[2006] NSWCA 353
Lenz Nominees Pty Ltd v Commissioner of Main Roads (2012) 186 LGERA 58
[2012] WASC 6
Maloney v Roads and Maritime Services (2018) 98 NSWLR 651
Source
Original judgment source is linked above.
Catchwords
[2008] NSWLEC 112
Barkat v Roads and Maritime Services [2019] NSWCA 240
Brock v Roads and Maritime Services (2012) 191 LGERA 267[2012] NSWCA 404
Chan v Cresdon Pty Ltd (1989) 168 CLR 242[2006] NSWCA 353
Lenz Nominees Pty Ltd v Commissioner of Main Roads (2012) 186 LGERA 58[2012] WASC 6
Maloney v Roads and Maritime Services (2018) 98 NSWLR 651[2018] NSWCA 252
Marshall v Director-General, Department of Transport (2001) 205 CLR 603[2001] HCA 37
Merlino v Roads and Maritime Services (2018) 98 NSWLR 625[1985] HCA 14
Roads and Maritime Services v United Petroleum Pty Ltd (2019) 99 NSWLR 279[2019] NSWCA 41
Roads and Traffic Authority (NSW) v Collex Pty Ltd (2009) 165 LGERA 419[2009] NSWCA 101
Roads and Traffic Authority (NSW) v Damjanovic (2006) 146 LGERA 403[2006] NSWCA 166
Roads and Traffic Authority (NSW) v McDonald (2010) 175 LGERA 276[2010] NSWCA 236
Roads and Traffic Authority (NSW) v Muir Properties Pty Ltd (2005) 143 LGERA 192[2005] NSWCA 460
Spencer v Commonwealth (1907) 5 CLR 418
Sydney Water Corporation v Caruso (2009) 170 LGERA 298[2009] NSWCA 391
Sydney Water Corporation v Marrickville Council [2014] NSWCA 438
Tolson v Roads and Maritime Services (2014) 201 LGERA 367
[2014] NSWCA 161
Walker Corporation Pty Ltd v Sydney Harbour Foreshore Authority (2008) 233 CLR 259
Judgment (25 paragraphs)
[1]
ices (2014) 201 LGERA 367; [2014] NSWCA 161
Walker Corporation Pty Ltd v Sydney Harbour Foreshore Authority (2008) 233 CLR 259; [2008] HCA 5
Walsh v Lonsdale (1882) 21 Ch D 9
Texts Cited: Brendan Edgeworth, Butt's Land Law (7th ed 2017, Thomson Reuters)
Category: Principal judgment
Parties: Transport for NSW (Appellant and cross-respondent)
Eureka Operations Pty Ltd (Respondent and cross-appellant)
Representation: Counsel:
Mr N Hutley SC with Mr M Astill (Appellant and cross-respondent)
Mr I Hemmings SC with Mr M Seymour (Respondent and cross-appellant)
[2]
Solicitors:
Clayton Utz (Appellant and cross-respondent)
Allens (Respondent and cross-appellant)
File Number(s): 2021/175402
Publication restriction: Judgment not to be published on CaseLaw until 26 April 2022
Decision under appeal Court or tribunal: Land and Environment Court
Jurisdiction: Class 3
Citation: [2021] NSWLEC 41
Date of Decision: 17 May 2021
Before: Duggan J
File Number(s): 2020/27760
[3]
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
[4]
HEADNOTE
[This headnote is not to be read as part of the judgment]
Eureka Operations Pty Ltd (Eureka) is the lessee of a service station. A part of the service station was compulsorily acquired by Transport for NSW as part of a public works proposal. As part of that change, access to and from Eureka's service station was severely curtailed.
Eureka brought a claim in the Land and Environment Court contending that the value of the remainder of its leasehold interest had decreased by reason of the carrying out of, or the proposal to carry out the public purpose for which the land was acquired.
The primary judge held that impact on the value of the Eureka Lease is to be determined on a before and after basis utilising the DCF method applied to the earnings of Eureka's business. The primary judge's decision was made on the basis that the lease term ceases on 28 April 2024.
Transport for NSW contended that the methodology adopted by the primary judge valued the effect of the carrying out of the public purpose on all of the assets deployed in Eureka's business and not just its leasehold interest. It appealed on three grounds. Eureka brought a cross appeal which challenged the primary judge's decision that the term of the lease ceases on 28 April 2024.
The principal issues before this Court were:
(i) whether the primary judge erred in law in finding that compensation could be awarded under s 55(f) of the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) for the decrease in the value of assets that were separate to and beyond its interest in other land, referring to para 90 of the reasons of the primary judge (ground 1),
(ii) whether the primary judge erred in law in finding that it was 'incorrect to ask what is the value attributed solely to the real estate which comprised the interest' (ground 2),
(iii) the primary judge erred in not applying the Spencer Test (Spencer v Commonwealth (1907) 5 CLR 418) (or an equivalent test) to the determination of the decrease in value of the interest in the land for the purpose of application of section 55(f) (ground 3), and
(iv) whether the primary judge erred in concluding that Eureka was entitled to compensation on the basis that its lease term ceased on 28 April 2024 (cross appeal).
Held, dismissing the appeal with costs, allowing the cross-appeal with costs, and remitting the proceedings to the Land and Environment Court (per Leeming JA and White JA; Preston CJ of LEC disagreeing)
[5]
As to issue (i) per White JA (Leeming JA agreeing)
The primary judge's reasons that are the subject of ground 1 did not raise a question of law, rather, they raised a question of fact as to how the market would value the Eureka lease: at [2], [46].
[6]
As to issue (ii) per White JA (Leeming JA agreeing)
The primary judge was stating at [83] that the question is how the market would attribute value to the leasehold interest. The answer to that question is a question of fact, therefore no question of law arises under ground 2: at [2], [48].
[7]
As to issue (iii) per White JA (Leeming JA agreeing)
No question of law arises under ground 3, and in any event, the primary judge did apply the test in Spencer v Commonwealth (1907) 5 CLR 418: at [2], [50].
Spencer v Commonwealth (1907) 5 CLR 418 cited.
[8]
As to issues (i), (ii), (iii) per Preston CJ of LEC
The primary judge erred in adopting the DCF method. Application of the DCF method in the particular circumstances of this case valued not merely the Eureka lease but also the Eureka business as well, such that the compensation determined exceeded the compensation to which Eureka was entitled under s 55 of the Acquisition Act, which was an error of law: at [102], [103].
The choice of the DCF method to value Eureka's leasehold interest was driven by the belief that this interest in land could be valued as a trade related property (TRP). The Eureka lease was not a TRP. The value of a TRP is of the land, the buildings and improvements and the business conducted on the land, which is greater than the value of a leasehold interest only. This was also an error of law: at [110], [111].
The erroneous belief that the Eureka lease could be valued as a TRP led to the primary judge's error in the choice of the hypothetical market. The relevant market was not that for the sale and purchase of trade related properties with service station and convenience store businesses. Instead, the relevant market was the market in lessees' interests in leases comparable to the Eureka lease. The primary judge's reasoning involved a misapplication of the Spencer test, which was an error of law: at [113], [114].
[9]
As to issue (iv) per Preston CJ of LEC (Leeming JA and White JA agreeing)
The cross appeal should be upheld. The primary judge was in error in determining the compensation to which Eureka was entitled on the basis that there had been no amendment of the term of the lease. The agreements for the extension of Eureka's lease are specifically enforceable and entitled Eureka to an equitable leasehold interest in the acquired land for the extended term. The lease will terminate at the latest 2 February 2029, but this date might be earlier than 2 February 2029: at [3], [55], [56], [152], [155].
Chan v Cresdon Pty Ltd (1989) 168 CLR 242 at 253; [1989] HCA 63, Walsh v Lonsdale (1882) 21 Ch D 9, Roads and Maritime Services v United Petroleum Pty Ltd (2019) 99 NSWLR 279; [2019] NSWCA 41, Walsh v Lonsdale (1882) 21 ChD 9, Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 27; [1985] HCA 14, Dockrill v Cavanagh (1944) SR (NSW) 78 cited.
[10]
Judgment
LEEMING JA: The background to this appeal and cross-appeal is contained in the judgments of White JA and Preston CJ of LEC, and shall not be repeated here. Both are confined, by s 57(1) of the Land and Environment Court Act 1979 (NSW), to questions of law.
Quantifying the decrease in value of the balance of Eureka's leasehold interest on which it conducted its business of operating a service station is far from a straightforward question of valuation. I would readily acknowledge that the methodology and its application are apt to be contestable. However, for the reasons given by White JA, I am unpersuaded that any of TfNSW's grounds of appeal amount to error on a question of law. That conclusion is not determined by the statements by the primary judge at [85] and [86] that her conclusions did not turn on any "matter of principle or dictate of the statutory language" or that she was not determining any methodology "as a matter of general valuation principle". Ultimately whether a judge regards himself or herself as resolving a contested issue of fact or determining a question of law cannot dictate whether in fact that is so, for the purposes of s 57(1). Ultimately it is a question for the appellate court to determine whether or not that is so, in satisfying itself that it has jurisdiction. The question turns on the substance of the decision, rather than the primary judge's view about it.
On the cross-appeal, subject to what follows which is principally by way of elaboration, I agree with the reasons of Preston CJ of LEC.
As Preston CJ of LEC has explained, a series of transactions known as the "Alliance Agreements" between lessor and lessee (and others) were entered into, having the effect as a matter of contract of varying the date defined in the written lease as its end date. The sequence is somewhat complicated, but the details do not for present purposes matter. At no stage was a lease reflecting the agreed amendments registered. Accordingly, Eureka could not, and did not, submit that it had the benefit of a legal lease with an extended term. Eureka submitted that nonetheless the effect was to create an agreement to enter into a lease for an extended term which was enforceable in equity thereby creating an equitable lease.
At [111], the primary judge accepted TfNSW's submission that the rights and obligations under the Alliance Agreements did not run with the land, but were personal to the parties. Her Honour observed at [112] that such personal relationships were not relevant to the ascertainment of the term of the lease. At [106], her Honour noted Eureka's submission that the agreement created an equitable interest in the land, but the reasons did not separately address this.
[11]
In the joint report of Mr Lunney and Mr Dyson, Mr Dyson concurred with Mr Lunney's assessment of the market rental value in the "before scenario". The difference between Mr Dyson and Mr Lunney was as to how the market would value the leasehold interest. Mr Dyson considered that the market would value the leasehold interest by assessing the profit that could be derived from it by carrying out a discounted cashflow assessment of normalised income for each year of the term of the lease discounted at an appropriate internal rate of return. Mr Lunney considered that the market would value the leasehold interest by assessing the profit rent. The primary judge preferred Mr Dyson's opinion.
Mr Firth provided valuations both on the basis of applying a discount rate on a "before" and "after" basis to annual Earnings Before Interest Tax Depreciation and Amortisation for the balance of what he took to be the remaining term of the lease. The discount rate he adopted was 9.5% on an after tax basis and around 13.6% on a before tax basis.
Dr Firth and Dr Ferrier agreed that a pre-tax discount rate of 13.6% was a reasonable discount rate for valuing the Eureka business as part of an integrated retail network.
