State Administrative Tribunal (WA)|2007-10-12|Before: Judge J

The applicant's approach to assessment of compensation

24 The crux of the applicant's approach to assessment of the value of the respondent's leasehold interest in the land is identified in par 5 of the applicant's Statement of Issues, Facts and Contentions. That paragraph contains the assertion that "the leasehold interest in land equates with the value of the business, the activities of which constitute the highest and best use of the leasehold as at the relevant date." It is upon that assumption that the applicant instructed Ms Jacqueline Le-Fevre and Mr James Thompson to provide opinions as to the value of the respondent's business. Ms Le-Fevre is a certified practising accountant with experience in the provision of accounting, taxation and business advice to small businesses. That experience includes the provision of business valuations for the reason of sale or purchase, Family Court requirements or asset valuation purposes. She also has experience in business compensation valuations for several public authorities. She is not a licensed land valuer.

25 Mr Thompson holds a master of business administration, but otherwise has no formal qualifications relevant to valuation. He does, however, have lengthy experience, dating back to 1987, as a business broker and subsequently as the principal of a business valuing firm since September 1989. In that capacity he has assessed and valued a large number of small businesses since 1987. He has been involved with various publications relating to valuation theory and practice, and has been engaged in various training programs involving valuation theory and practice. He is not a licensed land valuer.

26 Ms Le-Fevre was requested by the applicant to "provide valuations of the business known as the Utopia Recreation Centre on the basis of total extinguishment of the business, and in respect of consequential losses due to the relocation of the business." In valuing the business, Ms Le-Fevre applied a "capitalisation of maintainable profits method", and a "discounted cash flow method". Having applied those methods, she assessed the value of the business at $210,000, but noted that Mr Richard Todd had valued the plant and equipment and leasehold improvements at $250,000 and therefore adopted that figure as the appropriate figure for compensation before allowing for solatium and stock on hand.

27 Mr Thompson was also engaged by the applicant to "provide valuations on the basis of extinguishment of business and relocation for the above business." His valuation was prepared "based on what the business was worth if sold on the open market at 5 September 2003 and without the compulsory taking order being in place." Mr Thompson analysed the accounts and provide that an adjusted net operating profit of the business over its operating history, he then applied a "return on investment method" to assess the value of the business. On the basis he assessed the value of the business at $16,000 to $18,000, but noted that, on his assessment, the plant and equipment was worth around $170,000 with stock of around $20,000. Mr Thompson applied an alternative of capitalisation of future profits method of valuation. That assessment gave rise to a value of $132,103 which Mr Thompson observed was lower than the current value of plant and equipment.

28 On the basis that the valuation of the respondent's interest in the lease equates to the value of the business, the applicant contended that the amount of the advance payments already made to Ms Shim represented full compensation for the taking.

Respondent's approach to assessment of compensation

29 The respondent relied upon assessments of compensation under s 241 of the LA Act by Mr Richard Todd, a licensed land valuer and the principal of Fincom business consultants and valuers. Mr Todd had originally been engaged by the applicant to "provide a valuation of [the Utopia] business in accordance with s 241(2) of the Land Administration Act". He was also asked to address the question of consequential losses under s 241(6) and the possible relocation of the business.

30 The respondent also relied upon the opinion of Mr Sidney Chesson, a licensed real estate and business agent since 1981. Mr Chesson holds a master of business administration and has been involved in the purchase and sale of businesses for more than 37 years, including 25 years as a practising business broker and real estate agent. He is a principal in a number of related entities that can be collectively referred to as Austasia. Austasia had involvement with Mr and Mrs Shim in finding the premises from which to operate the business. A Mr Carey was the representative who dealt with the Shims in relation to that matter. Mr Chesson has had a longterm business relationship and friendship with the director and owner of the Ackers Building. He conveyed Mr and Mrs Shim's offer to the lessor, but did not deal directly with Mr and Mrs Shim until the question of compensation for the compulsory taking arose. After the Shims commenced business, Mr Simon Chesson, an accountant with Austasia, and Mr Sidney Chesson's son, provided accounting services for the Shim's business.

31 It was Mr Sidney Chesson who urged the Shims not to leave the premises until adequate compensation was agreed. With Mr Simon Chesson, Mr Chesson analysed the trading history of the business and prepared a report on the appropriate valuation for the compensation claim. He applied a number of different methodologies, giving rise to a range of figures. Like Ms LeFevre and Mr Thompson, Mr Chesson is not a licensed land valuer.

32 Mr Todd assessed the value, as an ongoing concern, of the leasehold improvements, plant and equipment and furniture at $250,000. In assessing the value of the business, he considered a capitalisation of future maintainable earnings, or return on investment method. He made protections as to the future earning capacity of the business, and concluded that the net value of the business was $242,000 plus stock at valuation, but that there was "a good case for additional or special value to the owner over and above the market value." That was because "the business was started from scratch, it was just over two years old, it is growing rapidly and has potential to generate earnings in excess of those projected" and that "a further reason is the unique nature of the business with little in the way of direct competition."

33 On that basis, he considered that the value to the owners should be calculated by taking the cost of establishment, which he said was $250,000, allowing a goodwill factor of the projected earnings for one year, which he assessed at $132,000, then adding the value of stock. That gave a figure of $382,000 plus stock. Mr Todd also considered that the respondent should be compensated for a loss of profits for three months during the purchase of an equivalent business which he assessed at $33,000, stamp duty, legal and accounting fees in respect to purchase an equivalent business, which he assessed at $30,000, and solatium on the total of those amounts total being $47,000. The total compensation suggested by Mr Todd was $514,000.

