Land and Environment Court of New South Wales CITATION : BP Australia Pty Ltd v Roads and Traffic Authority of NSW [2006] NSWLEC 147 APPLICANT: BP Australia Pty Ltd PARTIES : RESPONDENT: Roads and Traffic Authority of NSW FILE NUMBER(S) : 31536 of 2004 CORAM: Biscoe J KEY ISSUES: Compensation - Compulsory Acquisition of Land :- Capitalisation rate evidence—inadmissibility of valuation reports which do not contain acknowledgment that witness has read expert Code of Conduct and agrees to be bound by it. LEGISLATION CITED: Land Acquisition (Just Terms Compensation) Act 1991, s 55 Ballina Shire Council v Jacobson [2006] NSWLEC 135; Blacktown City Council v Roads and Traffic Authority of New South Wales [2006] NSWLEC 37; Commissioner Of Succession Duties (SA) v Executor Trustee and Agency Co of South Australia Ltd (1947) 74 CLR 358; Cook and Edwards v City of Stirling (1991) 4 WAR 469; Eastaway v Commonwealth (1951) 84 CLR 328; CASES CITED: Fodor Investments v Hornsby Shire Council [2005] NSWLEC 71; Latimer v North Coast National Agricultural & Industrial Society (1938) 17 LVR (NSW) 67; Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705; Portal Software v Bodsworth [2005] NSWSC 1228; Roads Corporation v Dacakis [1995] 2 VR 508; The Commonwealth v Milledge (1953) 90 CLR 157 DATES OF HEARING: 15-17/03/2006 DATE OF JUDGMENT: 04/07/2006 APPLICANT: Mr J Robson, SC SOLICITORS Mallesons Stephen Jaques LEGAL REPRESENTATIVES: RESPONDENT: Mr P Tomasetti, Barrister SOLICITORS Blake Dawson Waldron JUDGMENT: THE LAND AND ENVIRONMENT COURT OF NEW SOUTH WALES BISCOE J 7 April 2006 31536 of 2004 BP AUSTRALIA PTY LTD v ROADS AND TRAFFIC AUTHORITY OF NEW SOUTH WALES JUDGMENT HIS HONOUR: A. INTRODUCTION 1 This is a claim under the Land Acquisition (Just Terms Compensation) Act 1991. It arises by way of an objection pursuant to the Act against the amount of compensation offered to the applicant of $2,860,040 in respect of the compulsory acquisition by the respondent of the applicant's land at 69 Sunnyholt Road, Blacktown, being Lot 5 in Deposited Plan 836203 (the acquired land). The compulsory acquisition was effected by notice published in Government Gazette No 95 of 11 June 2004 (the acquisition date). The purpose of the acquisition was to enable construction of the North-West Transitway. At the acquisition date there was a "BP Connect" service station on the acquired land. 2 Sections 54 and 55 of the Act relevantly provide as follows: 54 Entitlement to just compensation (1) The amount of compensation to which a person is entitled under this Part is such amount as, having regard to all relevant matters under this Part, will justly compensate the person for the acquisition of the land. …… 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, …… …… (d) any loss attributable to disturbance 3 "Loss attributable to disturbance" is defined in s 9. 4 In Further Amended Points of Claim filed on 2 March 2006, the applicant claimed $4,671,836.63 (plus statutory interest) comprising: · $3,900,000 in respect of the market value under s 55(a) of the Act; and · $771,836.63 in respect of loss attributable to disturbance under s 55(d). 5 In Points of Defence filed on 14 March 2006, the respondent contended that compensation is payable in the total amount of $3,502,419.50 comprising: · $3,305,000 in respect of market value under s 55(a); and · $197,419.50 in respect of loss attributable to disturbance under s 55(d). 6 At the conclusion of the hearing the parties agreed that the applicant is entitled to compensation under s 55(d) in the total amount of $228,431.41 comprising the following amounts under s 59 of the Act: · $23,193.91 in respect of legal costs under section 59(a); · $11,375 in respect of valuation fees under section 59(b); · $150,490 in respect of stamp duty under section 59(d); and · $43,372.50 in respect of site closure costs and consultants' fees under section 59(f). 7 Thus, the only matter still in dispute between the parties is: What was the market value of the land on the date of its acquisition? B. THE ACQUIRED LAND 8 On the acquisition date, the acquired land comprised a recently refurbished going concern service station and convenience shop, with Cafe Zip component, operating under the "BP Connect" banner. The main building was divided into three main areas: the consol office and Cafe Zip on the right hand side; storeroom and amenities on the left; and in the middle the main retail store. It was purpose built, having been redeveloped about the year 2001. The site had a three island forecourt, with in ground fuel storage tanks, three above ground double sided multi point fuel pumps selling fuel and a separate diesel pump. The building was in good condition and well maintained, commensurate with its age. The service station and shop have been demolished since the acquisition date. 9 The acquired land has a total site area of approximately 2,277 square metres. It is a level, irregularly shaped block. Its frontage to busy Sunnyholt Road is approximately 36.699 metres. 