Mr Firth also provided valuations using the "profit rent" methodology and applying the real estate discount rates provided by Mr Dyson. Mr Firth and Dr Ferrier agreed that if the hypothetical purchaser of the leasehold interest were assumed not to be subject to the Alliance Agreements the effect of the public purpose would be to reduce the gross profit of that operator by 42.5%. Assuming a slightly lower loss of trade (40.1%), Mr Firth calculated that there would be a decrease in trade from changes to the access of the site of $231,208 per annum and opined that a hypothetical purchaser of the site would be unwilling to pay rent as the service station would be expected to make a loss each year over the remainder of the term. He made an alternative calculation on this basis, adopting Mr Dyson's real estate discount rate of 8.5%, that calculated a decrease in value of $1,580,197.
All valuation methodologies took as their starting point the earnings derived from the business conducted pursuant to the lease, which involved not only the use of the land including its fixtures, such as underground storage tanks, but the use of other assets associated with the business including fittings, stock in trade and other tangible assets that were not part of the land, as well as intangible assets including trademarks.
[12]
The land acquisition
Eureka Operations Pty Ltd (Eureka) occupied pursuant to a lease a corner site known as 131-133 Cobra Street (corner of Fitzroy Street), Dubbo (the site), on which it operated a Shell Service Station and Coles Express Convenience Store (the Eureka business). The lease (dealing AB566973V) was executed on 27 November 2003 between The Shell Company of Australia Ltd (Shell) and Eureka. The term of the lease was 20 years and 150 days, commencing on 1 December 2003 and terminating on 28 April 2024.
By cl 2.1 of the lease, Shell granted Eureka a lease of the leased area for the conduct of the "Business", the right to use the fuel equipment for the conduct of the Business, the right to provide access to the shop to Eureka's entities and associates for the purposes of promoting their offers, and permission to remove all existing chattels, fixtures and fittings and improvements in the shop and to fit out the interior of the shop during the term of the lease. By cl 3.1 of the lease, Eureka must not use the leased area or the fuel equipment for any purpose other than the conduct of the "Business". The term "Business" was not defined in the lease but by cl 1.2 of the lease, definitions in another agreement between Shell, Eureka and other parties named the Alliance Agreement, applied to the lease unless the context required otherwise. The Alliance Agreement, cl 1.1, defined "Business", in effect, as the business of acting as Shell's agent in the sale of Shell's motor fuels and gas and operating the Coles Express convenience store business or other associated convenience stores.
Transport for NSW (TfNSW) compulsorily acquired a small corner of the site (15.3sqm) for the public purpose of undertaking works to upgrade the intersection of Cobra and Fitzroy Streets. The works included installing medians on the roads that would affect vehicular access to and from the site. The carrying out of the public purpose would be likely to reduce the number of vehicles attending the site, which would reduce the potential earnings of the Eureka business.
[13]
The compensation to be determined
Eureka, by reason of having a leasehold interest in the land, which was partially compulsorily acquired, was entitled to be paid compensation by TfNSW: s 37 of the Land Acquisition (Just Terms Compensation) Act 1991 (Acquisition Act). The amount of compensation to which Eureka was entitled was to be determined having regard only to the matters of relevance in s 55 of the Acquisition Act. Three of these matters were relevant: the market value of the land on the date of its acquisition (s 55(a)), any loss attributable to disturbance (s 55(d) and s 59), and any increase or decrease in the value of any other land of the person at the date of acquisition which adjoins or is severed from the acquired land by reason of the carrying out of, or the proposal to carry out, the public purpose for which the land was acquired (s 55(f)).
[14]
The primary judge's determination of compensation
The primary judge determined the amount of compensation to which Eureka was entitled by having regard to the matters in s 55(a) and (f) in a combined way, and the matter in s 55(d) separately. The primary judge determined the that the loss attributable to disturbance (s 55(d) was $141,628.72, made up of the agreed legal costs (s 59(a)) and the fees of a traffic consultant as a disbursement incurred by Eureka's lawyers, also within s 59(a): at [158] of the judgment. There is no appeal from the primary judge's determination of the loss attributable to disturbance.
The primary judge determined the compensation for the matters in s 55(a) and (f) in a combined way (at [20] of the judgement) by undertaking an assessment before and after the acquisition of the land of the value of the Eureka lease applying the DCF method to the earnings of the service station and convenience store business that Eureka conducted on the land: at [86], [103] of the judgment. The primary judge determined the amount of the market value of the acquired land and the decrease in the value of the adjoining land under s 55(f) to be $491,442: at [142], [162] of the judgment. The appeal and cross appeal both concern the primary judge's assessment of compensation for these matters.
Adding this figure of $491,442 to the loss attributable for disturbance of $141,628.72 gave a total amount of compensation of $633,070.72: at [162] of the judgment.
[15]
The market value of the acquired land
The land acquired by TfNSW was only the corner of the site having an area of 15.3sqm. On acquisition of this land, it was "freed and discharged from all estates, interests, trusts, restrictions, dedications, easements, rights, charges, rates and contracts in, over or in connection with the land": s 20(1)(b) of the Acquisition Act. As a consequence, Eureka's leasehold interest in the acquired land was divested or extinguished.
The first matter to be considered under s 55(a) of the Acquisition Act in determining the amount of compensation to which Eureka was entitled was the market value of Eureka's leasehold interest in the acquired land. The parties agreed that the market value of Eureka's leasehold interest in the acquired land was likely to be nominal, having regard to the small size of the acquired land (15.3sqm). Nevertheless, the adoption of a before and after valuation methodology to assess the decrease in the value of the land adjoining the acquired land under s 55(f) would also assess the market value of the acquired land under s 55(a) and incorporate that loss into the compensation awarded: [20] of the judgment.
[16]
The decrease in the value of the residue land
The second matter to be considered under s 55(f) of the Acquisition Act in determining the amount of compensation to which Eureka was entitled is commonly described as "injurious affection". Injurious affection arises from the partial acquisition of land and assesses the decrease in value of the residue (the non-acquired land) arising out of the acquisition or subsequent use of the acquired land. The label "injurious affection" is a "neat, expressive way of describing the adverse effect of the activities of a resuming authority upon a dispossessed owner's land": Marshall v Director-General, Department of Transport (2001) 205 CLR 603; [2001] HCA 37 at [32].
Although it is convenient to use this label, it should be used only as a shorthand description for the reference in s 55(f) to "any…decrease in the value of any other land of the person…which adjoins or is severed from the acquired land", and should not displace the language of the statutory provision: Leichhardt Council v Roads and Traffic Authority (NSW) (2006) 149 LGERA 439; [2006] NSWCA 353 at [29]; Lenz Nominees Pty Ltd v Commissioner of Main Roads (2012) 186 LGERA 58; [2012] WASC 6 at [304]; Merlino v Roads and Maritime Services (2018) 98 NSWLR 625; [2018] NSWCA 251 at [59]; Maloney v Roads and Maritime Services (2018) 98 NSWLR 651; [2018] NSWCA 252 at [5]. Primary regard must be given to the words of the statute: Marshall v Director-General, Department of Transport at [62]; Leichhardt Council v Roads and Traffic Authority (NSW) at [35]-[37]; Walker Corporation Pty Ltd v Sydney Harbour Foreshore Authority (2008) 233 CLR 259; [2008] HCA 5 at [31], [35]; Tolson v Roads and Maritime Services (2014) 201 LGERA 367; [2014] NSWCA 161 at [3], [36], [104]-[105].
The statutory provision of s 55(f) of the Acquisition Act is to be construed according to its natural and ordinary meaning, unless that would lead to a result that the legislature must be taken not to have intended. Application of this rule of statutory construction is particularly important "when, to do otherwise, would limit or impair individual rights, particularly property rights", such as might occur with statutory provisions conferring a right to compensation for the compulsory acquisition of land. As Gaudron J observed in Marshall v Director-General, Department of Transport at [38]:
"The right to compensation for injurious affection following upon the resumption of land is an important right of that kind and statutory provisions conferring such a right should be construed with all the generality that their words permit. Certainly, such provisions should not be construed on the basis that the right to compensation is subject to limitations or qualifications which are not found in the terms of the statute.": see also at [67] per Hayne J and Merlino v Roads and Maritime Services at [54]-[56].
[17]
The valuation methods
There are different valuation methods that can be used to determine such a decrease in the value of the leasehold interest in the residue land. The two most common methods are a "piecemeal approach" and a "before and after" approach: Sydney Water Corporation v Caruso (2009) 170 LGERA 298; [2009] NSWCA 391 at [70]. A "piecemeal approach" involves the separate assessment of the matters in s 55 of the Acquisition Act, such as the market value of the acquired land under s 55(a), any loss attributable to severance under s 55(c) and any decrease in the value of the residue land by reason of the carrying out of, or the proposal to carry out, the public purpose for which the land was acquired under s 55(f). The "before and after" approach involves comparing the market value of the land immediately before and immediately after the acquisition of the whole or part of the land.
The before and after approach is particularly useful where there has been an acquisition of only part of a parcel of land: Roads and Traffic Authority (NSW) v McDonald (2010) 175 LGERA 276; [2010] NSWCA 236 at [88]. Where there is a partial acquisition of land, the before and after approach involves calculating compensation by subtracting the market value of the residue land immediately after acquisition from the market value of the entire land immediately before acquisition: Gosford Shire Council v Green (1980) 48 LGRA 201 at 208; Mir Bros Unit Constructions Pty Ltd v Roads and Traffic Authority of NSW [2006] NSWCA 314 at [11], [12]; Sydney Water Corporation v Caruso at [70].
The before and after approach has the advantage of assessing compensation for a number of matters in s 55 of the Acquisition Act in a combined way, without the necessity for separate assessment of each matter: Mir Bros Unit Constructions Pty Ltd v Roads and Traffic Authority of NSW at [46], [57] and [58]; Merlino v Roads and Maritime Services at [23]; Roads and Maritime Services v United Petroleum Pty Ltd (2019) 99 NSWLR 279; [2019] NSWCA 41 at [51]. In particular, the before and after approach can determine the amount of compensation to which a dispossessed owner is entitled having regard to the matters in s 55(a), (c) and (f) of the Acquisition Act, being the market value of the acquired land and the effect on the value of the residue land attributable to severance or by reason of the carrying out of the public purpose for which the land was acquired: Roads and Traffic Authority (NSW) v Muir Properties Pty Ltd (2005) 143 LGERA 192; [2005] NSWCA 460 at [103]; Roads and Traffic Authority (NSW) v Damjanovic (2006) 146 LGERA 403; [2006] NSWCA 166 at [9]; Roads and Traffic Authority (NSW) v Collex Pty Ltd (2009) 165 LGERA 419; [2009] NSWCA 101 at [101]-[104]; Roads and Traffic Authority (NSW) v McDonald at [88], [89]; Tolson v Roads and Maritime Services at [110].
[18]
The claimed errors of law in the appeal
TfNSW argued that the primary judge's acceptance and application of the DCF method revealed, and itself involved, misdirection and asking the wrong question concerning the assessment task under s 55 of the Acquisition Act. The compensation to which Eureka was entitled only concerned the interest in the land that had been extinguished or diminished by the acquisition of the land, which was Eureka's leasehold interest in the land, and not any business that Eureka operated on the site by reason of its occupation of the land under the lease. The DCF method applied by the primary judge calculated the diminution in the cash flow of Eureka's business rather than the decrease in value of Eureka's leasehold interest in the land.