34 Mr Todd also gave consideration to relocation and reinstatement. In that regard, he noted that the Shims had been unable to locate any suitable premises in which to relocate their business, and that "second grade first and second floor office space is likely to have a rental value of $150 per square meter per annum or $120,000 per annum compared with the current rent of $38,000 per annum." He noted that the present value of the rental difference of $82,000 per annum for eight years at the overdraft rate of 8.5% is $463,000. To that, he suggested, should be added the physical cost of moving the business plus loss of profits during the move and settlingin periods and other incidentals. He considered that the cost of relocation and reinstatement of the business would exceed the value of the claim based on total destruction of the business, and for that reason did not consider it an appropriate measure of compensation.

35 Mr Chesson approached the assessment of compensation in a number of alternate ways. The first was by assessing the cost of lost opportunity/lost profits. Having analysed the trading performance of the business prior to its closure, Mr Chesson estimated its future profits through to the expiry of the option period under the lease. The estimates suggest dramatically increasing profits up until the year ended 30 June 2008 after which he anticipated an annual profit of $550 000. On the basis of those figures, he assessed the present value of the future profits on a discounted cash flow basis at $1,891,000 through to the end of the option period of the lease.

36 Mr Chesson also assessed the "value of existing lease". He noted that there was very little space suitable for a business with the characteristics of Utopia. He assessed, without identifying comparable properties, that similar premises would cost in the vicinity of $275 per square metre, plus outgoings of not less than $75 per square metre, making a total of $350 per square metre. He compared that with the existing rate of $38 per square metre and noted that, on the basis of those figures, the additional rent required to obtain similar premises over the 7.5 years remaining on the lease would amount to $1,815,000. He said that assessing the present value of that sum on a discounted cash flow basis would result in a figure of $1.2 million.

37 Mr Chesson assessed the value on the basis of the cost of sale as a going concern and establishment of an alternate business. On the basis of a return on investment method, he estimated the value of the business as a going concern at $549,000. On a stainable profit basis, he expressed the view that the business would demand "an asking price of $568,000". Mr Chesson suggested that because of the specialist type of business being attractive to overseas business investors, it may attract offers around $800,000. To that he added $400,000 for reestablishment of a similar business and suggested a compensation figure of $1.2 million. The contention that a premium might be paid by a business migrant was abandoned by the applicant during the hearing, and this element of Mr Chesson's approach to compensation needs no further consideration.

38 Finally, Mr Chesson assessed the compensation claim by reference to the cost of moving and refitting premises. He assessed the cost of moving and refitting new premises, and the loss of profits while the new business was being established at $425,000, to which he added the likely additional lease cost of $1.2 million as assessed in relation to the value of the existing lease. That gave rise to a compensation claim of $1,625,000.

39 In accordance with the Tribunal's practices, the four experts were required to confer and prepare a joint report identifying matters of agreement, matters of disagreement, and reasons for disagreement. Although there was substantial disagreement on many aspects of the underlying approach by each expert, they agreed that the market value of the business is between $203,000 and $264,000 if the business is valued using ordinary techniques and without any element of special value to the owners. They were not able to resolve any of their differences as to where, within that range, the proper value of the business should fall.

40 The agreement between the experts establishes, at least within a range, a value for the Utopia business based purely upon considerations as to its financial performance. It is entirely unaffected by any analysis, save as each expert's differing approach to projected income, of the factors peculiar to this particular business and the plans and aspirations of its owners. It was not in dispute that, at the time of the taking, the rent payable by the respondent for the premises was below the market rent. The lease provided for annual rent reviews based upon rises in the consumer price index, but subject to a maximum annual increase of 3%. It is apparent, therefore, that, as at the date of taking, the respondent's interest in the land was the right to occupy the premises pursuant to the lease at a rental significantly below what she would have had to pay for alternative premises.

41 The nature of the business was such that it required a location close to the railway station and other public transport in an area frequented by foreign students and backpackers. The site of the Ackers Building was ideal for the purpose. Because of the space requirements for snooker and pool tables, and karaoke rooms, a large area, at an affordable rent, was required. Mr and Mrs Shim considered, and I accept, that frontage to the street at footpath level was also important, and was provided at this site.

42 The choice of these particular premises, which appear to have been ideal for the type of business conducted, was the product of 18 months of consideration and research.

43 It is apparent that, following the taking, no similar premises could be found as a replacement for Utopia in the style it was conducted.

44 In August 2003, in anticipation of the taking, the Valuer General section of the Department of Land Information (DLI), on behalf of the Commission, provided the respondent with a list of CBD retail vacancies in order to enable her to consider relocation of her business following the taking. The respondent passed on the list to Mr Chesson's firm with a view to him looking at the properties as possible alternative sites. Most of them were completely unsuitable, being either too small, too expensive, or both. The 550 square metre basement area between Hay Street and Murray Street was thought by Mr Chesson to have been of some interest, but had a rental rate per square metre of $273. A ground floor area in Murray Street east, comprising 580 square metres, was available at $152 per square metre, but was not suitable because it was out of the main traffic flow area between the bus and railway stations and the Hay Street mall. It was thus a much less convenient location for the purposes of the Utopia business. An area in Hay Street east which had previously been used as a McDonalds restaurant had a large area available on the ground floor for between $350 to $450 per square metre, and 850 square metres on another level of the building that was $75 per square metre. Mr Chesson's recollection was that the cheaper space was only accessible through the ground floor tenancy and thus was not suitable, but in any event the premises were again away from the main pedestrian traffic flow areas likely to be utilised by the potential clientele of Utopia.

