129 Although I accept that the notional removal of the improvements from the land to be valued is a requirement of the statute, that notional removal is to take place before the land is valued. This is because, as a matter of logic, the land cannot be valued until that assumption is made. Only then does the valuer know exactly what it is that he is to value."
15 At the risk of complicating the discussion for little return I am also of the view that s 14G does not impact upon the authority of Toohey's case. The Privy Council held that the statute precluded the determination of the value of the vacant land by analysing the improved value of that land. As I understand the High Court in Fenton their Honours considered that their Lordships had dealt with the issue in terms of valuation principle derived from the terms of the statute (Fenton p 165). Nothing in s 14G impacts upon whether that principle continues to be appropriate. As I endeavour to explain below s 14G is concerned with the assumptions to be made which affect the development potential of heritage restricted land and which may affect its value as vacant land.
16 The valuers for both parties approached the assessment of the value of the land in the earlier proceedings on the assumption that the existing rental for the building on the land reflected market rates. However, it is now agreed that this is not the case and a different approach to valuation is required. Each party has retained a different valuer for the purpose of the valuation as at 1 July 2005 and 1 July 2006 and a further dispute has arisen with respect to the assumptions to be made when determining the land value for those years.
17 There were a number of issues which the primary judge was required to resolve. However, only one issue was raised in the appeal. It was submitted by the Valuer-General that in determining that issue his Honour erred in law. As framed by the Valuer-General that issue was said to be "whether the requirements of s 6A(1) coupled with those of s 14G(1) were complied with in the valuation methodology adopted by the primary judge." The appellant contended that the primary judge made an error of law because he failed to make an assumption, said to be required by s 6A(1), that the improvements on the land, other than land improvements as defined in s 4(1) of the Act "had not been made." It was submitted that at any stage of the valuation exercise where it was necessary to consider the improvements on the land, rather than assume that the building or buildings which currently exist on the land are in place, it must be assumed that the land is improved with a building or buildings, with the same design and layout as the existing building, but in a new or pristine condition.
18 The approach adopted by both valuers was consistent in many respects. They both agreed that it was appropriate to first identify the value of the land upon the assumption that the site was not heritage restricted. This value could be derived by using comparable sales. It was then necessary to adjust that value to reflect the impact of the heritage restrictions. The valuers agreed that this could be done by comparing the rental per m² lettable space achieved by buildings on unrestricted sites with the rental which could be achieved on the subject site, with its heritage restrictions and adjusting the land value for an unrestricted site in the same proportion to arrive at the land value of the restricted site. Mr Dempsey, who gave evidence on behalf of Commonwealth Custodial, identified four "sales" of heritage affected buildings from which he derived the market rental per square metre of the floor space available to rent within the existing building. Using the relative difference between that figure and the rental derived from comparable unrestricted sites he derived the value of the vacant land. In so doing he assumed that the building on the subject land would be let in its existing condition.
19 Mr Hill, who gave evidence on behalf of the Valuer-General, adopted the same methodology but assumed that the building on the subject site available to rent, although heritage restricted, was a new building rather than the actual building in its existing condition. This assumption had the effect of increasing the rental return from the building with a consequential increase in the value of the vacant land.
20 The primary judge accepted the position adopted by Mr Dempsey. His Honour's reasons were as follows
"33 Mr Hill's novel assumption was that a hypothetical Moneybox in new, pristine condition should be rental valued as at each valuation date. The Valuer General submits that this should be accepted because the Moneybox in its actual condition is only relevant to determining the highest and best use of the Land. Thus, the argument goes, its actual condition is irrelevant when making a rental comparison for present purposes. The Valuer General says that is clear from the assumption in s 14G(1)(b) that the Moneybox may be continued and maintained in order that "the use of that land as referred to in paragraph (a) may be continued". The Valuer General submits that that limited relevance of the actual condition of the Moneybox was confirmed in the leading judgment of Tobias JA in the Court of Appeal in the earlier proceedings at [111]:
'[T]he…assumption in s 14G(1)(b) refers to the continuance of the improvements existing upon the land as at the date of valuation only for the purpose of calling the land to be valued upon the basis, if it be the case, that the highest and best use is the continuation of its existing use…as required by s 14G(1)(a).'
and in the judgment of Jagot J in Longreach Capital Pty Ltd v Valuer-General [2007] NSWLEC 721 at [40(9)]:
'In the context of sub para (b) of the definition of heritage valuation, 'continued and maintained' should be understood as a composite phrase conveying the meaning that the improvements on the land at the relevant date may remain there and be maintained by the owner so that the use may be continued.'
34 I do not accept the Valuer General's submission. In the first place, I do not think it follows from the reference to "use" in s 14G(1)(b) that, for present purposes, the rental value of a hypothetical new, pristine Moneybox should be assessed. Secondly, the dicta of Tobias JA focused on the assumption in s 14G(1)(b) and the dicta of Jagot J focused on the equivalent assumption in paragraph (b) of the definition of "heritage valuation" in s 123 of the Heritage Act . Section 14G(1) contains three assumptions, not two. The first two assumptions, in s 14G(1)(a) and (b), are expressly concerned with the "use" of heritage restricted land. The third assumption, in s 14G(1)(c), does not refer to use: "that no improvements, other than those referred to in paragraph (b), may be made to or on that land". The third assumption - as well as the second assumption - requires regard to be had to the Moneybox in its actual condition. There is no suggestion in the third assumption - nor in the second assumption - that regard should be had to improvements on heritage restricted land on the further assumption that they were in new, pristine condition at the valuation date. Thirdly, the statutory definition in s 14G(2) requires regard to be had to the very building that attracts the heritage restriction; that is, to the Moneybox as it is - not to a hypothetical Moneybox in new, pristine condition. That is because the Land is "heritage restricted" within the meaning of the definition in s 14G(2) - and thus s 14G(1) is attracted - because of provisions in the Central Sydney Local Environmental Plan of 1996 and Sydney Local Environment Plan 2005 that land is heritage restricted if it is land that is identified on which there is a building which is listed in the heritage schedule. The Moneybox is listed in the heritage schedule. Finally, the relevance of the actual condition of the Moneybox, with all its perceived benefits and deficiencies, was acknowledged in the earlier valuation proceedings in the Court of Appeal by Tobias JA (with whom Spigelman CJ and Santow JA agreed in this respect) at [116].