TfNSW contended that this approach involved three errors of law:
1. awarding compensation for the decrease in the value of the assets of Eureka (which included the Eureka business) that were separate to and beyond Eureka's leasehold interest in the land, contrary to s 55(f) of the Acquisition Act, which limited compensation only to any decrease in "the value of any other land" (ground 1);
2. finding that "it is incorrect to ask what is the value attributed solely to the real estate which comprises the interest" (at [83] of the judgment) when that is the correct question required by s 55(f) of the Acquisition Act (ground 2); and
3. not applying the test in Spencer v The Commonwealth (1907) 5 CLR 418 (Spencer) to the determination of the decrease in the value of Eureka's leasehold interest in the residue land for the purpose of application of s 55(f) of the Acquisition Act (ground 3).
TfNSW contended that the central problem in the primary judge's approach, which is reflected in these three errors, is that the primary judge incorrectly elided the concept of the value of the interest in the land, being the Eureka lease, with the concept of the value of the Eureka business, which included assets beyond the interest in the land. To award compensation to Eureka for the diminution in the value of the Eureka business was not authorised by s 55(f) of the Acquisition Act.
Section 55(f) does make provision for compensation to be awarded to the extent that the carrying out of, or the proposal to carry out, the public purpose has an adverse financial effect for the person entitled to compensation, but this is limited to the extent that the carrying out of, or the proposal to carry out, the public purpose decreased the value of the land (which includes an interest in land) that adjoins the acquired land of the person. Section 55(f), unlike other provisions such as s 55(d) and s 59, does not allow compensation for consequential financial costs; it allows compensation only for a decrease in the value of the interest in the land that adjoins the acquired land. Whilst Eureka's leasehold interest is an interest in land within s 37 of the Acquisition Act, the Eureka business is not an interest in land. Hence, compensation is not payable for any decrease in the value of the Eureka business.
[19]
Eureka's defence of the appeal
Eureka noted at the outset that there was competing expert evidence of the valuers and the accountants as to how the market would transact Eureka's leasehold interest in the land. The primary judge's choice of one party's valuation method over the other party's valuation method was open to her on the evidence and did not disclose error on a question of law or error of valuation principle: Sydney Water Corporation v Marrickville Council [2014] NSWCA 438 at [28]; Barkat v Roads and Maritime Services [2019] NSWCA 240 at [48]-[49].
Dealing specifically with TfNSW's grounds of appeal and submissions, Eureka submitted that the primary judge's approach did not involve valuing the Eureka business. Eureka submitted that the primary judge well recognised that the relevant interest in the land that was to be valued was Eureka's leasehold interest. The question was how to value that leasehold interest, both for the purposes of determining the market value of the interest in the acquired land under s 55(a) and any decrease in the value of the interest in the other land adjoining the acquired land under s 55(f). The primary judge determined that the value of the acquired land under s 55(a) and the decrease in the value of the residue land under s 55(f) were to be determined by undertaking the exercise referred to in Spencer (at [78]).
The primary judge found that determination of the value at market of Eureka's interest in the land involves "ascertainment of the factors that a hypothetical purchaser would consider influence the price the market would pay to attain the benefit of that interest" (at [80]). The primary judge found that this involves asking "what would the market pay to have the benefit of the interest in the land taking into account all of the positive and negative features of that land" (at [83]). The primary judge noted that "how the market determines value may alter depending on the nature of the interest and the particular features and attributes of a particular interest" (at [85]).
The primary judge found that "an approach" the market would adopt in the determination of the value of the interest in question was "an earnings-based methodology" (at [85]). The primary judge stated that she was "not determining as a matter of general valuation principle whether a profit based methodology is appropriate for all commercial leases, but rather asking what the hypothetical market would pay to acquire Eureka's particular leasehold interest in this particular parcel of land in the before and after scenarios" (at [86]).
[20]
The primary judge erred in law in determining compensation
I consider that the primary judge did err in adopting the DCF method advanced by Eureka's valuer and accountant. In the circumstances of this case, this was not a valuation method available to determine the market value of Eureka's leasehold interest in the acquired land under s 55(a) of the Acquisition Act or the decrease in the value of Eureka's leasehold interest in the residue land (the other land which adjoins the acquired land) under s 55(f) of the Acquisition Act.
I reject two arguments advanced by Eureka and accepted by the primary judge. One was that the DCF method was intended to be used to value only Eureka's interest in the land and not Eureka's business conducted on the land. The other was that the market would use the DCF method to value the leasehold interest. The flaw in both arguments is that application of the DCF method in the particular circumstances of this case valued not merely the Eureka lease but also the Eureka business as well, such that the compensation determined exceeded the compensation to which Eureka was entitled under s 55 of the Acquisition Act.
The DCF method used by Eureka and applied by the primary judge involved calculating the net present value of the stream of potential earnings of the Eureka business over the term of the lease, in both the before and after scenarios, then deducting the after value from the before value, to derive the amount of compensation that would reflect not only the market value of the acquired land (s 55(a)) but also the decrease in value of the residue land (s 55(f)). The resultant compensation, however, reflected the value of the business conducted on the land under the lease, but only part of this value reflected the value of the leasehold interest itself.
The potential earnings of the particular business of the Shell service station and Coles Express convenience store conducted by Eureka on the land are generated by using all of the assets of the business and not just the lease that entitles occupation of the land to carry out the business. These other assets of the business include tangible assets, such as the substantial physical assets of underground fuel storage tanks, fuel pumps and associated plant and equipment, as well as stock in trade, and intangible assets, such as goodwill and intellectual property rights, including the right to use the Shell branding for the service station and the Coles Express branding for the convenience store. The lease itself does not generate any earnings. It is the conduct of the business on the land that generates earnings, but this involves using all of the tangible assets, intangible assets and human resources of the business, and not just occupying the land under the lease.
[21]
Eureka's cross appeal on the term of the lease
Eureka's cross appeal challenged the primary judge's rejection, at [114] of the judgment, of Eureka's contention that the term of the Eureka lease was until 2 February 2029, rather than the end date of 28 April 2024 set out in Schedule 1 to the lease.
Eureka contended that it was a party to an agreement for the term of the lease to be extended beyond the end date set out in the lease of 28 April 2024 to a later date, which would work out to be 2 February 2029. Although this amendment of the lease, or a new lease giving effect to the amendment, was not registered, Eureka contended that nevertheless the agreement to extend the term of the lease was specifically enforceable, so that Eureka could obtain against the other parties to the agreement all the remedies that would be available to it if a proper lease had actually been executed.
The result was to create an equitable term of the lease until the new Agreed End Date. Eureka submitted that this equitable term arises by virtue of the doctrine in Walsh v Lonsdale (1882) 21 Ch D 9 and the maxim that equity considers as done what ought to be done: Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 27; [1985] HCA 14.
Eureka submitted that its "interest in land" that was divested, extinguished or diminished by the compulsory acquisition of the land, and in respect of which Eureka was entitled to be paid compensation, was its interest under the Eureka lease for the equitable term until 2 February 2029.
The agreement that created this equitable term was made as part of an alliance to which Eureka was a party, which dealt with the operation of a network of Shell service stations and Coles Express convenience stores across Australia.
The Eureka lease was made on 27 November 2003 between the Shell Company of Australia Limited (Shell), which owned the site at the time, and Eureka. It had a term of 20 years and 150 days, commencing on 1 December 2003 and terminating on 28 April 2024, subject to clauses 2.1 and 2.3 of the lease. By cl 2.1, Shell granted to Eureka a lease of the leased area for the conduct of the business together with other rights and permissions during the period commencing on the commencement date (identified in Schedule 1 as 1 December 2003) and ending on "the earliest of the Remediation End Date, the Head Lease End Time, the End Date, the Alliance End Date and the Agreed End Date". There were, therefore, five potential end dates.
[22]
TfNSW's defence of the primary judge's finding
TfNSW contested that the primary judge erred in finding that the end date was that set out in Item 2 of Schedule 1 of the lease of 28 February 2024, rather than any amended date. TfNSW submitted that any agreement between Eureka, Viva Energy and the other parties to amend the lease was personal, and did not touch and concern the land, so that the end date of the lease remained that set out in Item 2 of Schedule 1 of the lease of 28 April 2024.
TfNSW submitted that the primary judge was correct, for the reasons she gave, for finding that the agreement to amend the end date of the lease was personal to the parties to the agreement and did not operate to alter the term of the lease: at [110], [111] of the judgment. The personal relationship between the parties is not relevant to the ascertainment of the term of the lease: at [112] citing Roads and Maritime Services v United Petroleum Pty Ltd at [25].
TfNSW submitted that the Alliance documents, including the Deed and the Alliance Agreement, contained rights that were personal to the parties to those agreements, which were not interests in land. A hypothetical purchaser of Eureka's leasehold interest could not become a party to the Alliance documents, so as to be able to take advantage of any rights under the Alliance documents.
TfNSW submitted that, even if the Deed were to give rise to an enforceable equity against the lessor (Viva Energy), only Eureka could enforce that equity. The hypothetical purchaser would not, by their purchase (assignment) of the Eureka lease, become a party to the various Alliance arrangements. Hence, the hypothetical purchaser of the Eureka lease could not take the benefit of any of the contractual terms of the Alliance documents, including cl 7 of the Deed that would enable Eureka to enforce the equity for an extended term of the lease.
TfNSW submitted further that, by operation of the Alliance documents themselves, once the site is transferred from Eureka (which must be assumed by the hypothetical transaction), the site would cease to be an Alliance site (cl 7 of the Alliance Agreement) and no longer would be covered by the Alliance documents, including the Deed. Clause 7 of the Deed providing for the extension of the term of the lease would cease to apply to the site.
In these circumstances, there would be no additional value to the hypothetical purchaser beyond the value of the lease based on the term on its face that ends on 28 April 2024. As the hypothetical purchaser could not have taken any benefit of the personal contractual arrangements to extend the term of the lease, that arrangement could not affect the value of the lease.
[23]
The primary judge erred in determining the term of the lease
I find that the term of the lease should be regarded, for the purposes of determining the compensation to which Eureka is entitled, as having been extended beyond the end date of 28 April 2024 set out in Item 2 of Schedule 1 of the lease but not necessarily to the end date of 2 February 2029.
The lessor, Viva Energy, and the lessee, Eureka, agreed that the Deed made on 2 June 2016 constituted a formal amendment of each Affected Site Agreement from the date of the Deed (cl 7(c) of the Deed). An Affected Site Agreement was a Site Agreement entered into prior to the date of the Deed (cl 7(a) of the Deed). A Site Agreement, as defined in cl 1.1 of the Alliance Agreement, which definition applied to the Deed by cl 1.2 of the Deed, includes an Alliance Site's Site Lease. The site of the Shell service station and Coles Express Convenience Store at Dubbo is an Alliance Site and the Eureka lease is an Alliance Site's Site Lease. The Eureka lease is therefore an Affected Site Agreement. The formal amendment of the Eureka lease effected by the Deed was the deletion of the date of 28 April 2024 set out in Item 2 of Schedule 1 to the lease (cl 7(b)).