10 The acquired land is within close proximity of the Blacktown central business district. It is on the north eastern corner of the intersection of Sunnyholt Road and Sackville Street, which is controlled by traffic lights. The site has access from traffic travelling in a southerly direction on Sunnyholt Road, from a northerly direction on Sunnyholt Road with a right hand turn into Sackville Street, and from Sackville Street. There is good visibility for traffic travelling in all directions and the site can be accessed from both streets. 11 Surrounding development comprises mainly residential single storey and attached dwellings to the east, with the main commercial and retail development located at Blacktown; and strip retail, fast food outlets, and commercial and industrial development, with office and showrooms on Sunnyholt Road. On the acquisition date there was a Shell service station on the opposite side of Sackville Street (it has since been removed). 12 The zoning is 2(a) Residential A under the Blacktown Local Environmental Plan 1988. The use of the site as a service station and convenience store is a non-conforming use within a residential 2(a) zone. However, a service station operated on the site for an extended period and was upgraded with Council consent. The property enjoys existing use rights. C. THE VALUATION EVIDENCE 13 It was agreed by the parties' expert valuation witnesses, Mr Coad for the applicant and Mr Paris for the respondent, and I accept, that: (a) the appropriate valuation methodology is capitalisation of market rental. This methodology involves choosing an appropriate capitalisation rate from comparable sales and applying it to the market rental; (b) the market rental on the acquisition date was $281,000 per annum; (c) the highest and best value of the land was as an investment property owned by a passive investor with a long term lease (10 years plus a similar option) to a major oil company, being BP Australia. 14 Thus, the only issue when determining the market value is: What is the appropriate capitalisation rate? 15 Mr Coad and Mr Paris produced a joint report dated 13 September 2005. In addition, Mr Coad produced a report dated 25 July 2005 and a report in reply dated 24 November 2005; and Mr Paris produced a report dated 11 June 2005 and a report in reply dated 1 December 2005. The main conclusions in these reports may be shortly summarised as follows: Valuer Parties Date of Report Rent p.a. $ Cap. Rate Value $ Paris respondent 11.6.04 265,602 8.5% 3,125,000 7.25% 4,135,000 Coad applicant 25.7.05 300,000 7.5% 4,000,000 7.75% 3,870,000 Joint Report 13.9.05 281,000 Coad: 7.2% Coad: 3,900,000 Paris: 8.5% Paris: 3,305,000 Coad applicant 24.11.05 281,000 7.2% 3,900,000 Paris respondent 1.12.05 281,000 8.5% 3,305,000 16 Although Mr Coad gave a range of capitalisation rates in his first report of 25 July 2005, the rate that he adopted therein was 7.5 percent. 17 Mr Coad and Paris also produced a second joint report dated 14 March 2006, which included a schedule of 12 comparable sales to which they finally had regard when determining the capitalisation rate. 18 Mr Coad and Mr Paris stated the following in their first joint report of 13 September 2005, which I accept: Both valuers agree on the same basic methodology in that the Highest and Best Value of the site would be as an investment property with an assumed long term lease to a major oil company being BP Australia and a market rental was calculated on a piecemeal approach by each valuer based on fuel throughput and shop or convenience store sales. Both valuers agree on a rental value based on fuel throughput at $113,000 per annum and a rental for the shop of $168,000 per annum giving a total rental for the site of $281,000 per annum. The valuers were unable to agree on a capitalisation rate. The valuers agreed that each of the capitalisation rates as used in their valuations being B. Coad range of 7% - 7.5% and M. Paris 8.5% can be sustained from the general sales evidence. Therefore, using the revised agreed rental of $281,000 per annum, utilising the capitalisation rates of each valuer, the calculation is as follows: B. Coad Adjusted: Rental of $281,000 per annum capitalised @ 7.2% yields a rounded value of $3,900,000 M. Paris Adjusted: Rental of $281,000 per annum capitalised @ 8.5% yields a value of say $3,305,000 As can be seen from supporting sales evidence of investment properties there is a wide range of capitalisation rates. As shown in B. Coad's valuation the range is between 6.85% yield and 10.2% yield. In M. Paris' valuation the range shown is between 6.85% yield and 11.91% yield. This range of yields or capitalisation rates is over a range of service stations mainly leased to substantial oil company tenants on long term leases. 