35 In support of Mr Hill's assumption of a hypothetical Moneybox in new, pristine condition, the Valuer General cites Longreach (above) at [32] where Jagot J held that the cost of placing a building in a condition where it may be used for the purpose of its existing use or maintaining the building in that condition is irrelevant. The case is distinguishable. There the land was valued under the Heritage Act . The definition of "heritage valuation" in s 123 contains the same assumptions as appear in s 14G(1) of the Valuation Act . The land had formerly been used as a mental hospital. Jagot J rejected the approach of the applicant's valuer which allowed for the expenditure of a very large amount of money in order that the land might once again be used for that obsolete purpose. That was not the use of the land at the valuation date and was therefore irrelevant.
36 Accordingly, in my opinion, as at each valuation date, the rental comparison is between the current market rental value for a hypothetical new, modern building assuming that it was completed and ready for occupation on the Land at the valuation date, and for the Moneybox in its actual condition."
21 Before this Court the Valuer-General submitted that his Honour was in error. It was submitted that because s 6A(1) requires the land to be valued upon the assumption that it is vacant land, and the improvements on it have not been made, an approach which was reinforced by this Court in the earlier decision it was not open to the valuers to have regard to the existing building in its existing condition. It was submitted that only by assuming a new building could the obligation to value the land as vacant land be realised.
22 To my mind this submission should be rejected. Section 6A(1) is concerned with the value of vacant land and, for this reason, the valuer must assume that the improvements, if any, have not been made. However, the Act recognises that the value of vacant land, which will be a product of its commercial or other potential, may be affected by the purpose or purposes for which it may be lawfully used. Where land has the benefit of existing use rights, s 6A(2) requires the benefit if any, conferred by those rights, including the right to use an existing building to be considered when determining land value. In the case of heritage restricted land that effect may come from the restraint on the purpose for which the land may be used as well as the fact that the improvements are confined to the building or buildings presently on the land. Although the restrictions are likely to be the consequence of the particular improvements on the land, because they impact on its potential they affect the value as vacant land. For this reason s 14G requires the valuer to make assumptions consistent with the heritage restrictions when assessing the land value.
23 One of the assumptions which s 14G(1) requires the valuer to make is that the improvements which are on the land when the value is determined may be continued and maintained. To assume, as Mr Hill has done, that a new building, although consistent with the design of the existing building, is on the land is to assume a building other than the building contemplated in s 14G(1)(b). The statutory assumption is consistent with the reality. Most heritage buildings will be of some age which, even if carefully maintained, will be apparent in the materials, finishes and general condition of the building. All of these matters may affect the building's marketability and, because of the cost of maintenance they impact upon the available return. No building which is subject to heritage restrictions will be entirely new and in pristine condition.
24 To my mind nothing said by this Court in Commonwealth Custodial about s 6A requires the outcome for which the Valuer-General contends. There is no difficulty in valuing the land upon the assumption that it is vacant land but with its potential development and ultimate return confined by the existing building and the purpose or purposes for which it may be used. That existing building may be more or less marketable than a new building and may have greater maintenance costs, but it is that building which the statute assumes will remain and accordingly defines the potential of the land as vacant land.
25 Although it must be assumed that the existing improvements continue, the section does not mandate any particular approach to the condition of the improvements The methodology adopted by the valuers in the present case required a comparison of the rental return from an assumed building, developed without heritage restrictions, with the return which can be achieved from the building as heritage restricted. The latter figure can be determined by consideration of the rental return from comparable buildings with the disadvantages and advantages inherent in heritage restrictions. The analysis must assume that the rental return determined for the building on the land, with its heritage restrictions, is the optimum return available from that building in the market place. Although this could not be a new building it may be that the optimum return would be achieved by an extensive refurbishment of the existing building. The potential cost of that refurbishment would be factored in to determine the return from the refurbished building.
26 In the present case as I have indicated, Mr Hill for the Valuer-General contended that the statute required the valuer to assume a new pristine building. The primary judge rejected this approach and consistent with my analysis of s 14G he was correct to do so. Having rejected Mr Hill's approach his Honour accepted the approach of Mr Dempsey. Although Mr Dempsey did not indicate whether he had considered that the optimum return might be available from a refurbished building, rather than the building in its existing condition, by reference to the rentals of comparable buildings he derived the rental return which in his judgment was appropriate for the building on the land.
27 The approach taken by Mr Dempsey was not inconsistent with the assumptions a valuer was required to make under the statute and, there being no other available alternative, his Honour was entitled to accept it. In these circumstances his Honour has made no error of law.
28 In my judgment the appeal should be dismissed with costs.
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