The consequence of this deletion of the date set out in Item 2 of Schedule 1 was that, for the purpose of the definition of the End Date in the lease, the end date became the Alliance End Date. The End Date and the Alliance End Date thereby became coterminous.
The amendment affected by the Deed accordingly had consequences for the term of the lease, but what those consequences were remained uncertain. Under cl 2.1 of the lease, the term of the lease was from the commencement date to the earliest of five defined dates, three of which were the End Date, the Alliance End Date and the Agreed End Date. When the date of 28 April 2024 was set out in Item 2 of Schedule 1, the End Date was the date set out in Item 2 of Schedule 1. This date of 28 April 2024 was the earliest of the applicable defined dates in cl 2.1 of the lease. However, once that date was deleted from Item 2 of Schedule 1 by the Deed, the End Date became the Alliance End Date. The Alliance End Date is the earliest of three dates set out in cl 3.2 of the Alliance Agreement (which definition is applied to the lease by cl 1.2 of the lease). One of these three dates is a definite date, 2 February 2029, but the other two dates are indefinite and occur on the happening of the event specified in cl 3.2(a) or (b) of the Alliance Agreement. If either of the two events happen before 2 February 2029, the date of the event will become the Alliance End Date. Accordingly, the date that will be the Alliance End Date is uncertain; it will be 2 February 2029 unless one of the events in cl 3.2(a) or (b) occurs earlier, in which case it will be the date of that event.
[24]
Conclusion and orders
TfNSW has established that the primary judge erred in using the DCF method to determine the amount of compensation payable for the market value of Eureka's leasehold interest in the acquired land under s 55(a) and the decrease in the value of Eureka's leasehold in the residue land under s 55(f). TfNSW's appeal should be upheld.
Eureka has established that the primary judge erred in not determining the amount of compensation payable on the basis that the lease had been amended by the Deed between the lessor, Viva Energy, and the lessee, Eureka. Eureka's cross appeal should be upheld.
The proceedings will need to be remitted to the court below for the amount of compensation to be determined.
Eureka should pay TfNSW's costs of the appeal. The error of the primary judge in adopting the DCF method to determine compensation was based on Eureka's evidence and arguments. Conversely, TfNSW should pay Eureka's costs of the cross appeal. Again, the error of the primary judge in not determining compensation on the basis that the lease had been amended by the Deed was based on TfNSW's argument. Whether these counter costs orders will offset each other, so that in effect there will be no order as to costs, can be determined by agreement of the parties or upon assessment.
I propose that the Court make the following orders:
1. The appeal is upheld.
2. The cross appeal is upheld.
3. The orders of Duggan J of 17 May 2021 are set aside.
4. The proceedings are remitted to the Land and Environment Court to be redetermined in accordance with this Court's decision.
5. Eureka Operations Pty Ltd is to pay Transport for NSW's costs of the appeal.
6. Transport for NSW is to pay Eureka Operations Pty Ltd's costs of the cross appeal.
[25]
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: 27 April 2022
TfNSW submitted that the Alliance Agreements did not touch and concern the land, and therefore could not extend the term of the lease:
"TfNSW further says that the Cross-Appellant has not addressed whether the Alliance Agreements, and in particular, the clause which purports to extend the term of the Site Lease by means of an extension to the Alliance End Date, 'touch and concern' the land.
The Trial Judge found that the requirement to operate the business in a certain manner are elements that touch and concern the land. However, the Trial Judge also found that the nature of the interest would be one that would attract an operator subject to the terms of the Site Lease absent the obligations and entitlements conferred by the balance of the Alliance Agreements.
TfNSW submits that clause 3.2 of the Alliance Agreement, which provides for an extension to the Alliance End Date, contains a covenant that is personal in nature and does not 'touch and concern' the land. That covenant is not enforceable by the hypothetical purchaser against Viva (or indeed VER Custodian who is not a party to the Alliance Agreement)."
No authority was cited for the proposition that because the clause in the Alliance Agreements did not touch and concern the land, it did not assist Eureka. I do not agree with TfNSW's submission. The starting point is to unpack it.
The law is concerned with covenants that "touch and concern" the land for a number of reasons. If there is privity of estate, but not privity of contract, then leasehold covenants may be enforced if they touch and concern the land. This is significant where there is an assignment of the reversion by the lessor, or an assignment of the lease by the lessee (or both). Although there is no privity of contract between the assignees, each may enforce a leasehold covenant which touches and concerns the land. The idea underlying TfNSW's submission is that there will be no privity of contract with any hypothetical purchaser, and unless the extension to the Alliance End Date touches and concerns the land, the hypothetical purchaser cannot enforce it.
In principle, if there were a bona fide purchaser which had no notice of the equitable lease, then the purchaser would not be bound. This is part of the point made by the joint judgment in Chan v Cresdon Pty Ltd (1989) 168 CLR 242 at 253; [1989] HCA 63 by reference to a passage from Maitland's Lectures in Equity that "between the contracting parties, an agreement for a lease may be as good as a lease ... But introduce the third party and then you will see the difference". But that issue is never reached.
The principle invoked by Eureka creates a different interest in land, namely, an equitable lease, on the footing that there is a specifically enforceable agreement between lessor and lessee to create a legal lease. Chan v Cresdon Pty Ltd holds that the legal lease is distinct from the equitable lease, contrary to one reading of what was said in Walsh v Lonsdale (1882) 21 Ch D 9. In the present case, the difference is even clearer: Eureka is the lessee under a legal lease with a term expiring on 28 April 2024, as well as claiming to be the lessee under an equitable lease expiring at some later date.
None of this turns on the agreement "touching and concerning" the land. The only question is whether the agreement to create a legal lease is specifically enforceable (in the sense stated in Chan v Cresdon Pty Ltd at 253). If so, then a new interest in property was created, namely, an equitable lease.
Contrary to TfNSW's submissions, this equitable lease is far removed from the personal relationships between lessor and lessee which might be hoped to lead to a renewed lease, which were the subject of comment in Roads and Maritime Services v United Petroleum Pty Ltd (2019) 99 NSWLR 279; [2019] NSWCA 41 at [25]. Eureka had an enforceable right to compel its landlord to grant it a legal lease with an extended term.
It is to be borne in mind that the issue is not whether some purchaser which has in fact acquired Eureka's interest in the land can enforce the agreement between Eureka and Viva Energy. The parties are in dispute because some of Eureka's land has been compulsorily acquired. Section 4 of the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) defines "land" to include any interest in land, and defines "interest in land" to mean (a) a legal or equitable estate or interest in the land, or (b) an easement, right, charge, power or privilege over, or in connection with, the land. The equitable lease with a term extending beyond 28 April 2024 which came into existence because of the specifically enforceable agreement to grant a legal lease was an equitable estate or interest in land and therefore "land" for which just compensation under Division 4 of Part 3 of the statute was required.
As Preston CJ of LEC points out, primary regard must be given to the words of the statute. Those words explicitly extend to equitable interests. Once Eureka establishes a specifically enforceable agreement to grant it a lease for an extended term, then there is an equitable interest in land which engages the statute.
I agree with the orders proposed by White JA.
WHITE JA: This is an appeal from orders of the Land and Environment Court in Class 3 proceedings. The respondent (Eureka Operations Pty Ltd) ("Eureka") is the lessee of a service station in Cobra Street, Dubbo. A part of the service station was compulsorily acquired by the appellant (Transport for NSW) as part of a public works proposal. The works proposed by Transport for NSW involved replacing an existing roundabout at the intersection of Cobra Street and Fitzroy Street with traffic signals. As part of that change, access to and from Eureka's service station was severely curtailed. Prior to the proposed works there were five points of entry and exit to the service station. As a result of the proposed works there was 100% loss of movement from three of those entry and exit points, a 75% loss of movement from the fourth and a 50% loss of movement from the fifth. The joint opinion of the traffic engineers was that the total decrease in the number of customer vehicles that would visit the service station was 58%.
Section 55 of the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) provides:
"55 Relevant matters to be considered in determining amount of compensation
In determining the amount of compensation to which a person is entitled, regard must be had to the following matters only (as assessed in accordance with this Division) -
(a) the market value of the land on the date of its acquisition,
(b) any special value of the land to the person on the date of its acquisition,
(c) any loss attributable to severance,
(d) any loss attributable to disturbance,
(e) the disadvantage resulting from relocation,
(f) any increase or decrease in the value of any other land of the person at the date of acquisition which adjoins or is severed from the acquired land by reason of the carrying out of, or the proposal to carry out, the public purpose for which the land was acquired."
Initially, Eureka made a claim for compensation based upon disturbance (s 55(d)) but by the hearing its claim was based upon s 55(f). It contended that the value of the remainder of its leasehold interest which adjoined and had been severed from the land acquired by Transport for NSW had been decreased by reason of the carrying out of, or the proposal to carry out the public purpose for which the land was acquired. "Land" is defined to include any legal or equitable estate or interest in land (s 4).
The joint opinion of the forensic accountants was that, if the hypothetical purchaser of the leasehold interest was assumed to be subject to the Alliance Agreements, the effect of the public purpose would be to reduce the gross profit of that operator by 23.6%.
Eureka relied upon reports of a real estate valuer, Mr Michael Dyson, and a business valuer and accountant, Mr Andrew Firth.
Mr Dyson opined:
"63. In my experience, the Lessee's interest in a property is generally determined by way of assessing the profit that can be arrived at from the asset. This is either done by:
(a) Amortising the initial year's income (or normalised income to remove one-off or abnormal income or expenditure items) at an appropriate discount rate (or yield) for the term of that income; or
(b) Carry out a "Discounted Cash Flow" of the normalised income for the each year of the tenure or term of the anticipated income which is then discounted at an appropriate Internal Rate of Return (IRR)."
Mr Dyson considered that an "Appropriate Real Estate Discount Rate (Yield or Capitalisation Rate)" was in the order of 6% and that an "Appropriate Real Estate Discount Rate (Internal Rate of Return)" for the property was in the order of 8.5%. He said:
"65. Where the income is purely derived from a real estate asset, the valuation of the asset is generally completed by a Real Estate Valuer who has the experience and expertise to value this type of asset. Should the income be derived from a business, then the market value should be determined by an appropriately qualified business valuer who has experience in assessing the value of the specific type of business.
…
68. Although I have the expertise to assess the value of a business, I do not have the experience to do so. Therefore I have the knowledge as to the appropriate methods and application for carrying out these assessments, I do not have the current experience for doing these assessments."
Mr Firth's principal valuation methodology was referred to as a "profits method" that involved valuing cashflows generated from the site (J [47]).
He said that the value of the leasehold interest was the present value of the cashflows or earnings generated from the leasehold interest. That present value was to be assessed using a discounted cashflow methodology being, he said, the most theoretically sound valuation methodology to value an asset, including an interest in land, given that the asset is worth its future cashflows discounted to recognise the risk of achieving those cashflows and the time span over which they would be achieved. He said that the cashflows used to value a leasehold interest of a service station are the expected net cash inflows (or earnings) generated from the operation of the service station.