45 Mr Chesson also reviewed premises not on the list provided by DLI. He considered a property at the corner of the Hay Street mall and William Street, not far from the Ackers Building, but it was unsuitable because of difficulties with access, and in particular after-hours access. The nearest suitable property identified by Mr Chesson was the top floor of the old Commonwealth Bank building on the corner of Forrest Place and Murray Street. That location would have been ideal, and the top floor was available at $150 per metre per annum plus outgoings. The available space was, however, on either the fifth or sixth floor and access was only available by lift which was accessed from within the building.

46 It is clear that the opportunity for Mr and Mrs Shim to undertake their particular style of business, involving provision of karaoke rooms and recreation facilities specifically directed to the market of Asian students and backpackers was, at the time of the taking, unavailable to them in any other premises within the vicinity of the public transport hubs, with the possible exception of the Commonwealth Bank building. The Commonwealth Bank building was less suitable because of its access issues, and would have involved a substantially increased rent and outgoings.

47 The notion that land may have a "special value" was explained in Pastoral Finance Association Ltd v Minister [1914] UKPC 77; [1914] AC 1083 at 1088, where the Privy Council said:

"That which the appellants were entitled to receive was compensation not for the business profits or savings which they expected to make from the use of the land, but for the value of the land to them. No doubt the suitability of the land for the purpose of their special business affected the value of the land to them, and the prospective savings and additional profits which it could be shown would probably attend the use of the land in their business furnished material for estimating what was the real value of the land to them. But that is a very different thing from saying that they were entitled to have them taken into consideration so far as they might fairly be said to increase the value of the land. Probably the most practical form in which the matter can be put is that they were entitled to that which a prudent man in their position would have been willing to give for the land sooner than fail to obtain it."

48 In Boland v Yates [1999] HCA 64; (1999) 167 ALR 575 at 654, Callinan J explained special value as follows (at [292]):

"The special value of land is its value to the owner over and above its market value. It arises in circumstances in which there is a conjunction of some special factor relating to the land and a capacity on the part of the owner exclusively or perhaps almost exclusively to exploit it. None of the examples given by the Full Federal Court are true examples of special value. There will in practice be few cases in which a property does have a special value for a particular owner. Obviously neither sentiment nor a long attachment to it will suffice. The special quality must be a quality that has an economic significance to the owner. A possible case would be one in which, for example, a blacksmith operates a forge in the vicinity of a racetrack on land zoned for residential purposes as a protected non-conforming use, the right to which might be lost on a transfer of ownership or an interruption of the protected use. Such a property will have a special value for its blacksmith owner, and perhaps another blacksmith who might be able to comply with the relevant requirements to enable him to continue the use but to no one else."

49 Mr Thompson and Ms Le-Fevre expressed the view that the business had no special value. Whether the business has special value is not the correct question. The question is whether the leasehold interest, being the interest in land taken, has special value to Mrs Shim. In my view it did. It was the leasehold interest, at a very favourable rent, in premises peculiarly, and possibly uniquely, suitable for their intended purpose, which enabled the respondent, with her husband, to undertake a business carefully and specifically designed to capitalise upon a growing market of Korean, and other Asian, students and backpackers in Perth. It was the qualities of location and low rental, providing an opportunity to the Shims to utilise their ethnic background and language and their experience in a novel endeavour, which had the economic significance which Callinan J identified as necessary for special value to exist. The trading figures of the business suggest that Mr and Mrs Shim's business plan of developing the business into an increasingly profitable operation were well on track. I have absolutely no doubt that Mr and Mrs Shim would not have been willing to sell their interest in the lease and their business at the market value range identified by the experts. That position was not based on some sentiment or attachment, but was objectively reasonable having regard to the opportunity that the leasehold interest presented to them.

50 It follows that, in my view, the equation of the value of the leasehold interest to a market value of the business based solely upon trading performance and simple projections of future income ignores the special value of the lease to Mr and Mrs Shim, and is not the appropriate methodology for assessment of the compensation payable to them pursuant to s 241 of the LA Act.

51 The only one of the four experts who considered special value was Mr Todd. His approach was to take a summation of the individual asset values within the business. To that end he took the assessed cost of establishment of the business by way of leasehold improvements, plant and equipment and owner's time, which he put at $250,000, and added to that a goodwill factor. He said that goodwill values are generally in the range of one to two years' purchase of earnings. On the basis of his protected earnings of $132,000 for the 2003/2004 year, he considered one year's purchase reasonable so that the total value of the business was $382,000 plus stock. Closing stock as at 31 December 2003 had been shown as $22,000, which, if confirmed by stocktake, would place a total value on the business at $404,000.

52 There were criticisms of Mr Todd's approach, especially by Mr Thompson but also by Ms Le-Fevre. The principal criticism was that they did not accept that the business had any special value. Mr Thompson did not accept the projected profit figure and therefore the goodwill figure of $132,000, but argued that it would be possible to purchase another business earning $132,000 per year for $260,000 and thus replace the lost income stream at a cost of much less than Mr Todd's special value. Mr Thompson's argument misses the point, however, that it is the special value of the lease, for the reasons outlined above, which is to be considered. Mr Thompson's exclusive focus on the application of his methodology to the valuation of the Utopia business renders his evidence substantially irrelevant to the question of special value.