19 At the hearing, the following statement of the valuers was tendered apparently by way of explanation: At our initial joint meeting we could not agree on a mutually acceptable capitalisation rate. Mr Coad agreed his capitalisation range would be 7% to 7.5% from all the available sales and Mr Paris reaffirmed his capitalisation rate of 8.5% based on the agreed rental of $281,000 per annum net. 20 Why Mr Coad moved from a range of 7.25 percent to 7.75 percent in his first report to 7 percent to 7.5 percent in the first joint report was not explained to my satisfaction. 21 I accept the evidence of Mr Paris, with which Mr Coad agreed, that the factors to be taken into account, and which they did take into account, in determining the capitalisation rate, are as follows: a) Covenant of tenant — generally, the stronger the covenant the lower the capitalisation rate; b) Length of lease — generally, the longer the lease the lower the capitalisation rate. A lower capitalisation rate is generally reflected in a longer term lease, for example 10 years and beyond, whilst a higher capitalisation rate would apply to short term leases, for example five years; c) Condition of improvements — generally, the more modern the facilities and the better the condition of improvements the lower the capitalisation rate. Where the property is in poor condition and requiring capital expenditure a higher capitalisation rate is required; d) Layout of improvements — generally, the more convenient or advantageous the layout the lower the capitalisation rate. The layout of the forecourt and size of convenience store have direct impact on level of custom which can be serviced. This is reflected in a higher capitalisation rate for poor forecourt layout and small shops, whilst more advantageous forecourt layout and larger shop will be reflected in lower capitalisation rates; e) Rental — generally, the higher the rental is above market the greater the risk that the rental will not be sustained and therefore the higher the capitalisation rate. Rental is crucial to the capitalisation rate when comparing and analysing investment sales of services stations. Generally speaking, the higher the rental is considered above market, the greater the risk in this rental not being sustained beyond the terms of the existing lease and therefore a higher capitalisation rate would be used (the greater the risk the greater the return which needs to be earned); f) Zoning of site — The zoning can have a direct impact on the capitalisation rate due to the implied future potential for redevelopment of a site. The greater the redevelopment potential the lower the capitalisation rate. With restricted redevelopment potential a higher capitalisation rate will apply; g) Access — the greater the ease of ingress and egress to a site, the lower the capitalisation rate. 22 The valuers agreed, and I accept, that the most important of these factors are the strength of the tenant's covenant and the length of the lease. 23 I accept the analysis by Mr Paris, with which Mr Coad agreed, regarding the application of those factors to the acquired property, to the following effect: Factors Analysis Regarding Applicant's Property (a) Covenant of tenant BP, the assumed tenant provides a strong covenant. BP provides security of tenure because of the tenant's ability to pay the rent plus outgoings and to maintain the improvements over the term of the lease. This strong covenant decreases the capitalisation rate required. (b) Length of lease Mr Coad and Mr Paris agreed on a 10 year lease with options for the subject property. They agreed that this term of lease is considered average for service stations. It has a neutral effect on the capitalisation rate required. (c) Condition of improvements The site was rebuilt about 4 years ago in the new BP Connect image. The good condition suggests a lower capitalisation rate. (d) Layout of Improvements The property had an adequately sized convenience store; however, the offset forecourt in starting gate formation with restricted pump access and limited on site parking was detrimental to the fuel throughput and shop sales at this site. This should be reflected in a higher capitalisation rate for poor forecourt layout. (e) Rental The property rent is considered to be market rent, therefore having a neutral effect on capitalisation rate. (f) Zoning of site The property is zoned Residential 2(a) under the Blacktown Local Environmental Plan 1988. The fact that the site has "existing use rights" could be considered beneficial in any future development of the site as it increases development opportunities for alternative uses without restriction to those uses permitted in the Residential 2(a) zone. The Residential 2(a) zoning it is not as advantageous as a General Business zoning and as such is reflected in a higher capitalisation rate. (g) Existing service station competition in surrounding area The site was affected by competing service stations in Sunnyholt Road, Vardys Road, Quakers Hill Parkway, Richmond Road, Third Avenue, Reservoir Road, Flushcombe Road, Blacktown Road, Bungarribee Road and Windsor Road. This high level of competition creates a requirement for a higher capitalisation rate. (h) Access Sunnyholt Road carries a large volume of traffic and with the existing bus lane there are difficulties of ingress and egress to the site. This increases the capitalisation rate required. 