Transport for NSW relied upon expert reports of a Mr David Lunney, a real estate valuer, and a Dr Rodney Ferrier, an accountant. Mr Lunney opined:
"Market Rental Valuation Considerations
67. In my experience, the market rental value of a service station is typically assessed by real estate valuers by reference to actual or projected data relating to:
● Fuel throughput volumes;
● Gross margins on fuel sales. The gross projected or maintainable margin is generally determined by reference to historical performance of a particular business and by reference to other relevantly comparable service station businesses analysed; and
● Projected shop sales and typical margins. A broad analysis of service station businesses reflects shop sales typically in the range of $100-$350 per 1,000 litres of fuel throughput. Such analysis also indicates typical gross margins in the range of 30% to 35%.
68. I note that real estate valuers often apply an industry "rule of thumb" in assessing a market rental value in the range of 15% to 25% (net of outgoings) of the actual or projected gross profit which could be generated from the service station business."
Mr Lunney calculated the market rental value to be $173,400 per annum net. This was calculated as 20% of projected gross profit. On the basis that the actual rent payable to the lease was $83,318 per annum, he calculated the profit rent in the "before" scenario as being $90,000 per annum.
Dr Ferrier opined that the appropriate basis for valuing the leasehold interest was using the profit rent method where it is necessary to distinguish between the value of the leasehold interest as an interest in land and the value of the other assets and liabilities which contribute to the earnings of the business conducted from the leasehold land. It was his opinion that the appropriate "before and after valuation methodology" would be as follows:
"(a) assess the 'before' value of a service station business operating from the site for the remaining term of the lease and paying the rent required under the lease using business valuation principles. That valuation will include the value of all assets and liabilities necessary to derive the earnings of a service station business operating from the site;
(b) assess the 'before' value of a service station business operating from the site for the remaining term of the lease and paying market rent using business valuation principles. That valuation will include the value of all assets and liabilities necessary to derive the earnings of a service station business operating from the site which is required to pay market rent for its use of the site;
(c) assess the 'before' value of the leasehold interest as the difference between (a) and (b), on the basis that the only difference between (a) and (b) is attributable to the difference between the rent required under the lease and the market rent, and is therefore attributable only to the leasehold interest;
(d) assess the 'after' values adopting the same approach described in (a) to (c), but assuming the business is impacted by the acquisition and the effect of the public purpose on the residue interest;
(e) assess the reduction in the value of the leasehold interest as the difference between the 'before' and 'after' values of that asset"
Dr Ferrier concluded:
6.21 On the basis of the above calculations, and assuming that the hypothetical purchaser of the business would operate the business as it was operated by Eureka and would be bound by the Alliance Agreements, it is my opinion that:
(a) the decline in the value of Eureka's leasehold interest in land is $42,773; and
(b) the decline in the value of other assets would be wholly attributable to goodwill, because the public works would not be expected to have any effect on the value of tangible assets owned by Eureka.
…
7.6 The following table sets out my assessment of the present value of the future lease payments adopting the annual rent amount as advised by Mr Lunney and assuming that the hypothetical purchaser either:
(a) would not have the benefit or obligations of the Alliance Agreements, and would therefore have a remaining lease term of 4.86 years; or
(b) would have the benefit and obligations of the Alliance Agreements, and would therefore have a remaining lease term of 10 years
Remaining term: Remaining term:
4.86 years 10 years
Annual rent payments $83,318 $83,318
Period of annuity (years) 4.86 10.0
Annuity factor at 45.5%, mid-year discounting 2.22 2.59
Present value $184,851 $215,687
The primary judge concluded:
"[142] On the basis of the findings made above, impact on the value of the Eureka Lease is to be determined on a before and after basis utilising the DCF method on the following basis:
(1) The Eureka Lease term ceases on 28 April 2024;
(2) The purchaser is a networked operator and not an independent operator;
(3) There is no delay in the manifestation of the impact from the carrying out of the Public Purpose and it is to be assumed to have commenced on the acquisition date;
(4) The Eureka earnings represents the earnings capability of a reasonably efficient operator;
(5) The before gross profit is $576,579;
(6) The after gross profit is reduced by 23.6% as appropriate for a networked operator as agreed by the accounting experts as at [4.1.14] of their joint report; and
(7) The appropriate discount rate is that for a networked operator agreed by the accounting experts at [4.1.11] of their joint report at 13.6%. I note that by employing this discount rate the Applicant's claim for Special Value does not arise."
Thus the primary judge assessed the decrease in the value of Eureka's leasehold interest by applying the appropriate discount rate for an assessment of the value of Eureka's business to the reductions in earnings of the business.
Transport for NSW contends her Honour erred because, so it was said, the methodology her Honour adopted reflects not only the decrease in the value of the leasehold interest, but the value of all assets including intangible assets deployed in the business and the reduction of goodwill of the business.
This was a central contention at trial. Her Honour dealt with it in the passages quoted below. In essence, her Honour accepted Mr Dyson's evidence in preference to Mr Lunney's evidence that this was how hypothetical purchasers of Eureka's leasehold interest would value that interest.
The primary judge said:
"[81] In this case, the hypothetical market into which the hypothetical vendor and purchaser are engaging is the assignment (sale) of the Eureka Lease to another who wishes to continue to use the land for the Service Station Use (purchaser). Inherent in that task is the need to ascertain the matters which the hypothetical market would consider affected the value of the Eureka Lease in the before and after scenario.
…
[83] The Respondent, at least by inference, equates a determination of value at market of an interest by reference to an earnings basis as a claim for consequential business losses (which has expressly been precluded from being claimed as a disturbance loss under s 59(f): see United). Such a characterisation is misplaced. The valuation of land by reference to the market asks what a hypothetical buyer and seller would transact the interest for. It has long been accepted that a market for real estate can establish a value for a parcel of land by reference to factors not related to the real property interest being acquired, for example, access to views; proximity to public transport; and positive and negative benefits of being located on main roads. These factors are a feature of the land but are not interests conferred by the title to the land, yet they influence the value placed on the transaction of the real estate. For that reason, it is incorrect to ask what is the value attributed solely to the real estate which comprises the interest. The correct question is what would the market pay to have the benefit of the interest in the land taking into account all of the positive and negative features of that land.
…
[85] How the market determines value may alter depending on the nature of the interest and the particular features and attributes of a particular interest. There is no matter of principle or dictate of the statutory language that precludes the determination of the value of an interest on an earnings-based methodology. The only question is whether such approach, in the particular circumstances of the interest in question, is an approach the market would adopt in the determination of value.
[86] Accordingly, in this case I am not determining as a matter of general valuation principle whether a profit based methodology is appropriate for all commercial leases, but rather asking what the hypothetical market would pay to acquire Eureka's particular leasehold interest in this particular parcel of land in the before and after scenarios. On the evidence adduced and the reasons that follow, I prefer the evidence of the Applicant over that of the Respondent and conclude that the value of the Eureka Lease would be ascertained by referenced to the DCF method as identified by Mr Firth.
…
[90] Whilst on one view the calculation of the cash flow of the business may, in effect, be valuing any number of assets including but not limited to the asset that is represented by the lease, if the (sic) that is how the market values the Eureka Lease, then it matters not how the components that are utilised to derive the value are characterised.
[91] In the circumstances of this case, I prefer the evidence of Mr Firth and Mr Dyson that the market would consider that the attributes of the land available for commercial exploitation by the interest conferred by the Eureka Lease was such that the value of the Eureka Lease would be determined other than by a profit rental method…
…
[96] The use of a profit rent method isolates certain components of this Business (such as fuel throughputs and shop sales) to determine the amount a person would pay as rent and a landlord would accept as rent to enable occupation of the land. That isolation of part profit expense is said to limit the value to just the leasehold interest, which is only an asset of value. The use of the concept of a profit rent may be appropriate where the profit-making use of the land is relatively unrelated to physical and locational attributes of the land (a first floor office use on a high street as an example). However, where the occupation of land that has inherent profit-making features for a particular use, the exploitation of which is largely open to any occupier of that land, I consider that such would have value over and above a profit rent.
[97] This relationship between the features of the Site and the profitability of the Service Station Use is further reinforced by the evidence in this case that the commercial return of this land could be achieved by any reasonably efficient operator of such use and was not achieved by virtue of a particular attribute of the particular operator. Such a link between the business return and the land indicates that the hypothetical market may determine value of the right to occupy the land on the terms in the Eureka Lease is to be ascertained not by reference to a profit rent, but rather the impact on the returns the business that the Eureka Lease permits and requires to be undertaken as a term of its occupancy of the Retained land.
[98] The use of the Eureka earnings to identify the value at market in the before and after scenario is also appropriate. Firstly, of significance, in the circumstances of this case, was the general acceptance by the valuers that the earnings generated by Eureka in the before scenario were an expression of the "highest and best use" dictated by the locational features of the Site. That is, the earning capacity of the Site existed largely independent of the identity of the particular operator of the Service Station Use. This, on the evidence in this case, indicates that the value of the Eureka Lease is that the holder of the Lease is given the right of exclusive possession to carry out the use which enables the earnings to be realised. The value of obtaining the Eureka Lease is reflected in that earning capacity as a whole and not on isolated elements of earnings that reflect in the quantum of profit rent.
[99] Secondly, to the extent that there was a concern that some intangible assets (such as goodwill) were assets that reflected on profit were, to a large extent, taken account of in the use of the Eureka earnings. These asset classes did not change as a consequence of the carrying out of the Public Purpose Works. That is, the intangible assets such as goodwill, brand recognition and the like was accounted for in the calculation of the after scenario. These assets either did not change and would remain neutral or, as was the evidence in this case, continued to positively affect the profitability of the Service Station Use by retaining custom that would have been lost as a consequence of the carrying out of the Public Purpose Works."
These were findings of fact. They raise no question of law.
The primary judge did not value Eureka's business as such. Rather her Honour held that a hypothetical purchaser of Eureka's lease would value the lease by capitalising expected future earnings over the term of the lease, both before and after notice of acquisition of part of the leased land was given.
That does not amount to an error of law. As Basten JA said (with the concurrence of Macfarlan JA and in this respect Payne JA) in Roads and Maritime Services v United Petroleum Pty Ltd (2019) 99 NSWLR 279; [2019] NSWCA 41, where land is used for commercial purposes and that is the best available economic use, the market value of the land may be calculated by capitalising maintainable earnings at an appropriate discount rate (at [20]). That must be particularly so, as the primary judge observed, where it is the location of the land that generates custom for the business, as in the present case. That is equally true of freehold and leasehold interests, although of course the calculation of the value of the leasehold interest will take into account the limit of the remaining term of the lease.
It may be accepted that if the freehold is to be valued by reference to its potential commercial profitability over a period that includes the term of the lease, the leasehold interest cannot be valued on the same basis in the same amount. To this extent I agree with the observations of Preston CJ of LEC at [112]. Otherwise I respectfully do not agree. If the remaining term of the lease is X years I see no reason why, in an appropriate case, the freehold could not be valued by capitalising future maintainable earnings using an appropriate multiplier or discount rate, valuing the leasehold using the same methodology for its term of X years, deducting the latter from the former, and adding the value of the rental income over X years.
It may be that the appropriate hypothetical purchaser in the before and after scenarios should be taken to be a stand alone operator, rather than a member of an integrated network who would have the benefit of trademarks and systems. But that was not a ground of appeal.
It was a question of fact as to whether the market would adopt a discounted cashflow method to assess the value of Eureka's leasehold interest or adopt the method propounded by Dr Ferrier, or some other method.
The evidence accepted by the primary judge was that this was how the market would value the leasehold interest.
