaintiff's/Cross-defendant's costs of the Statement of Claim for Judicial Advice filed on 19 April 2016 and Cross Claim filed 6 November 2017 be paid out of the estate on the indemnity basis. 7. Adjourn the proceedings to Monday, 2 March 2020 at 9:30 AM for the return of any further motions in, including motions as to whether the defendant/cross claimant should pay the plaintiff cross-defendant's costs of these proceedings on the ordinary basis or the indemnity basis or whether some other special costs order should be made and any motions in related proceedings. 8. The Cross-claim is otherwise dismissed. 9. His Honour notes that the NSW Trustee and Guardian undertakes to the Court by its solicitor, Mr Jackson, that it will not act on the declarations made today before the 2 March 2020. 10. Grant liberty to apply.

Amendments 12 February 2020 - [2] - italicise "1925" [13] - line 4, space between "reconstituting" and "judicial" [18] - within quote, third like delete "10" before property [23] - line 4, delete comma after "contest"; third last line, "George" replaced with "Cleveland" [28] - third last line, "at" instead of "a liberty" [42] - second line, "story" to "storey" [47] - third line, "$3,500 - $4500" to "$3500 to $4500" [65] - last line, "billion" to "million" [67] - third line, delete "Saying" before "As between" [76] - fourth line, "$" before "3, 136,434" [80] - third last line, "Exhibit" capitalised [81] - fourth last line, second "case" deleted [93] - fourth line, delete "of that" before "Mr Price" [98] - add quotation before the word "unimproved" [99] - second line, delete "to" after "upon" [133] - fifth last line add "to" before "bring; third last line, delete "on" before upon", second last line, delete "and approach for this property that" and delete "also" before "rejected" and after "rejected add "this," [145] - third line, delete second "will" and add "be" [153] - third line, capitalisation of "Reconciliation" [179] - last line, italicise "Valuers Act 2003" [180] - fifth line, quotation before "the qualifications" [185] - italicise "Duties Act 1997" [188] - add "he" before "gave" [189] - second last line, "at" before "liberty" [193] - third last line, "PI" to "Professional Indemnity" [206] - second line, quotation after "father" [207] - fourth line delete "-" before "office" [208] - second line, add "s" after "seem"; second last line, "been" to "mean" [213] - second line, add "ly" after "active" [230] - second last line, add "In" before "The Court's" [231] - second line add "in" after "with" [232] - second line, add comma after "property" [233] - third last line, add "a" before "similar tenant"; capitalisation of "Weighted Average Lease Expiry" [240] - second last line, "be" before "seen" [241] - third line, "$7.34M" to "$7.34 million" [244] - second line, add "to" after "apply" [247] - second last line, add "a" before "figure" [252] - fourth line, add comma after "St"; third last line add "a" after "for" [256] - third line, delete "is" after "reasoning" [260] - fourth line, "in this Court" moved after ""restated" [261] - first line add "are" before "that the" [262] - first line, delete "to" after "way" [263] second last line, add "was" before "accepted" [270] - third last line, "clever" to "Cleveland"; second last line, delete "of" and add "Street" after "George" [271] - third line "Trustees" to "Trustee's" and delete "and are"; fourth last line, "choos" to "choose" [278] third last line, comma after "earnings" [281] - fifth line, delete "that" before "they" [282] - fourth line, "are" before "affected" [283] - fifth line, "Mr Besele premise the prices" to "Mr Besele's and Mr Price's quality"; third last line delete "above" before "in the course" [284] - fourth line delete "Court" before "such"; capitalisation of "Duties" fourth last line, "Ward" to "Wardy" [286] fourth last line, "of" before $427,000" [287] - second last line, add "to" before "how"

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 February 2020