The Commonwealth v Reeve

[1949] HCA 22

High Court of Australia|1949-07-01|Before: Webb JJ, Owen J

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Source facts

Court

High Court of Australia

Decision date

1949-07-01

Before

Webb JJ, Owen J

Source

Original judgment source is linked above.

Judgment (20 paragraphs)

[1]

The application of the principles can rarely be easy. That is characteristic of most questions of valuation. But perhaps a particular source of difficulty is the necessity of distinguishing between the ultimate measure of compensation and the factors, such as the value of the goodwill destroyed by an acquisition, which may be taken into consideration in making the determination. Ultimately what is to be found is the value to the owner of the interest taken. All the actual and potential advantages to the proprietor of the interest enter into that value to him. If the goodwill of his business is annexed inseparably to the interest, it may not be possible to disentangle the one from the other. But it is the money equivalent to him found to be contained in the interest expropriated that must be assessed. You cannot simply take the profits of the business and capitalize them at a rate of interest and directly add them to whatever is thought to be the value of the land or interest therein to one who purchases it for some other purpose. That is shown by Pastoral Finance Association Ltd. v. The Minister [7] . But you may be guided in your assessment of the value to the owner of his proprietary interest by weighing the effect such a consideration would have upon a person anxious to step into the owner's shoes in making his estimate of what he would give in order to do so and what effect it would have upon the owner in fixing an amount for which he would be ready to part with his interest.

[2]

[6]

In supporting the Commonwealth's appeal counsel appeared to fall back upon a criticism of the evidence. The facts proved showed clearly enough that the business had depended on the situation of the coffee lounge, that there had been no possibility of the plaintiffs obtaining other premises at hand to which the business might be removed and that the plaintiffs had perforce to buy an entirely new business elsewhere. They proved that in the three years ended 30th June 1945 their annual net profits from the business had been successively £791, £737 and £655, or an average of about £725 a year. In arriving at this profit they had made no deduction for the value of their own personal services in the business, that is for notional wages. They employed one full-time employee at £4 a week and three part-time employees at £2 a week each. Two expert witnesses were called to prove what was the value of the business. One of them was an accountant who had acted for the plaintiffs. He said that he had made a study of the way in which the goodwill of a business is valued and had valued businesses. His evidence amounted to little more than saying that the basis of valuation should be the average net profit aggregated over three years, on the assumption that there would be a sufficient assurance that the site would be available to the business for a similar period. The other expert had for ten years been carrying on as a business and estate agent and was experienced in the sale of restaurants and similar businesses. He took the profits as £750 per annum and valued the business at £1,500. In this he included the plant, of which he had a list. On the faith of the list he attributed £350 to the plant, leaving £1,150 for the goodwill. He said that at the present time (scilicet because of the National Security (Landlord and Tenant) Regulations and similar legislation) a weekly tenancy was accepted without any objection by purchasers of businesses. But a covenant not to set up in opposition within half a mile was taken on the sale of a business like that of the plaintiffs in the city. He based his estimate on four considerations besides the profits, viz. the rent, the turnover, the position and the plant. As to the rent he considered it to be £5 a week under the rental value of the premises. As to the net profits, he was not informed whether they had been arrived at with or without a deduction of notional wages for the working proprietors. On this subject he gave a series of answers in cross-examination which showed his attitude to be that the purchaser of such a business bought on the basis that he would by, so to speak, working for two years without remuneration, recover the price he had paid for the business and that the witnesses' estimate of £1,500 would not be altered by the fact that no deduction for notional wages for the proprietors had been made in arriving at the average annual profit of £725 or £750 derived by the plaintiffs from the business.

