Valuer-General of New South Wales v In Adam Pty Limited

HEADNOTE The owner of land occupied by a heritage restricted building appealed against land values determined by the Valuer-General for 2006, 2007 and 2008. Section 14G(1)(b) of the Valuation of Land Act 1916 required the land value of land with heritage restricted buildings to be determined on the assumption that all improvements on the land were new without any deduction for their actual condition. The Commissioners in the Land and Environment Court found that a newly built copy of the heritage restricted building would cost $1,666,203 more than a new, non-heritage building, with the same net lettable area. Biscoe J held that the additional cost reduced the land values. The Valuer-General sought leave to appeal claiming that Biscoe J had erred in law in allowing this deduction. At the conclusion of the hearing the Court dismissed the application with costs, with reasons to be given later. HELD: Publishing the Courts' reasons, Biscoe J did not err in law in allowing this deduction and the orders pronounced by the Court orally on 28 November 2011 should be confirmed.

Judgment 1ALLSOP P : The reasons of Handley AJA, with which I agree, reflect in substance my reasons for joining in the orders made on 28 November 2011. 2HANDLEY AJA : On 28 November 2011 this Court dismissed with costs an application by the Valuer-General (V-G) for leave to appeal from the decision of Biscoe J [2011] NSW LEC 55 and the President announced that the Court's reasons would be given later. The Judge had allowed appeals by the owner pursuant to s 56A of the Land and Environment Court Act (the Court Act) from valuations of 223-225 Liverpool Street Darlinghurst for the base dates of 1 July 2006, 2007 and 2008. 3The property was heritage restricted and had to be valued under the special provisions in s 14G of the Valuation of Land Act . Subsection (1), as it applied before Biscoe J, provided: "(1) Land that is heritage restricted on the date by reference to which its land value is to be determined is to have its land value determined on the basis of the following assumptions: (a) that the land may be used only for the purpose, if any, for which it was being used when the value is determined, (b) that all improvements on that land when the value is determined may be continued and maintained in order that the use of that land as referred to in para (a) may be continued, (b1) that all improvements referred to in para (b) on that land are new (without any deduction being made because of their actual condition), (c) that no improvements, other than those referred to in para (b), may be made to or on that land." 4The owner's appeals from the relevant valuations were heard in the first instance by Commissioners. They allowed the appeals in part, but rejected the allowance claimed for the increased cost of erecting a new heritage building on the land. The owner's appeals to Biscoe J, pursuant to s 56A of the Court Act, were limited to questions of law. 5Biscoe J held that the assumption in s 14G(1)(b1) that the improvements on heritage restricted property were new required the valuer to allow for the increased cost of constructing those improvements over the cost of erecting a modern building of the same size with the same net lettable area (nla). The allowance significantly reduced the land values. 6A further appeal to this Court, also limited to questions of law (ibid s 57(1)), lies only by leave of this Court (ibid s 57(4)(c)). 7The V-G's application for leave to appeal challenged the legal basis of the allowance for the increased cost of construction. It was filed on 1 June following a notice of intention. Because of the public importance of the question the hearing was expedited and fixed for 28 November. When the case was called on the Court was informed by Mr Ayling SC, who appeared with Mr J Maston for the V-G, that on 24 November the Valuation of Land Amendment Bill 2011 was introduced into the House of Assembly and having passed both Houses by 26 November was awaiting Royal Assent. 8The Bill would amend s 14G(1) by adding a new paragraph (d) and a new subs (1A) to deny, with general retrospective effect, any deduction for the increased cost of constructing a "new" heritage building. Transitional provisions would exclude the cases before the Court and others in which legal proceedings had already been commenced. The Court was informed by Mr Ayling that there were between 5 and 10 other cases which would not be affected by the Bill when it became law. 9The Bill greatly diminished the importance of the question but since a number of cases were still affected the Court heard full argument. 10This is the third time that s 14G, introduced by the Valuation of Land Amendment Act 2000, has come before this Court. The first case, Commonwealth Custodial Services Ltd v V-G [2007] NSWCA 365, 156 LGERA 186 concerned the valuation of the land occupied by the Commonwealth Bank building at the corner of Pitt Street and Martin Place Sydney. The owner's appeal from the decision of Talbot J [2006] NSWLEC 775 was dismissed. 11The second case V-G v Commonwealth Custodial Services [2009] NSWCA 143, 74 NSWLR 700 involved the same property for later years. The Court dismissed appeals by the V-G from the decision of Biscoe J [2008] NSWLEC 310 who had held that the assumption in s 14 G(1)(b) that "all improvements on that land may be continued and maintained" did not require the valuer to assume that the improvements were new. 12McClellan CJ at CL, who gave the principal judgment in this Court, held that the valuer was entitled to have regard to the condition of the heritage restricted building and the potential cost of refurbishment undertaken to maximise its rental income (ibid [23]-[27]). 