53 There are however, difficulties with Mr Todd's approach. There is no explanation of the relationship between the summation of assets approach and the nature of the "special value" to the owners. He adopts a "goodwill" component based on one year's projected profit. There was much debate between the experts as to what the projected profit might have been. Mr Todd said $132,000, Mr Thompson said (after various adjustments he claimed must be made) $15,000 or $18,000, Mr Chesson said $125,000 in 2003/2004 and $209,000 in 2004/2005 and Ms Le-Fevre said $98,000. The selection of a particular figure, and the assessment of whether one attributes one year profits or two years profits, or something in between, as representing a "goodwill" component of the special value, is very difficult to determine and more difficult to relate to the particular nature of the special value identified in this case.

54 As discussed above at [34], Mr Todd gave consideration to relocation and reinstatement. In that context, he effectively placed a value on the difference between the commercial rent payable for the space as at the date of taking and the actual rent being paid, over the remaining life of the lease. That produced a value of $463,000. In oral evidence, when asked about that calculation, Mr Todd described it as "an attempt to assess what the value of the lease might have been". He concluded that that lease value, when added to the cost of reinstating the business elsewhere would be "way in excess of the market value of the business on an extinguishment basis." He said, "I probably could have gone on there and said that that was another good reason why the business had special value issues. That was another factor in looking at a different method of valuation to try and arrive at a money value for the special value to the Shims."

55 In essence, the exercise undertaken by Mr Todd was, to use his expression, a valuation of the "profit rent" inherent within the lease, where the "profit rent" is the difference between the market rent, and the rent payable under the lease. In my view, where the assessment of present value of that future cash flow advantage exceeds the value of the business conducted under the lease, the value of the leasehold interest will usually be reflected by capitalisation of the rental saving rather than by the value of the business. That is because it would, at least theoretically, be possible for the tenant to sublet the premises at a marker rent, and then profit by the rent received in excess of the rent payable under the head lease. In those circumstances the sublease may be the highest and best use of the leasehold interest.

56 In my view, the valuation of profit rent is, in this case, the fairest way to estimate the special value of the lease to the respondent. It was because of the favourable terms of the lease, and the peculiar character and location of the premises, that the respondent was able to utilise their background and experience thereby creating the special value.

57 Whether that is characterised as special value of the business conducted pursuant to the lease, or simply the valuation of the leasehold interest without regard to the business conducted on the premises, makes no difference for the purposes of compensation. In either case, the resultant figure falls within s 241(2) of the LA Act.

58 If that approach to valuation is to be taken, it is necessary to be satisfied as to the difference between the "market rent" and the actual rent being paid. It is also necessary to have regard to the possibility of redevelopment which, under the terms of the lease, could result in early termination of the lease.

59 Ms Le-Fevre suggested that there was a flaw in Mr Todd's approach in taking the current rent as $38,000 per annum. She suggested that that figure ignored the fact that the Shims had been required, under the terms of the lease, to expend $150,000 on fitting out the premises, which, she suggested, should be amortised over the term of the lease. I do not agree. The fitout costs had, at the time of the taking, been met by the Shims. Nothing further was required to be paid by way of fitout. At the time of the taking, the liability of the Shims on an annual basis was for rental of approximately $38,000 for which they received the benefit of premises the rental value of which was significantly more. It is the present value of that future rental advantage which represents the value of the leasehold interest to the tenants.

60 Counsel for the applicant suggested that the Tribunal could not assess the value of the lease on this basis because of inadequate evidence as to the true market rental of the premises as at the date of taking. Mr Thompson, Ms Le-Fevre and Mr Chesson accepted that they were not qualified to value the lease as an interest in land as distinct from the business conducted pursuant to the lease. All agreed that Mr Todd, being a licensed land valuer, was the only expert witness qualified to undertake that exercise. It is true, as counsel for the applicant argued, Mr Todd did not undertake a detailed analysis of comparable rental properties for the purpose of his assessment.

61 Having regard to all of the evidence, I am satisfied that the figure adopted by Mr Todd, namely $150 per square metre per annum, is sufficiently reliable to provide a basis for the assessment of the value of the lease, and the special value of the business, to Mrs Shim.

62 Both Mr Todd and Mr Chesson gave evidence that, between 2001 and the taking in late 2003, the market for rental space within the central business district tightened significantly. Although Mr Chesson was not qualified to value the lease, he has had extensive experience in the CBD central market and his evidence as to his own experience of rents being paid for the premises at the relevant time is reliable as source material to support Mr Todd's opinion. Mr Todd said that second and third grade office space, like this, was, for a long time during the 1990s unlettable. He said that "That was probably still the case in 2001 when the Shims negotiated their lease. That's why they were able to do the deal that they did. Their timing was good, and it was by 2003 that it was becoming apparent that there was going to be a shortage of office space in the city in the ensuing years, and the developers started getting active."

63 Mr Chesson said that, around the time of the taking, there was a big demand for space, and that he believed that space of the type occupied by Mrs Shim would have brought $150 per square metre. He indicated that, since that time, the demand for such space has increased markedly to the point where "properties which were renting for $150 a metre office space are now getting $500".