[10]

This is an appeal by the Commonwealth of Australia from an order of the Full Supreme Court of New South Wales dismissing with costs an appeal from an award of compensation made by Owen J. exercising jurisdiction under s. 37 of the Lands Acquisition Act 1906-1936. The claim for compensation arose out of the compulsory acquisition by the appellant under the provisions of that Act of the Grace Building situated in King, York and Clarence Streets, Sydney. The notice of acquisition was published in the Gazette on 8th November 1945 and by s. 17 of the Act the estate and interest of every person entitled to the land was thereupon converted into a claim for compensation. The respondents, in the first instance the mother, and after September 1939, the mother and the daughter, had carried on the business of a coffee lounge in Room 2 of this building since May 1937. They had a sub-lease of the room until 31st October 1939. Then they had two successive leases from the owners, the first from that date until 31st October 1942 and the second from 1st November 1942 until 31st October 1945. Thereafter they became monthly tenants of the owner at the existing rental of £34 13s. 4d. per month. The lounge which seated forty persons was open from 9 a.m. to 4.30 p.m. Mondays to Fridays; the room was in an excellent position for such a business; both partners worked in the business with some additional help, and the business showed profits, the net profits without deducting any notional salaries for the work done by the partners being for the year ended 30th June 1943, £791, for that ended 30th June 1944, £737, and for that ended 30th June 1945, £655, so that the average net profits were about £725. Section 28 of the Act provides, so far as material, that in determining compensation regard shall be had to the value of the land acquired. Section 29 (1) (a) provides that this value in the case of land acquired for a public purpose not authorized by a special Act (as in the present case) shall be assessed on 1st January last preceding the date of acquisition. The validity of the last-mentioned provision is under appeal in the Privy Council but on the present appeal it is not suggested that there was any difference in the value of the respondents' estate in Room 2 between 1st January 1945 and 8th November 1945. The learned trial judge assessed the compensation at £1,250 and the Full Supreme Court on appeal refused to disturb his award. The case is a trumpery one to bring on a further appeal to this Court but we were assured that the appellant had only done so because there were grievous errors in the legal approach of the learned trial judge and the Full Supreme Court to the assessment of compensation. I listened carefully to the argument of the appellant but I have not been able to perceive these errors. The compensation was as I understand the reasons of Owen J. assessed on the basis that the respondents were entitled to be compensated for the value to them of the leasehold interest in the land of which they were expropriated. They were not evicted from the room immediately upon the acquisition but were allowed to remain in possession thereof as the tenants of the appellant and to carry on their business until July 1946 when they were given notice to quit. They refused to quit and still remained in possession until they were evicted in October 1946. They were then unable to obtain other accommodation in the locality into which they could move and continue to carry on their business.

[11]

The effect of the acquisition of the Grace Building by the appellant was therefore that the respondents lost the whole value of the business which they were carrying on in Room 2. They only had a monthly tenancy but that tenancy was protected by the provisions of the National Security (Landlord and Tenant) Regulations which made the tenants' occupation of indefinite duration, and the evidence is clear and uncontradicted that there were many businesses similar to that of the respondents carried on in leasehold premises under monthly and weekly tenancies in the city of Sydney which were being bought and sold for large sums of money. The respondents called an expert witness, G. N. Emmett, who swore that the respondents' business carried on in Room 2 with a monthly tenancy (provided the respondents were willing to enter into a restrictive covenant not to carry on a rival business within half a mile) had a sale value of £1,500 of which £350 was the value of the furniture, equipment and fittings, so that the value of the goodwill of the business was £1,150. Owen J. accepted this evidence and on this evidence and other evidence as to sales of similar businesses, especially the purchase by the respondents of the Gainsborough and Domino coffee lounges and the sale by the respondents of the former business, found the fact that the respondents were carrying on business in Room 2 added a special value to the monthly tenancy which without the business would have had a nominal value only and assessed that special value at £1,100. He also found the fact that cubicles and partitions had been erected, floor coverings provided, and various gas and electrical cooking and coffee-making appliances had been installed in the premises added something further to the value of the respondents' interest. He said that making the best estimate that he could he assessed that additional value at £150. In this way he arrived at the £1,250 which he awarded to the respondents as compensation. This was in my opinion a perfectly correct approach to the problem.