24 In his report in reply of 24 November 2005, Mr Coad stated that the rental figure of $281,000 per annum agreed in the first joint report was "below market levels"; that the market based rental was $300,000 per annum; and that if a $281,000 rental were to be used, then a capitalisation rate of 7.2 percent should be adopted. On objection being taken, I held that this report was only admissible to explain why he adopted a capitalisation rate of 7.2 percent in the first joint report. I ruled that I would not admit as valuation evidence his opinion that the market rental was $300,000 per annum, because it was inconsistent with the rental that he had agreed with Mr Paris in their first joint report, and the inconsistent evidence was not permitted by the Practice Direction: Expert Witnesses No 22. I also ruled that I would not admit as valuation evidence his reliance on a sale at Blakehurst and on recent unidentified transactions, as they were not referred to in the experts' schedule of the comparative sales to which they had regard in their second joint report of 14 March 2006. 25 At the hearing, Mr Coad continued to favour a capitalisation rate of 7.2 percent. D. APPLICANT'S SUBMISSIONS 26 The applicant submitted that I should adopt a capitalisation rate of 7.2 percent, or alternatively, of 7.25 percent. The applicant submitted that Mr Coad's evidence as to the capitalisation rate should be preferred to that of Mr Paris for two reasons. The first reason was that Mr Coad has adopted a firmer capitalisation rate, consistent with the peaking market at the date of acquisition, whereas Mr Paris has disregarded more current comparable sales, and instead relied on dated sales in 2000/2001, resulting in a yield inconsistent with the market yield at the date of acquisition. Accordingly, it was said, Mr Coad's reasoning for a firmer capitalisation rate is sensible and sound. 27 The applicant's second reason as to why Mr Coad should be preferred was that, given the valuers agreed in their first joint report that each capitalisation rate "can be sustained from the general sales evidence", any doubt in relation to the valuation methodology as to the amount properly payable by way of compensation must be "resolved in favour of a more liberal estimate" in favour of the dispossessed owner: Commissioner Of Succession Duties (SA) v Executor Trustee and Agency Co of South Australia Ltd (1947) 74 CLR 358 at 374. Compensation is to be determined "in a generous rather than a niggardly spirit": Latimer v North Coast National Agricultural & Industrial Society (1938) 17 LVR (NSW) 67 at 73. The Executor Trustee principle was put forward in written submissions before the hearing began. However, in view of the tender during the hearing of the joint explanatory evidence of the value, to which I have referred (Exhibit 2), it seems to me that the foundation for this argument has disappeared. It was not referred to in the applicant's closing submissions. In any case, I have not found it necessary to have recourse to the Executor Trustee principle in this case. 28 It was alternatively submitted that I should not regard one valuer's opinion as more meritorious than the other, and therefore that I should resolve the question in favour of the rate that will result in a more favourable rate of compensation to the applicant: Cook and Edwards v City of Sterling (1991) 4 WAR 469 at 472-473 per Anderson J. I have not found it necessary to take this course. 29 The applicant submitted that the fuller reasoning of Mr Coad, as compared to that of Mr Paris, in their initial reports, should influence my decision. I have not found this consideration to be of assistance in adjudicating on the capitalisation rate. 30 The applicant, like the respondent, acknowledged that I was not bound to accept either valuer's opinion as to the capitalisation rate. E. RESPONDENT'S SUBMISSIONS 31 The respondent submitted that Mr Paris' capitalisation rate of 8.5 percent should be adopted because he had carefully considered the range of capitalisation rates between 6.85 percent and 11.38 percent for comparable service station sites, the features of the subject land, and the features of the comparable service stations. The respondent pointed to Mr Paris' report in reply, which set out in detail his reasons for adopting