64 I am particularly influenced by Mr Chesson's account of his enquiries into space within the Commonwealth Bank building in Forrest Place. He indicated that as the most suitable alternative premises into which Mr and Mrs Shim might relocate their business. It was available at $150 per square metre. It was in an equivalent location so far as access to the public transport facilities and pedestrian access is concerned. Notwithstanding its access difficulties, it appears to have been very similar space to that occupied by Mr and Mrs Shim.

65 The other evidence concerning available rentals within the CBD which was before the Tribunal is the list of CBD rental vacancies provided to Mrs Shim prior to the taking. While much of the space contained within that list, such as prime retail space, bears no sensible comparison to the subject premises, the list of "secondary office (over retail) vacancies" reveals spaces where the asking rent was well over $150 per square metre, with only one offering less than $150 in a much less desirable location.

66 On the basis of the materials available, it is clear that the adoption of a market rental figure of $150 per square metre for the subject premises will certainly not result in any overcompensation to the respondent.

67 Mr Chesson also undertook an analysis of the lost value of the existing lease, which produced a figure of $1.2 million. That figure was arrived at by assuming a market rental of $275 per square metre with outgoings of not less than $75 per square metre. There is no adequate foundation for adoption of those figures, and Mr Chesson's oral evidence and his agreement with Mr Todd's calculation during the course of oral evidence, and his acknowledgement that only Mr Todd had the expertise to value the leasehold interest, suggest that Mr Chesson's calculation should not be relied upon. The same conclusion can be drawn in relation to the other values suggested by Mr Chesson in his report. His calculations were generally excessively favourable to the respondent, no doubt because he was engaged by them to support their claim. At the hearing however, and in the joint conferral process, he was inclined to support Mr Todd's more moderate approach, and did not seek to argue with any force for adoption of his own calculations.

68 Mr Todd's assessment of the present value of the rental difference assumed a remaining term of eight years. The lease commenced on 1 July 2001 and the second five-year term would have expired on 30 June 2011. The date of taking was 5 September 2003. The remaining term was 7.75 years. It follows that Mr Todd's figure is overstated to the extent of the present value of $20,500 in rental savings from April to June 2011. It is not necessary to undertake a precise calculation of that figure, but I would estimate it at about $8,000 and revise Mr Todd's calculation to $455,000 to cater for that adjustment. In my view, that figure represents the value of the interest held by Mrs Shim, whether characterised as the value of the profit rental or as the special value to her of the business operated pursuant to the lease.

69 The lease contained a redevelopment clause that permitted the landlord to terminate the lease on six months notice if the premises were required by the landlord for redevelopment or renovations. The notice could not be given earlier than six months before expiry of the initial term. If the notice expired in the first years of an extended term, the lesser was required to pay the tenant $50,000 by way of compensation. The amount of compensation reduced by $10,000 each year thereafter during the final five years of the extended term.

70 Mr Chesson expressed the view that because the Ackers Building was relatively small, redevelopment was unlikely without consideration of other surrounding buildings, and that, for that reason, redevelopment within the extended term of the lease was unlikely. All experts agreed that redevelopment clauses are almost standard provisions in commercial leases, for those reasons, and because of the relatively generous compensation provision, I do not consider that the presence of the redevelopment clause should lead to a discounting of the value of the lease.

71 Mr Todd considered that, in addition to the special value of the business, Mrs Shim should be compensated by a loss of profits for three months to cover the period during which a new business might have been established and to cover the stamp duty, legal and accounting fees estimated in establishing a new business. In my view, those amounts should not be allowed under s 241(6) as suggested by Mr Todd. The recognition of the special value of the business involves recognition of compensation for loss of the future income that the business may have earned. Even the market value assessments made by Ms Le-Fevre and Mr Thompson recognise a disposal of the future profit of the business. It would be over compensating the respondent to pay by way of compensation the whole of the special value of the lease, and then provide additional compensation for loss of the income from that lease. Had Mrs Shim disposed of the lease and business for its full special value (being the asset she had at the time of the taking), she would not then have had an ongoing business. Mr Todd's approach would give her both.

72 Having provided for the full value of the leasehold interest, compensation for the consequences of taking the interest in the land without agreement is met by an award for compensation under s 241(8), or what is commonly referred to as solatium. The maximum alternative is 10% and no reason is advanced to reduce that amount. There are no exceptional circumstances that would justify an award in excess of 10%.

73 The respondent should be awarded compensation of the sum of $455,000 pursuant to s 241(2) of the LA Act. It is appropriate that the full award of 10% solatium should be made under s 241(8), being $45,500. To that should be added interest pursuant to s 241(11), taking account of the advance payment as required by s 241(12). Interest should be calculated at the rate of 6% per annum on the sum of $500,500 from 17 February 2004 (the date when possession was handed over) to 5 March 2004 (17 days: $1,398); on the sum of $250,500 from 5 March 2004 to 19 April 2004 (35 days: $1,441); and on $217,800 from 19 April 2004 to the date of delivery of this decision 12 October 2007 (1281 days: $45,863) and thereafter $35.80 per day until payment. The total interest to 12 October 2007 is $48,702. Obviously, the payment of compensation made as a result of the Tribunal's orders must be reduced by the amount of the advance payments made pursuant to s 248 of the LA Act. The amount to be paid is $549,202 less $283,783.75 being $265,418.25.