[12]

Their Honours in the Full Supreme Court made a similar approach. Jordan C.J. in a judgment in which the other members of the Full Court concurred referred to the leading case of Inland Revenue Commissioners v. Glasgow and South-Western Railway Co. [1] , where the owners were awarded compensation for the value of the land to them under three heads (1) a sum for the value of the land; (2) a sum for the value of the buildings and (3) a sum for compensation for loss of business. The House of Lords held that all these items were included in the value of the land to be purchased. Lord Halsbury L.C. said: "Now the language of the legislature is this - that what the jury have to ascertain is the value of the land. In treating of that value, the value under the circumstances to the person who is compelled to sell (because the statute compels him to do so) may be naturally and properly and justly taken into account; and when such phrases as "damages for loss of business" or "compensation for the goodwill" taken from the person are used in a loose and general sense, they are not inaccurate for the purpose of giving verbal expression to what everybody understands as a matter of business; but in strictness the thing which is to be ascertained is the price to be paid for the land - that land with all the potentialities of it, with all the actual use of it by the person who holds it, is to be considered by those who have to assess the compensation" [2] . Lord Watson said: "When a proprietor instead of letting his land to a tenant occupies it himself for the purposes of trade, that is a special kind of occupancy which must be taken into account in estimating the value of the land; and the claim made here, which was affirmed by the jury to the extent of £9,500, was obviously intended to cover the loss which Sommerville & Co. sustained by reason of their having to give up the occupancy of the saw mills which the railway company took for the purposes of their undertaking. Upon that footing it is an item of value which is rightly included in the price. The owner may let to a tenant and in that case the proprietor's claim would cover only the first two items in the finding of the jury. Upon the third item the railway company would in that case have to deal with the tenant and to satisfy his claim for loss of occupancy, which would be greater or less according to the duration of his lease" [1] .

[14]

This case and other cases where compensation for disturbance of business has been allowed were discussed in the judgments of the Court of Appeal in Horn v. Sunderland Corporation [2] . Scott L.J. said that "a claim for disturbance connected with the land taken must be made as part and parcel of the claim for purchase money. It cannot come under the head of compensation for severance or for injurious affection to the other lands of the owner, and the statute knows no tertium quid in the way of compensation. None the less, the owner in a proper case - that is, in a case where he really does incur a loss of money by disturbance due to the taking over and beyond the loss for which he is to be reimbursed in respect of the land taken - is entitled, because it has to do with the land, to have that element of personal loss taken into the reckoning of the fair price of the land, as has been held by the Courts from a very early stage" [3] . Goddard L.J. said: - "The Act nowhere in terms refers to compensation for loss by disturbance, but it has always been held that, in assessing the value of the land, it is the value to the owner that has to be ascertained, and elements in the value to him are that he was carrying on business on the land which he is forced to sell and that he would have to move out of the house where he was living. Thus, it will be seen that, while disturbance, which includes loss of business, was not mentioned eo nomine in the Act, it was a very real element to be taken into account in determining what the owner was to receive by way of compensation" [4] . In one of the cases cited by Scott L.J., Duke of Buccleuch v. Metropolitan Board of Works [5] , Blackburn J. said: "I agree that the words of the Act should be construed liberally, so as to give full compensation for all that is taken from an unwilling purchaser. I quite agree that where a house has a particular value, as, for instance, from being a place where a trade is carried on, the goodwill of which would be injured by the removal, the compensation should include that" [6] .