13Parliament responded by amending s 14G(1) to insert para (b1) with general retrospective effect. This required the assumption that all improvements on the land were new. The amended s 14G(1) was then considered by Commissioners and Biscoe J in the cases before this Court. 14The Commissioners [2010] NSWLEC 1262 first determined the land values under s 6A(1), without regard to the heritage restrictions, based on capitalisation of the rental income at $1,656.75 m2 nla. They reduced that figure to allow for the heritage assumptions in s 14G(1) by the percentage difference between the rent for a hypothetical new non-heritage building and the rent for a hypothetical new heritage one. 15The rent for the former was $380/m2 nla and for the latter $300/m2 nla. The percentage difference of 21.05% was deducted from $1,656.75/m2 nla and then multiplied by the actual nla to give the adjusted capital value. This approach and these findings were not challenged. 16The issue before Biscoe J. and this Court concerned what was described as the "heritage cost penalty". This was the increased cost of constructing a new "heritage" building compared with the cost of constructing a new "non-heritage building" with the same nla. Biscoe J held that this amount, $1,666,203.00, should be deducted in arriving at the value of the property. 17The reasoning of Biscoe J [28] may be summarised as follows: (a) The land value determined in accordance with s 6A(1) was based on the capitalisation of the net rental income of the property determined on the assumption "that the improvements ... thereon ... had not been made." (b) The highest and best use of urban land to derive rental income requires buildings. (c) The rent for a new non-heritage building would be $380/m2. (d) The rent for a new, heritage building, would be $300/m2. (e) Buildings come at a cost and a new heritage building would cost $1,666,203 more than a new non-heritage building with the same nla. (f) If it cost more to build a new heritage building to derive a lower rent the land value must be less. 18Mr Ayling argued that s 14G(1)(b1) only required the valuer to assume that the existing improvements are new without any deduction for its actual condition, and there was no justification for a heritage cost penalty. 19The basic valuation provision in s 6A(1) provides: "(1) The land value of land is the capital sum which the fee-simple of land might be expected to realise if offered for sale on such reasonable terms and condition as a bona-fide seller would require, assuming that the improvements, if any, thereon or appertaining thereto, other than land improvements, and made or required by the owner or the owner's predecessor in title had not been made." 20This reflects the principle formulated by Isaacs J. in Spencer v The Commonwealth [1907] HCA 82, 5 CLR 418 at 441: "To arrive at the value of the land at that date, we have, as I conceive, to suppose it is sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and cognizant of all circumstances which might affect its value ...". 21Although s 6A(1) does not fully reproduce this principle it presupposes it, including the assumption that the parties to the hypothetical sale "were perfectly acquainted with the land, and cognizant of all circumstances which might affect its value". 22In the real world an informed and willing, but not anxious, purchaser of heritage restricted property would take into account the restrictions which reduce its value. The assumptions in s 14G(1) do not operate in a vacuum. The section operates in conjunction with s 6A(1), and both must be applied in the valuation exercise. This was confirmed in the Commonwealth Custodial Services cases [2007] NSWCA 365, 156 LGERA 186 at [84], [111], [115], and [2009] NSWCA 143, 74 NSWLR 700 at [11], [22]. 23Thus the assumptions required by s 14G(1) must be included in the matters of which the hypothetical parties are "perfectly acquainted ... and cognizant." I don't see how the assumptions can operate in any other way. 24Most of the assumptions in s 14G(1) modify the basic, but artificial, assumption in s 6A(1), that the improvements, other than land improvements, have not been made. Those assumptions introduce facts from the real world. Paragraph (b1) is different because it introduces a fiction which bears no relationship to the real world. 25A court confronted with such a fiction has to determine its consequences. The relevant principles were considered by Lord Asquith in East End Dwellings Co Ltd v Finsbury BC [1952] AC 109, 132-3. This was a valuation case where the statute provided that in certain events the compensation for a compulsory acquisition of war damaged property should be assessed as "if the whole of the damage had been made good". Lord Asquith said: "If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. ... The statute says you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs." 26In the present case the imaginary new heritage restricted building which must be treated as real has as one of its inevitable corollaries an imaginary cost of construction. There being no relevant prohibition, one of the consequences which the Court must also treat as real is that the hypothetical willing and informed purchaser would take its cost of construction into account in negotiating for the purchase of the land. 27In my judgment Biscoe J was correct for the concise reasons he gave and the orders pronounced orally by the President on 28 November should be confirmed. 28TOBIAS AJA : I agree with the reasons of Handley AJA which also reflect in substance my reasons for joining in the orders made on 28 November 2011.