74 I will hear the parties further as to the question of costs of the proceedings which, at the express request of the parties, I reserved for submissions in light of the Tribunal's decision.

The compensation payable to the respondent by the applicant for the taking of the applicants leasehold interest in premises located at Nos 124 130 William Street Perth under a Notice of Taking published on 5 September 2003 is $549,202 together with interests in the amount of $35.80 per day from 12 October 2007 to the date of payment, less the sum of $283,783.75 previously paid by the respondent by way of advance payments on 5 March 2004 and 19 April 2004.
The question of costs is adjourned to a date to be fixed.

I certify that this and the preceding [74] paragraphs comprise the reasons for decision of the State Administrative Tribunal.

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CITATION : WESTERN AUSTRALIAN PLANNING COMMISSION and SHIM [2007] WASAT 262 (S)

BETWEEN : WESTERN AUSTRALIAN PLANNING COMMISSION

Costs Proceedings for compensation for resumption of land Award of compensation greater than landowner offered to accept Principles to be applied in relation to costs in resumption cases

1 Having made an award of compensation payable by the Western Australian Planning Commission to Mrs Kyoungae Shim for the taking of her leasehold interest in land, the Tribunal received an application by Mrs Shim for payment of her costs of the proceedings. Mrs Shim had obtained an award of compensation substantially in excess of the amount offered by the Commission, but also substantially less than her claim. The award of compensation was, however, also substantially more than Mrs Shim had offered to accept during negotiations in the course of the Tribunal proceedings. The Tribunal examined the principles to be applied in relation to the costs of compensation proceedings, and determined that, in the circumstances of this case, an order should be made that the Commission pay Mrs Shim's costs both before and after the offer of settlement. The amount of the costs payable is to be agreed between the parties or alternatively determined by the Tribunal.

2 In a decision delivered on 12 October 2007 (Western Australian Planning Commission and Shim [2007] WASAT 262), the Tribunal ordered that the applicant pay to Mrs Shim the sum of $549, 202 plus interest (less an amount paid by advance payment), by way of compensation for the compulsory taking of a leasehold interest held by Mrs Shim in a property in William Street, Perth. Following that decision, the respondent sought an order that the Commission pay her costs of the proceedings, including her costs and expenses incurred in getting advice and assistance in assessing the quantum of compensation, making the claim, and having the claim dealt with by the Tribunal. The written submissions filed in support of that application dealt with the Tribunal's jurisdiction to award costs, and identified factors which the respondent contended support an award of costs in this case. They did not condescend to detail as to what costs or expenses were being claimed.

3 During oral submissions, the respondent's counsel produced a document entitled "Shim Expense Summary" which indicated, it was said, the costs and expenses to which Mrs Shim has been subjected and which form the basis of the claim for an order. That expense summary was as follows:

Valuations, Assessments, negotiations with Landcorp, Meetings with Clients, Mountains Lawyers, Search for alternative premises, general case and attention

4 No further breakdown of the claimed expenses was provided by counsel, and the hearing on costs was concluded on the basis that the Tribunal would rule as to what, if any, categories of costs might be awarded, following which the parties would endeavour to agree quantum, or alternatively the Tribunal would determine the quantum in the light of a more detailed claim. These reasons concern, therefore, the question of whether any award of costs should be made in favour of the respondent, and if so what categories of costs or expenses should be included in that award.

5 The principles which govern the determination of an application for an order for payment of costs by the Tribunal in the context of proceedings for compensation for compulsory acquisition were explained by the President of the Tribunal, Justice Barker, in Clifford and Shire of Busselton [2007] WASAT 89 (S) at [39] to [63]. I respectfully adopt his Honour's analysis and explanation of the approach to be taken. In summary, his Honour explained that the starting point is that the State Administrative Tribunal is a costs neutral Tribunal (s 87(1) State Administrative Tribunal Act 2004 (WA) (SAT Act). It has, however, a discretion to order one party to pay another party's costs in an appropriate case (s 87(2) SAT Act). He discussed the development of approaches to the exercise of that discretion by reference to the example of the approach taken in vocational regulation proceedings. He referred to s 87(3) which empowers the Tribunal to make an order of an amount over and above the normal legal costs of proceedings to compensate a person in certain circumstances; to s 87(4) dealing with some factors to be considered on the question of costs in relation to review proceedings; to s 87(5) dealing with the effect of certain offers to settle and responses to that offer; and to the provisions of the State Administrative Tribunal Rules 2004 (SAT Rules) dealing with offers of settlement, and in particular r 42. His Honour then observed that the jurisdiction of the Tribunal in relation to the assessment of compensation is in the original jurisdiction of the Tribunal. In relation to compensation proceedings, his Honour said at [54] - [56]:

"Ordinarily, where a citizen feels obliged to commence a proceeding in the Tribunal for compensation under the LA Act they are dissatisfied with and have rejected an offer of compensation made by a resuming authority. If they succeed in their claim in the Tribunal, it would seem fair and reasonable that the Tribunal should ordinarily exercise its discretion under s 87(2) and award the applicant the costs of those proceedings. This is because, putting it simply, ordinarily if the applicant succeeds, it will have been demonstrated to the Tribunal that the applicant was not offered fair compensation by the resuming authority and was obliged to commence and maintain the proceedings in order to gain justice. It would seem unreasonable for an applicant to have to fight to gain fair compensation only to have to deduct from the compensation the costs incurred in obtaining the award.