The appeal to this court lies only on a question of law (Land and Environment Court Act 1979 (NSW), s 57). Where an appeal lies "on a question of law", it is necessary for the appellant to frame one or more questions that is or are claimed to amount to "questions of law" (Ferella & Anor v Chief Commissioner of State Revenue [2014] NSWCA 378 at [6] (Leeming JA), [22] (White J)). No such question was identified in the notice of appeal. Rather, the notice of appeal contended that the primary judge erred in law in finding that compensation could be awarded under s 55(f) for the decrease in the value of assets that were separate to and beyond its interest in other land, referring to para 90 of the reasons of the primary judge (ground 1). But para 90 of the primary judge's reasons quoted above did not raise a question of law. Rather, it raised a question of fact as to how the market would value the Eureka lease.
Ground 2 of the notice of appeal was that:
"The Court below erred in law in finding that it was 'incorrect to ask what is the value attributed solely to the real estate which comprised the interest.' The Court below ought to have found that was the correct question."
This ground refers to the primary judge's finding at [83] quoted above that the correct question is not what is the value attributed solely to the real estate which comprises the interest, but what the market would pay to have the benefit of the interest in the land taking into account all features of the land. Understood in context, her Honour was saying that the question is how would the market attribute value to the leasehold interest. The answer to that question is a question of fact. Hence no question of law arises under ground 2.
The third ground of appeal was:
"The Court below erred in not applying the Spencer Test* (or an equivalent test) to the determination of the decrease in value of the interest in other land held by the respondent for the purpose of application of section 55(f) of the Just Terms Act. That is especially so as the Court below made the correct finding (at [77]-[80]) that the concept of value in section 55(f) was the same as that considered in that case. (*Spencer v Commonwealth (1907) 5 CLR 418)."
This ground did not frame a question of law. In any event, it is plain that the primary judge did apply the test in Spencer v Commonwealth (1907) 5 CLR 418 but did so applying the opinions of Messrs Dyson and Firth in preference to the opinions of Messrs Lunney and Ferrier. Ground 3 does not raise a question of law.
For these reasons I would dismiss the appeal.
Eureka was the lessee under a registered lease that commenced on 1 December 2003 and expired on 28 April 2024 or on various other possible dates as explained in the reasons of Preston CJ of LEC. The lease was granted to it by the then registered proprietor, The Shell Company of Australia Limited. It changed its name to Viva Energy Australia Pty Ltd ("Viva"). On 8 August 2016 Viva transferred the land to VER Custodian Pty Ltd ("VER"). On 4 August 2016 VER granted a concurrent lease to Viva for a 12-year term commencing 8 August 2016 subject to seven option periods of 10 years each. The transfer and concurrent lease were registered on 23 November 2016. The effect of the grant of the concurrent lease is to create a relationship of landlord and tenant between Viva as landlord and Eureka as tenant for the period in which the two leases overlap (Edgeworth, Butt's Land Law, 7 ed para 7.340).
It is an agreed fact that:
"If at the expiry date of 7 August 2028 a site lease (such as the Eureka Lease) would continue to be in place, Viva was required under clauses 15.4 and 15.5 of the Concurrent Lease to exercise the next option term and where an option was exercised in those circumstances, the parties were required to document the lease for the option term by way of a variation of the Concurrent Lease for the period of the option term."
Viva was a party to the Alliance Agreement and the Alliance Project Agreements Amendment and Restatement Deed whose relevant provisions are summarised by Preston CJ of LEC, and the effect of which included that Viva agreed to extend the term of Eureka's lease to 2 February 2029 but with the possibility, as explained by his Honour that the term might end sooner.
I agree with Preston CJ of LEC and Leeming JA that these agreements for the extension of Eureka's lease are specifically enforceable and entitled Eureka to an equitable leasehold interest in the acquired land for the extended term. The primary judge erred in concluding that Eureka was entitled to compensation on the basis that its lease term ceased on 28 April 2024.
For these reasons I would dismiss the appeal with costs, allow the cross-appeal with costs and remit the proceedings to the Land and Environment Court to be redetermined having regard to the extension of the term of Eureka's lease to 2 February 2029 subject to the possibility of earlier termination as explained in the reasons of Preston CJ at LEC.
PRESTON CJ OF LEC: This appeal and cross appeal concern the compensation payable to a lessee for the compulsory acquisition of part of the land leased by the lessee. The central issue in the appeal is whether the primary judge erred in law in assessing compensation using a particular valuation method, a discounted cash flow (DCF) method, to determine the diminution in the net present value of the potential earnings of the lessee's business operated on the land. The central issue in the cross-appeal is what is the term of the lease that should be used to determine the compensation payable to the lessee.
In the present case, the inquiry required by the statutory provision of s 55(f) is to assess "any decrease…in the value of any other land of a person at the date of acquisition which adjoins…the acquired land" that occurs "by reason of the carrying out of, or the proposal to carry out, the public purpose for which the land was acquired". The latter phrase is the cause, the former phrase is the consequence.
Starting with the cause, s 55(f) makes clear that the cause must be "the carrying out of, or the proposal to carry out, the public purpose for which the land was acquired" and not the acquisition of the land itself. The latter cause is used to determine loss attributable to disturbance (see s 59(1) of the Acquisition Act) but the former cause is used to determine injurious affection under s 55(f): see Almona Pty Ltd v Roads and Traffic Authority (NSW) (2008) 160 LGERA 375; [2008] NSWLEC 112 at [60]-[61]; Brock v Roads and Maritime Services (2012) 191 LGERA 267; [2012] NSWCA 404 at [40]; Maloney v Roads and Maritime Services at [76]-[79].
Turning to the consequence, the term "land" is defined to include "any interest in land": s 4(1) of the Acquisition Act. It includes, in this case, Eureka's leasehold interest in this site. Thus, the reference in s 55(f) to "the acquired land" will, in this case, refer to the corner of the site that was acquired "freed and discharged" from Eureka's leasehold interest in that land. The reference in s 55(f) to "any other land" will, in this case, refer not only to the residue of the site (the non-acquired land) but also Eureka's leasehold interest in the residue land.
Putting the cause and the consequence together, the assessment task is to determine whether the carrying out of, or the proposal to carry out, the public purpose for which the land was acquired, here being the intersection upgrade works, has caused any decrease in the value of Eureka's leasehold interest in the residue land (the non-acquired land).
In the present case, the amount of compensation to which Eureka was entitled was to be determined by having regard to two of these matters, in s 55(a) and (f) of the Acquisition Act. The parties' valuers used the before and after approach to assess the amount of compensation to which Eureka was entitled having regard to these two matters of the market value of the land and injurious affection. The valuers differed, however, on the particular before and after approach that was appropriate to be used in the circumstances.
Eureka's valuer, Mr Dyson, and accountant, Mr Firth, applied a discounted cash flow (DCF) or net present value methodology to the earnings of the Eureka business over the remaining term of the lease in the before and after scenarios in order to determine the decrease in value of the leasehold interest. TfNSW's valuer, Mr Lunney, and accountant, Dr Ferrier, used a profit rent approach to determine the decrease in value of the leasehold interest by comparing the passing rent under the lease (which did not change in the before and after scenarios) with the market rent (which did change in the before and after scenarios due to the capacity of the site to generate profit).
The primary judge accepted that the appropriate valuation method was Eureka's DCF method rather than TfNSW's profit rent approach: at [86], [103] of the judgment. TfNSW contended that the primary judge erred in law in doing so.
TfNSW submitted that although a leasehold interest in land may enable the carrying out of a business on the land, the lease and the business are separate and distinct from each other. The assets of a business will include, but be more extensive than, any lease that enables the business to operate on the land. Business assets will usually include goodwill and stock in trade, and in the case of a service station, there are likely to be substantial physical assets such as underground fuel storage tanks, fuel pumps and associated plant and equipment.
Furthermore, TfNSW submitted, merely transferring the lessee's interest in any lease would not transfer any assets of the business. Holding a lease by itself does not generate any profits. There is a need to operate a business on the leased premises, using and applying all necessary tangible assets, intangible assets, and human resources to generate profits.
TfNSW made a further submission particularly directed to the third ground of appeal that the primary judge incorrectly applied the Spencer test. Both the valuers and the primary judge sought to use a before and after approach to determine the amount of compensation. This involved valuing the whole of the site before the acquisition and the residue land after the acquisition. The difference in approach between TfNSW on the one hand and Eureka and the primary judge on the other hand concerned the assets being valued and the market to be used to value the assets in the before and after scenarios.
TfNSW submitted that the asset to be valued is only Eureka's leasehold interest in the land and the relevant market to value that leasehold interest is the market in lessees' interests in leases comparable to the Eureka lease. The asset to be valued is not the service station and convenience store business that Eureka conducted on the land and the relevant market is not that relating to the purchase and sale of service station businesses, whether with or without an assignment of any lease. The relevant market is also not that relating to lessors and respective lessees negotiating the market rent for premises with each other.
In this regard, TfNSW submitted, the primary judge's reliance on the evidence of Eureka's accountant, Mr Firth, that Eureka's leasehold interest in the land could be valued as a type of property which certain international accounting standards referred to as Trade Related Properties (TRP), was misconceived. The relevant market was not TRPs generally or a TRP with a service station and convenience store business particularly. Valuation of either kind of TRP was unauthorised under s 55(f) of the Acquisition Act, as the TRP, being the Eureka business operated on the site, included but was not limited to Eureka's leasehold interest in the land.
TfNSW submitted that, in order to determine the market value of Eureka's interest in the land that is compensable under s 55(a) and (f) of the Acquisition Act, the Spencer test required asking what the willing but not anxious incoming lessee and Eureka would agree as the amount to be paid to Eureka for the purchase (assignment) of Eureka's leasehold interest in the land in both the before and after scenarios. This transaction, required to be assumed under the Spencer test, is not the transaction involved in the sale of a TRP, which involves the sale of the land and the business conducted on the land and not just the leasehold interest in the land. To apply the Spencer test to the sale of a TRP, in both the before and after scenarios, in order to establish the difference in values for the purposes of s 55(f) is to apply the wrong test.
TfNSW submitted that, in contrast, the approach that it had put forward, the profit rent approach, did ask the correct question. The profit rent approach advanced by TfNSW's accountant, Dr Ferrier, and adopted by TfNSW's valuer, Mr Lunney, involved a comparison of the passing rent payable under the lease with the market rent. If the passing rent under the lease was equal to or greater than the market rent, the incoming lessee would not pay anything to the outgoing lessee because, absent a monopoly on premises of that kind, they would go to other premises and pay market rent to the lessor (without paying any premium). However, if the passing rent was less than the market rent, the incoming lessee would pay for the benefit of paying less than market rent for the remainder of the term of the lease. This difference between the higher market rent and the lower passing rent is termed the profit rent, and hence, this approach to valuation is referred to as a profit rent approach. The profit rent approach derives the market value of the lease to the vendor lessee and a purchaser lessee. Importantly, the profit rent approach only values the leasehold interest in the land, and not in addition the value of any business operated on the land under the lease. The approach therefore accords with the valuation required by s 55(a) of determining the market value of the interest in the acquired land and by s 55(f) of determining the decrease in the value of the residue land.