[17]

The evidence of Emmett was attacked because he had valued the goodwill of the respondents' business on the basis of two years net profits without knowing whether any charge had been made against those profits for the respondents' own services. But he maintained firmly under cross-examination that his value would be the same whether the profits included or excluded such a charge. He said that he had taken also into consideration rental value, turnover, plant and position. He said that the rent was £5 a month less than the full rental value and as to position that there was no other lounge in the vicinity, "that there was an established clientele that went there which was worth a terrible lot of money to a business of that description especially in that position which was nearly one hundred per cent - although not as good as the Strand Arcade." It may seem strange that there are members of the community who are prepared to pay £1,000 and more for the goodwill of a business out of which they may not be able to make profits substantially in excess of the wages which they would earn if they worked for an employer, but there are evidently many members of the community who prefer to work for themselves even if they can only make such profits and to pay considerable sums to acquire businesses of their own. There is nothing fantastic, it seems to me, in Emmett maintaining his opinion that at the date of acquisition purchasers could have been found who would have been willing to pay £1,500 for the monthly tenancy, goodwill, and the furniture, equipment and fixtures of the respondents' business in Room 2. His evidence is supported by such facts as were brought out in evidence relating to the prices which the respondents paid for the Gainsborough and Domino coffee lounges and that which they received for the sale of the former lounge. The appellant called no evidence to rebut the respondents' evidence. The learned trial judge had the opportunity of seeing Emmett in the witness box and determining the degree of credence which he could attach to his evidence as a whole. In Commissioner of Succession Duties (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd. [1] , this Court pointed out, citing a passage from the judgment of the Privy Council in Charan Das v. Amir Khan [2] , that it would not be proper for this Court on an appeal of this nature to substitute its own opinion for that of the court below unless it were satisfied that the court below acted on some wrong principle of law, or that the value was clearly erroneous. In the present case I am of opinion that the Courts below acted on right principles of law and I am certainly not satisfied that the value was clearly erroneous or even erroneous at all.

[20]

The principles of assessment of compensation for lands compulsorily acquired do not appear to have been misunderstood or misapplied in the Supreme Court of New South Wales unless their misapplication is indicated by the assessment of £1,250 compensation for this coffee-shop business in view of the nature of the evidence. The witness Emmett did make the incredible suggestion on cross-examination that the profit made would not influence the price that might be offered for such a business; but this did not make it unreasonable to accept his evidence that the goodwill of this business was worth £1,150 if the business was likely to continue indefinitely: on the uncontradicted evidence for the respondents it returned to them a taxable income averaging £725 per annum for the three years preceding the resumption. This, however, made no allowance for the value of the services of the respondents in the coffee shop. Further, there was evidence that the rent was £5 per month less than the room was worth. There was also evidence that the managerial services of the respondents were worth £5 6s. per week each. At all events £5 6s. was stated in evidence to be the weekly wage for the manageress of a cafe in Sydney. Deducting from the average profit of £725, £550 for the respondents' services and £60 for additional rental, there was still left a profit of £115 per annum, or nearly treble the interest on £1,150 invested in Commonwealth stock or bonds. A business capable of returning that profit should have been worth £1,150 if likely to continue indefinitely. Moreover the work of the owners amounted to nothing more than providing and serving light refreshments between 9 a.m. and 4.30 p.m. on five days a week, to say nothing of the satisfaction of being owners and controlling their own time and movements. At the time of the resumption, the respondents had, at most, a monthly tenancy; but the Landlord and Tenant Regulations were then in force and gave additional security of tenure; although it might well have been anticipated that those regulations would cease to operate in the then not distant future. But it did not follow that when those regulations were no longer in force the tenancy would become so precarious as to render the goodwill valueless. The goodwill was local and not personal and there was evidence that no coffee room was available in the immediate neighbourhood; but it was reasonable to suppose that the landlord would have been satisfied to receive a fair rent for the room and have allowed the respondents to remain in occupation while a fair rent was paid. This is the case where premises are built for bona fide letting purposes and not for the exploitation of tenants who have worked up a good business. It was not suggested that in a large building like the Grace Building, in which rooms are let to many tenants, the landlord would want to take over the business of every successful tenant or subject him to a rack-rent.