Of course what should be recognised as 'success' in every case requires some further consideration. If the applicant does not succeed in obtaining a compensation award following a hearing that betters the original compensation offer made by the resuming authority, it can hardly be said that the applicant was successful in the proceedings. Indeed it could be said in such a case that the applicant has maintained an unjustified proceeding and so should have to pay the respondent its costs for the trouble and expense of defending the claim.

Either way it really is a question of fairness: on the one hand, in the case of a successful applicant it is fair that they should ordinarily receive their costs when they are put to the trouble and expense of proving that their claim is right, over the reticence of the resuming authority to recognise the rightness of the claim; on the other hand, it is fair that an applicant who does not establish that a resuming authority's offer was not right, should have to pay the resuming authority's costs given the trouble and expense to which they have put the resuming authority."

6 His Honour observed that the settlement rules fit into the regime he had just described "very neatly". He said at [61] - [63]:

"Nonetheless, there is an expectation in the context of the SAT Act provisions referred to earlier, and these settlement rules, that where a party did not accept an offer more favourable than the Tribunal's final order, then that party will ordinarily be liable to meet the other party's costs.

In the context of a compensation claim under the LA Act, offers to settle made by a resuming authority or an applicant will also ordinarily take into account costs and fees reasonably incurred.

In the final result, however, the Tribunal maintains a discretion to award or to not award costs notwithstanding the making of settlement offers and the rejection of settlement offers. This enables the Tribunal to take into account all the circumstances of the particular case."

7 In Mount Lawley Pty Ltd v Western Australian Planning Commission (2006) WASC 82 (S) Templeman J considered the approach to be taken to an award of costs in the context of a valuation case arising from the imposition of a reservation of the subject land. He considered at [19] - [51] a line of authorities commencing with Brewarrana Pty Ltd v Commissioner of Highways (No 2) (1973) 32 LGRA 170; Minister for the Environment v Florence (1979) 21 SASR 108; Pastrello v Roads and Traffic Authority of NSW [2000] NSWLEC 209; (2000) 110 LGERA 223 and culminating in Downie v Sorrell Council [2005] [2005] TASSC 74; 141 LGERA 304 at [112], where Hill AJ accepted that the approach to costs in cases for compensation for compulsory acquisition should include a consideration by the court of the following matters:

Costs should be awarded to the claimant if the award of compensation is significantly higher than the amount offered by the authority.

The determination of compensation is not ordinary litigation and arises out of a unilateral decision by the acquiring authority to compulsorily acquire the claimant's land.Costs are compensatory, not punitive.The extent to which an award of costs to the acquiring authority will erode the full benefit of the compensation awarded. [His Honour then referred to the passage from the judgment of Talbot J in Pastrello at [17].]The extent to which the claim was frivolous or excessive as compared to the amount awarded."

8 Templeman J also made reference to the decision of Parker J in Cerini v Minister for Transport (2001) WASC 309 (S) where, in considering whether the public interest in enabling dispossessed landowners to secure their due entitlement to compensation should displace the operation of O 24A of the Supreme Court Rules 1971 (WA), his Honour concluded that public interest was a relevant consideration but not a justification for displacing the normal operation of the rule. That position was endorsed by Templeman J in Mount Lawley, who also, at [51], extracted from the authorities he had referred to the proposition:

"that there is no overriding principle in a compensation case (or a valuation case) that the amount of compensation (or value) determined by the Court should not be eroded by denying the applicant his costs or requiring him to pay the costs of the relevant authority. In the end, whether or not there are statutory provisions relating to the exercise of the costs discretion in such cases, it is always necessary to have regard to the particular circumstances. It cannot be said that only in an exceptional case should an applicant be deprived of his costs, or required to pay the costs of the relevant authority."

9 In my view, the observations by Barker J in Clifford are entirely consistent with the authorities referred to by Templeman J in Mount Lawley and the conclusion reached by him, having regard to the particular statutory context within which the State Administrative Tribunal operates. As Barker J observed, the notion of "success" requires an examination of the particular circumstances of each case. Sometimes the question will involve nothing more than an examination of the comparison between the compensation awarded, and the position adopted by each party at the hearing. Frequently, however, the determination of compensation will be, as it was in this case, at a figure different from that propounded by either party at the hearing. In those cases, determination of a fair order in relation to costs may involve an examination of the outcome of particular issues in dispute at the hearing and a comparison of the rationale for the ultimate award as against the arguments advanced by each party at hearing.

10 Where there have been offers made by either or both of the parties in negotiations prior to hearing, whether in accordance with the SAT Rules, or as Calderbank offers, it will be necessary to have regard to those offers to determine what is fair by way of a costs order in the circumstances.

11 The history of negotiations and the positions adopted by the parties at the hearing are set out in [8] - [11] of the Tribunal's reasons in the substantive hearing. In essence, the Commission's position was that the total amount of the advance payment, namely $282,700 represented full compensation for the taking. Mrs Shim's claim, based on Mr Chesson's evidence, was for an amount of $1,200,000, although Mr Chesson's differing valuation approaches produced a number of figures from $459,000 plus stock to $1,890,000. At the hearing, Mrs Shim called Mr Todd, and relied upon his valuation which produced a total compensable amount of $514,000. The approach taken by Mrs Shim at the hearing was, in effect, to put forward a number of alternative bases of assessment of compensation and inviting the Tribunal to choose that which it considered appropriate in the light of the evidence adduced.