The primary judge found that in the hypothetical market "the value of the Eureka Lease would be ascertained by reference to the DCF method as identified by Mr Firth" (at [86]). More particularly, the primary judge found that "the appropriate valuation methodology is a before and after assessment of the value of the Eureka Lease having regard to the DCF of the Service Station Use adopting the Eureka EBITDA as the indication of the base earnings capacity the market would utilise to determine that value" (at [103]).
Eureka submitted that this reasoning reveals that the primary judge did value only Eureka's leasehold interest, and not also the Eureka business, but that the method of valuation that the primary judge found the market would use to determine the value of the leasehold interest was the DCF of the business in the before and after scenarios.
Eureka submitted that this approach did not reveal any error of law. The primary judge did not assume the hypothetical purchaser was buying the business. Rather, the hypothetical purchaser was acquiring the leasehold interest and its value, in the before and after scenarios, was to be determined by reference to the amount of profit that the hypothetical purchaser could make from the leased premises.
Eureka submitted that the DCF approach adopted by the primary judge did not result in compensation being paid for assets in addition to the leasehold interest in the land. The primary judge was alert to this issue. In [90], the primary judge found:
"Whilst on one view the calculation of the cash flow of the business may, in effect, be valuing any number of assets including but not limited to the asset that is represented by the lease, if the that is how the market values the Eureka Lease, then it matters not how the components that are utilised to derive the value are characterised."
Eureka submitted further that the DCF approach did not result in compensation being paid for goodwill, because the hypothetical purchaser (which the primary judge found would be a well resourced network operator: at [120]) would bring their own goodwill to the site, rather than purchasing Eureka's goodwill.
Eureka submitted that, even if the DCF approach did value goodwill, stock in trade and other assets of the business, these assets were equal inputs in both the before and after scenarios, so that no compensation was attributable to them. However, even if this approach did amount to an error on a question of law, it was not an error that vitiated the primary judge's determination of compensation: Sydney Water Corporation v Caruso at [8], [25]-[26], [136] and [199].
In response to TfNSW's submissions on the profit rent approach, Eureka accepted that the profit rent approach is a traditional approach to the valuation of a leasehold interest. The primary judge found, however, that the profit rent approach would not in fact have been applied by the market to value the hypothetical transaction involving the transfer of the leasehold interest in this case. Eureka submitted that the finding was open to the primary judge on the evidence.
To award compensation in an amount that is derived by valuing the earnings of the business conducted on the land, which are generated by using not only Eureka's leasehold interest in the land but also other assets of the business, is to determine compensation not in accordance with s 55 of the Acquisition Act. The compensation to which Eureka is entitled under s 55(a) and (f) is limited to the market value of the leasehold interest in the acquired land and the decrease in the value of the leasehold interest in the residue land. To award compensation for more than these matters is contrary to s 55(a) and (f) and an error of law.
This error is not what Eureka suggested, but rejected, as having occurred of awarding compensation for the acquisition of the business, goodwill, intellectual property rights or other assets of the business. These assets were not compulsorily acquired so that no compensation should be payable in respect of them. Yet, this is what has occurred by application of the DCF method. The earnings of the business that are used to determine the net present value in the before and after situations are generated by the use of the tangible and intangible assets of the business conducted on the land, and not just occupation of the land under the lease. The difference in these net present values before and after the acquisition of the land fixes the amount of compensation. Hence, the amount of compensation is derived from the earnings generated by all of the assets of the business and not just the lease.
This error also cannot be said not to be material and vitiating. Eureka argued that the primary judge had found that to the extent that some intangible assets, such as goodwill or intellectual property rights, were reflected in the earnings of the business, this was immaterial because these assets were the same in the before and after scenarios, not changing as a consequence of the carrying out of the public purpose for which the land was acquired: at [99] of the judgment. That argument is both legally and factually wrong.
Legally, the net present value of the earnings of the business derived by the DCF method will reflect the contribution of the intangible assets of the business, which should not be included, for the reasons given above. The resultant valuation is therefore not one that accords with s 55 of the Acquisition Act. Factually, as TfNSW submitted, the assumption that the intangible assets, and their contribution to the net present value of the earnings, will not change in the before and after scenarios is without evidentiary foundation and counter-intuitive. The goodwill of the business will be less in the after scenario than in the before scenario, as a result of the decrease in access to the site and the number of customers, and hence the earnings of the business, by reason of the carrying out of the public purpose. The different contributions of the intangible assets to the earnings of the business in the before and after scenarios will thereby differentially affect the net present values of the earnings in the before and after scenarios and the difference between these net present values, and hence the compensation payable.
There is a further error of law involved in the primary judge's use of the DCF method. The choice of the DCF method to value Eureka's leasehold interest was driven by the belief that this interest in land could be valued as a trade related property (TRP). This was also in error. The Eureka lease itself was not a TRP. Eureka's accountant Mr Frith, defined TRPs as "individual properties, such as hotels, fuel stations and restaurants, that usually change hands in the marketplace while remaining operational. These assets include not only land and buildings, but also fixtures and fittings (furniture, fixtures and equipment) and a business component made of intangible assets including transferrable goodwill" (Report of Andrew Frith [5.10]). Any sale of a TRP will be of both the land with its buildings and improvements and the business conducted on the land. The value of a TRP might well be able to be derived by using the DCF method, calculating the net present value of the potential earnings of the business (trade) conducted on the property, but that value necessarily will be of both the land and its buildings and improvements and the business conducted thereupon.
In the present case, only Eureka's leasehold interest in the land, and not the land itself, with its buildings and improvements, such as fuel equipment and shop, or the business conducted on the land, is to be valued for the purpose for determining compensation under s 55 of the Acquisition Act. Thus, the DCF method for valuing a TRP was not the appropriate method to value only Eureka's leasehold interest in the land. It resulted in an award of compensation greater than the amount of compensation to which Eureka was entitled under s 55 of the Acquisition Act. This was an error of law.
Put another way, the capacity of the land to support a profitable commercial operation, such as the Eureka business, is reflected in the market value of the land, which is enjoyed by the owner of the fee simple estate. The market value of an interest less than the fee simple estate, such as Eureka's leasehold interest in the land, is limited to the value of that interest, which necessarily will be less than the value of the fee simple estate. The leasehold interest cannot be valued on the basis of future business expectations that depend on an interest other than the leasehold interest. As Basten JA observed in Roads and Maritime Services v United Petroleum Limited at [52]:
"It is also possible that a claim may be capable of characterisation under more than one provision, depending upon the circumstances. However, it would not be consistent with the evident purpose of the legislation for the full market value of commercial land to be assessed by reference to its potential commercial profitability where there was a single owner of the fee simple estate, but for the same compensation to be awarded twice in circumstances where there was a division of legal interests between a landlord and a tenant, where the tenant carried on the relevant business by way of actual use of the land. That is not to say that the tenant will not obtain separate compensation for the acquisition of its interest in the land; it is, however, to say that the tenant will only be compensated for the loss of its interest in the land and not for the loss of its future business expectations which would depend upon an interest it did not hold at the date of the compulsory acquisition."
This erroneous belief that the Eureka lease could be valued as a trade related property also led to the primary judge's error in the choice of the hypothetical market in which the assumed transaction of Eureka's leasehold interest would take place. The relevant market was not that for the sale and purchase of trade related properties with service station and convenience store businesses. Instead, the relevant market that should have been assumed, in order to value Eureka's leasehold interest in the land, was the market in lessees' interests in leases comparable to the Eureka lease. That involved a misapplication of the Spencer test, which was an error of law.
For these reasons, the primary judge erred in law in determining the amount of compensation to which Eureka was entitled using the DCF method, which increased the amount of compensation beyond what Eureka was entitled to be awarded under s 55 of the Acquisition Act.
TfNSW's appeal should be upheld.
The Remediation End Date was defined to mean the date specified in a notice given under cl 2.3 (see definition in cl 1.1 of the lease). Clause 2.3 only applied if the site was leased to Shell at the commencement date. It was not. Hence, no notice could be given at the date of acquisition of the land under cl 2.3.
The Head Lease End Time was also not applicable to this lease, as at the commencement date Shell owned the fee simple estate and the site had not been leased to Shell. There could only be a Head Lease, and hence a Head Lease End Time, if the site had been leased to Shell at the commencement date (see definitions of these terms in cl 1.1 of the lease).
The End Date was applicable and was defined as "the date, if any, set out in Item 2 of Schedule 1, and if no date is set out in Item 2 of Schedule 1, means the Alliance End Date" (cl 1.1 of the lease). Item 2 in Schedule 1 did set out an end date of 28 April 2024.
The Alliance End Date was not defined in the lease. The Agreed End Date was defined to be "the date, if any, specified in a Network Planning Agreement as the date when the Site should cease to be an Alliance Site". The terms "Network Planning Agreement" and "Alliance Site" were not defined in the lease. Clause 1.2 of the lease, however, applied the definitions in the Alliance Agreement to the lease, unless the context requires otherwise. The Alliance Agreement was defined to be "the agreement of that name between SCO [Shell], Shell Gas [Shell Gas (LPG) Australia Pty Ltd], CSA [Coles Supermarkets Australia Pty Ltd], CMFL [Coles Myer Finance Ltd] and CML Sub [Eureka], as amended from time to time" (cl 1.1 of the lease). The conformed copy of the Alliance Agreement as of 1 March 2019 (the copy of the Alliance Agreement as at the date of the lease was not in evidence) defined "Alliance End Date" to have the meaning given in cl 3.2 (cl 1.1 of the Alliance Agreement). Clause 3.2 of the Alliance Agreement (as of 1 March 2019) defined the Alliance End Date to be the earliest of three dates:
1. the day on which the Alliance comes to an end under cl 29 of the Alliance Agreement;
2. if Eureka gives Viva Energy [Viva Energy Australian Pty Ltd, the new name of Shell] a notice under cl 20.1(b) of the Alliance Agreement, the termination date defined in cl 20.1(c) of the Alliance Agreement; or
3. 2 February 2029.
The Alliance Agreement did define the "Agreed End Date" but as it was in different terms to the definition in the lease, the lease definition prevailed (see cl 1.2 of the lease).
The upshot was, at the commencement date of the lease, the applicable end date of the lease was the end date set out in Item 2 of Schedule 1 of the lease of 28 April 2024.
This end date was sought to be changed in 2016. Shell had by then changed its name to Viva Energy Australia Pty Ltd (Viva Energy). On 2 June 2016, Viva Energy, Eureka and other parties, being Viva Energy Gas Pty Ltd, Coles Supermarkets Australia Pty Ltd, Coles Group Finance Limited and Coles Group Ltd, executed the Alliance Project Agreements Amendment and Restatement Deed (the Deed). Clause 7 of the Deed amended the end date in the "Site Agreements". A "Site Agreement" was defined in the Alliance Agreement as of 1 March 2019 (which definition applied to the Deed: see cl 1.2 of the Deed) to mean "in relation to an Alliance site, that Alliance Site's Site Lease or Site Licence (as applicable)". The Eureka lease was a Site Agreement. Clause 7 of the Deed provided:
"(a) The parties acknowledge that each Site Agreement entered into prior to the date of this Deed (defined in Affected Site Agreement) contains a definition of 'End Date' that means the date, if any, set out in Item 2 of Schedule 1, and if no date is set out in Item 2 of Schedule 1, means the Alliance End Date.