12 At the hearing in relation to costs, I was provided with a copy of a Calderbank letter (that is, a letter written without prejudice save as to costs) dated 19 April 2007 from Mrs Shim's solicitors to the solicitors for the Commission. That letter contained an offer to settle the matter for $100,000 over and above the interim payments made to that point. The letter is silent as to Mrs Shim's costs to that point, and the offer to settle must be read as inclusive of costs. The letter also refers to, and rejects, an offer apparently made on 3 April 2007 by the Commission to settle the matter for $15,000. By the time of the offer of 19 April 2007, the proceedings in this Tribunal had commenced, there had been four directions hearings and a mediation in the Tribunal. The offer was made at the point where Mrs Shim was about to file her Statement of Issues, Facts and Contentions and was faced with compliance with various directions leading up to the two-day hearing listed for late July 2007.

13 In the final result, Mrs Shim was awarded compensation of $510,000 plus interest, taking the total award to $549,202 as at 12 October 2007. She therefore succeeded in obtaining considerably greater compensation than she had offered to accept in April 2007.

14 Having regard to the observations of Barker J in Clifford, there is, in my view, a clear case for an award of costs to be made to Mrs Shim, at least from the date of offer of 19 April 2007. It was clear, at that point at least, that the Commission was not prepared to offer fair compensation, and Mrs Shim had no alternative but to proceed to hearing, and incur the expenses associated with doing so. Her compensation ought not be eroded by those costs.

15 In my view, the same consideration applies in relation to costs reasonably incurred by Mrs Shim prior to the offer of 19 April 2007. The Commission's position was effectively unchanged between the time of the second advance payment through to the completion of the hearing. That position was reaffirmed by its offer of $15,000 on 3 April 2007. That offer was merely a reaffirmation of what was clearly the Commission's position from the time of the early advanced payments onwards.

16 It is necessary, however, to determine whether the costs incurred by the dispossessed landowner were reasonable having regard to what the Tribunal has ultimately determined to be the appropriate amount of compensation. It is reasonable that costs of representation and expert advice be obtained to enable proper assessment of the acquiring authority's offer to be made. If, however, an exorbitant claim is pursued, that may be a reason to disallow some or all of the costs of pursuing that claim. In this case, Mr Chesson's expert report adopted valuation approaches which produced compensation figures well in excess of the amount ultimately allowed. It appears to me that those figures were produced as attempts to illustrate the significance of the loss of the premises to Mr and Mrs Shim and were excessively favourable to her claim. His report which produced those figures needs to be read, however, in the context that Mrs Shim was relying as well on Mr Todd's report which produced a lower figure (approximating the amount ultimately awarded), and that the respondent had indicated a preparedness to accept a much lower figure than most of Mr Chesson's figures. The need to deal with Mr Chesson's alternative approaches took relatively little time at hearing, although it probably consumed some time during the expert conferral processes. I do not, however, consider that the overall cost of the proceedings was significantly affected by the approach taken in Mr Chesson's report.

17 The ultimate decision of the Tribunal drew on the opinion of Mr Todd, and the support for that opinion by Mr Chesson. One of the approaches to valuation by Mr Chesson reflected the approach preferred by the Tribunal, albeit that the figures used by Mr Chesson produced a significantly higher value for the leasehold interest. The approach to compensation put forward by the applicant was rejected. On my view, it can be said that the respondent was substantially successful in her claim.

18 In the circumstances, I consider that there should be an award of costs in favour of the respondent in an amount to be agreed by the parties, or alternatively settled by the Tribunal. In approaching the quantum of the costs, I consider that an allowance for the initial evaluation assessments and meetings with lawyers and valuers concerning compensation around the time of resumption should appropriately be awarded as expenses resulting from the matter because of which the proceedings were bought - see s 87(3). To compensate for the aspects of Mr Chesson's report which were ultimately found to be excessive, I would suggest that the allowance in relation to his expert and Tribunal witness fee should be reduced by 50 per cent. There should be no allowance for the item referred to as "Brofam - Gerry Brown", since no information has been provided to explain that aspect of the expense summary. The claim for legal costs of the proceedings in the Tribunal by AustAsia Legal and Vicki Mountain and counsel fees are matters which may need more particularisation. I would be inclined, however, to award costs in relation to those items provided particularisation demonstrates their reasonableness. I would be hopeful that the parties could agree a figure in relation to those items. The item in relation to Mr Todd's expert witness fee appears, on its face, reasonable.

19 Hopefully the parties can agree costs but otherwise the matter can be relisted for directions.

The applicant pay the respondent's costs in an amount to be agreed by the parties, or failing agreement to be determined by the Tribunal.

I certify that this and the preceding [20] paragraphs comprise the reasons for decision of the State Administrative Tribunal.

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Administrative Tribunal Rules 2004

Administrative Tribunal Act 2004

Administration Act 1997

Region Town Planning Scheme Act 1959

WESTERN AUSTRALIAN PLANNING COMMISSION and SHIM [2007] WASAT 262 (12 October 2007)

(2000) 110 LGERA 223

WESTERN AUSTRALIAN PLANNING COMMISSION and SHIM [2007] WASAT 262 (12 October 2007)

At a glance

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WESTERN AUSTRALIAN PLANNING COMMISSION and SHIM [2007] WASAT 262 (12 October 2007)