(b) Notwithstanding the existence of a date in Item 2 of Schedule 1 of any Affected Site Agreement, the parties agree that:
(i) save as provided for in clause 7(b)(ii) below, any date in Item 2 of Schedule 1 of a Site Agreement shall be deleted; and
(ii) if the relevant Site Agreement is in respect of a Site which is the subject of a Head Lease which is otherwise leased or licensed from a third party to Viva Energy, the 'End Date' shall remain the date set out in Item 2 of Schedule 1 of the relevant Site Agreement, or if there is no date specified in Item 2 of Schedule 1 of the relevant Site Agreement, shall, be the earlier of the Alliance End Date and the 'Head Lease End Time,
and each Site Agreement will be amended accordingly.
(c) The parties agree that in consideration of the mutual promises of the parties, this Deed constitutes a formal amendment to each Affected Site Agreement from the date of this Deed."
Eureka submitted that the intended effect of cl 7(b)(i) of the Deed was for the end date of 28 April 2024 set out in Item 2 of Schedule 1 of the Eureka lease, to "be deleted" and for the Eureka lease to "be amended accordingly". The parties agreed in cl 7(c) that the Deed constituted a formal amendment to the Eureka lease from the date of the Deed, which was said to be 2 June 2016.
Eureka submitted that this amendment of the Eureka lease by the deletion of the end date specified in Item 2 of Schedule 1 did not cause the lease to become void for uncertainty, because of the definition of "End Date" in the lease and the terms of cl 2.1 of the lease. The End Date was defined to be the date set out in Item 2 of Schedule 1 if a date is set out, but if no date is set out in Item 2 of Schedule 1 it is the Alliance End Date. The amendment of the Eureka lease by the Deed deleted the end date that was set out in Item 2 of Schedule 1, with the consequence that the end date thereupon became the Alliance End Date. The Alliance End Date, as defined in cl 3.2 of the Alliance Agreement as of 1 March 2019, was the earliest of the three dates specified. Eureka submitted that, in the absence of either the Alliance coming to an end or Eureka giving Viva Energy a notice under cl 20.1(b) of the Alliance Agreement, the earliest date would be 2 February 2029. The consequence, Eureka submitted, was that for the purposes of cl 2.1 of the Eureka lease, the term of the lease was from the commencement date of 1 December 2003 to the amended end date that would be 2 February 2029.
Accordingly, Eureka submitted that, at the date of acquisition of the land, Eureka held an interest in the acquired land of a lease for a term ending on 2 February 2029. The primary judge was in error in finding that the term of the lease remained that set out in Item 2 of Schedule 1 of 28 February 2024.
TfNSW submitted in the alternative that, even if the amendment agreed in the Deed to delete the end date set out in Item 2 of Schedule 1 to the lease did touch and concern the land and effect an extension of the term of the lease, the end date of the lease would not necessarily be 2 February 2029, but could be earlier. The amendment agreed in the Deed operated on the definition of End Date in the lease. By deleting the date set out in Item 2 of Schedule 1, the End Date became the Alliance End Date. The Alliance End Date, as defined in cl 3.2 of the Alliance Agreement, was the earliest of three dates. One of these three dates was definite, 2 February 2029, but the other two dates depended on the happening of specified events. If either of the specified events were to occur before 2 February 2029, the date of that event would become the Alliance End Date.
TfNSW submitted that regard must also be had to the terms of cl 2.1 of the lease itself, which fixes the term of the lease to be until the earliest of five defined dates. One of those five dates is the End Date. The amendment effected by the Deed changed the date that will be the End Date to be the Alliance End Date as just explained. As the site was not leased to Shell at the commencement date of the lease, there was no Head Lease and hence the Head Lease End Time was still not applicable. Equally, because the site was not leased to Shell at the commencement date, no notice could be given under cl 2.3 of the lease to permit Shell to comply with any obligations under a head lease in respect of any contamination. Hence, the Remediation End Date was still inapplicable.
This left the Agreed End Date. This was defined to be "the date, if any, specified in a Network Planning Agreement as the date when the Site should cease to be an Alliance Site". Although there was not, at the date of acquisition, a Network Planning Agreement specifying the date when the site should cease to be an Alliance Site, TfNSW submitted that the hypothetical purchaser would need to assess the risk that such a Network Planning Agreement might be made, which would trigger a date as the Agreed End Date. This date could be earlier that 2 February 2029.
A Network Planning Agreement, as defined in cl 8.7 of the Alliance Agreement, is a recommendation that is notified by the Network Planning Committee to Viva Energy and Eureka under cl 8.6 and is accepted in writing by their representatives. The Network Planning Committee has a range of functions under the Alliance Agreement, including recommending that any site should cease to be an Alliance Site and the date when it should cease to be an Alliance Site (cl 8.2(g) of the Alliance Agreement). By cl 9.2, where the Network Planning Committee recommends, and Viva Energy and Eureka accept the recommendation under cl 8.7, that an Alliance Site should cease to be an Alliance Site, that Alliance Site ceases to be an Alliance Site on its Agreed End Date. That is to say, the date on which the Network Planning Committee recommends, and Viva Energy and Eureka accept, as the date when the site should cease to be an Alliance Site will become the Agreed End Date.
TfNSW submitted that in circumstances where a leasehold interest in an Alliance Site is sold to a third party (the hypothetical transaction that must be assumed), it is inevitable that the Network Planning Committee would not want that site to continue to operate as an Alliance Site. This is especially so if the site were to be sold to and operated by a well-resourced network operator, who would be in competition with Shell and Coles Express. It should be assumed, therefore, that the Network Planning Committee would recommend, and Viva Energy and Eureka would accept, that the site should cease to be an Alliance Site and the date when it should cease to be an Alliance Site would be soon after the assumed transaction, which would become the Agreed End Date. This is likely to be well before 2 February 2029.
In these circumstances, TfNSW submitted that the end date for the lease could be either the Alliance End Date or the Agreed End Date, but under either the actual end date could be before 2 February 2029. Under the Alliance End Date, one of the two alternative terminating events could occur before the specified date of 2 February 2029. Under the Agreed End Date, the Network Planning Committee might recommend and Viva Energy and Eureka might agree on a date when the site should cease to be an Alliance Site and this date could be before 2 February 2029.
It cannot be said, therefore, that Eureka held a lease for a term that definitely would terminate on 2 February 2029, but instead for a term that would terminate at any point between the date of acquisition of the land and 2 February 2029. TfNSW submitted that this uncertainty as to the end date of the lease would affect what the hypothetical purchaser would pay for the lease in the hypothetical transaction. The market would not value the lease on the basis that it was for a certain term ending on 2 February 2029. Instead, the market would have regard to the risk of the lease terminating prior to the date (and potentially prior to 28 April 2024) and assess its value accordingly.
In conclusion, TfNSW submitted that the cross-appeal should fail because the amendment agreed in the Deed was personal and did not effect a change of the term of the lease. In the alternative, if the cross-appeal were to be upheld, the matter should be remitted to the court below for an assessment of the market value having regard to the risks regarding the term of the lease.
In turn, this Alliance End Date might or might not become the end date of the term of the lease for the purpose of cl 2.1 of the lease. It will depend on whether another of the defined dates in cl 2.1 of the lease occurs before the Alliance End Date. The only other defined end date that could occur beforehand is the Agreed End Date.
The Agreed End Date is defined in cl 1.1 of the lease to be "the date, if any, specified in a Network Planning Agreement as the date when the Site should cease to be an Alliance Site". Currently, there is no Network Planning Agreement specifying a date when the site the subject of the Eureka lease should cease to be an Alliance Site. Nevertheless, on the assumption that there were to be a hypothetical sale of the Eureka lease, which is an Alliance Site's Site Lease, it might further be assumed that the Network Planning Committee might recommend, and Viva Energy and Eureka might agree, that the site should cease to be an Alliance Site and the date when it should cease to be an Alliance Site, under cl 8.7 of the Alliance Agreement. The site would cease to be an Alliance Site on its Agreed End Date (cl 9.2 of the Alliance Agreement). This Agreed End Date might be before the Alliance End Date. If so, the Agreed End Date will become the date on which the lease will end for the purposes of cl 2.1 of the lease. This adds to the uncertainty about the term of the lease.
Notwithstanding this uncertainty as to the precise date on which the lease will terminate, as a result of the amendment of the lease by the Deed, neither party contended that the lease thereupon became void for uncertainty. There is a date on which the lease will terminate, which will be at the latest 2 February 2029, but this date might be earlier than 2 February 2029.
The next question is whether this amendment of the lease by the Deed is to be used to determine the amount of compensation to which Eureka is entitled under s 55 of the Acquisition Act. I consider it should be. Although this amendment of the lease, by changing the end date of the lease from that set out in the lease, was not properly executed or registered, it nevertheless created an equitable term of the lease that extended beyond the date of 28 April 2024 set out in Item 2 of Schedule 1 of the lease until either the Alliance End Date or the Agreed End Date, whichever occurred earlier. As Mason J held in Progressive Mailing House Pty Ltd v Tabali Pty Ltd at 27, this equitable term arose by virtue of the doctrine in Walsh v Lonsdale and the maxim that equity considers as done what ought to be done. The parties agreed that the Deed effected a formal amendment of the lease. Eureka, as a party to the agreement to amend the lease, which agreement was specifically enforceable, could obtain against the other party, Viva Energy, who was the lessor, all the remedies which would be available to Eureka if the amendment of the lease had been properly executed: Dockrill v Cavanagh (1944) SR (NSW) 78 at 83 cited in Progressive Mailing House Pty Ltd v Tabali Pty Ltd at 26-27. That amendment was to delete as the end date of the term of the lease the date of 28 April 2024 set out in Item 2 of Schedule 1 of the lease, which had the effect of fixing another end date, being the earlier of the Alliance End Date and the Agreed End Date.
The compensation to which Eureka was entitled needed to be determined as if the amendment of the lease that the parties had agreed to had been properly executed. Eureka was entitled to be compensated for the adverse effect of the acquisition of the land on this leasehold interest in the land.
The primary judge was therefore in error in determining the compensation to which Eureka was entitled on the basis that there had been no amendment of the term of the lease, rather than on the basis that there had been an extension of the term of the lease. To this extent, Eureka's cross appeal should be upheld. However, the end date will not necessarily be 2 February 2029, as Eureka contended, but could be an earlier date. An earlier date could arise for the purpose of cl 2.1 of the lease if either of the events specified in cl 3.2(a) or (b) of the Alliance Agreement were to occur before the date of 2 February 2029 specified in cl 3.2(c), or a Network Planning Agreement were to be made specifying a date when the site should cease to be an Alliance Site, which would set an Agreed End Date, which date might be earlier than any Alliance End Date.
This uncertainty in the term of the lease will need to be taken into account in determining the amount of compensation payable for both the market value of Eureka's leasehold interest in the acquired land under s 55(a) and the decrease in the value of Eureka's leasehold interest in the residue land under s 55(f). The market would not value the lease as having a certain term until 2 February 2029, but instead as having an uncertain term that might extend up to 2 February 2029 but might be an earlier date. That assessment of the value of the lease has not yet been done. The proceedings will need to be remitted to the court below for this assessment to be done.