a capitalisation rate of 8.5 percent, the factors relevant to determining the capitalisation rate, and the relevant factors of the subject land (set out earlier in this judgment). The respondent submitted that unlike Mr Paris, Mr Coad did not apply a reasoned approach to the adoption of an appropriate capitalisation rate. 32 The respondent submitted that, while there is a recognised principle in valuation law that doubts ought to be resolved in favour of the dispossessed owner, the principle does not mean that in every case where there is a genuine dispute between the parties, the claimant's position is to be preferred. Reference was made to Roads Corporation v Dacakis [1995] 2 VR 508 at 526, where Batt J said: The respondents also called in aid of the statement by Dixon J in Commissioner of Succession Duties (S.A.) at 374 that in a case of compensation doubts are resolved in favour of a more liberal estimate. But, as that case indeed shows, that statement does not mean that valuations at first instance are immune from review in the case of error. It relates, rather, to the penumbral area in valuation matters where opinion, assessment and adjustment (perhaps unexpressed) are permissible. 33 The respondent submitted, and I accept, that the exercise is to determine value "not by a strict adherence to precise arithmetical calculations, but by a commonsense endeavour, after consideration of all the material before the Court, to fix a sum satisfactory to the mind of the Court as representing the value contained in the land on [the relevant date]": The Commonwealth v Milledge (1953) 90 CLR 157 at 162. The respondent referred to Brown, Land Acquisition (5th ed, Lexis Nexis Butterworths, Australia 2004) at 134-135: In practice the courts do not resolve a dispute in this manner. The "liberal estimate" principle does not imply that all doubts must, on the balance of possibilities, be resolved in favour of the claimant. It is submitted that the principle has limited scope and application. The duty of the court is to arrive at a figure that reflects the fair value of the land. The valuations are tendered to assist the court in determining that value. The valuations are not tendered on the basis that the highest figure must be accepted. The valuations are tendered to provide the court with the primary facts and the inferences that the expert valuer has drawn from those facts. Where the arguments are finely balanced in the mind of the judge, it may be that the judge will rely on the Executor Trustee principle. The application of the principle does not require the court to be unfair to the resuming authority. Faced with four different valuations, it may be the quality of the research and the reasoning that primarily influences the court in determining the market value of the resumed land. 34 The respondent submitted, and I accept, that a process of averaging the prices of comparable sales would be fallacious, and referred to the following passage in The Commonwealth v Milledge (1953) 90 CLR 157 at 161: Indeed [the trial judge] expressed the view, although he does not seem to have acted upon it, that the true basis for computation is not that to be found in one comparable sale, but in the average of a number, the larger the number the more acceptable the result. "Such a statistical average", he added, "will tend to eliminate the effect of the individual peculiarities (if any) of those in the transactions". We do not find it possible to give countenance to this view. Perhaps it would be safer to work from an average of several prices than from one price if the sales were substantially contemporaneous sales of parcels of land which were identical in all material respects, but it must be rarely, if ever, that a process of averaging sale prices can be anything but fallacious. 35 The respondent pointed to the detailed analysis of relevant factors and their application in Mr Paris' report in reply; to unsatisfactory aspects of Mr Coad's statement in reply, where he appeared to resile from an earlier agreement with Mr Paris as to market rent; and to Mr Paris' greater experience in valuing service stations. While these three considerations are factually sound, I have not found them to be of assistance in adjudicating on the capitalisation rate. F. OTHER VALUATION REPORTS 36 The respondent also submitted that I should take into account two other valuation reports of the applicant's land. The applicant opposed that course. The respondent's submission did not particularise what aspects of those valuation reports I should take into account. 37 One of those valuation reports was conducted on behalf of the Valuer-General by Preston Rowe Paterson and contained the valuation to which the applicant objected and which gave rise to these proceedings. This valuation report was an annexure to the Amended Application in these proceedings, and was located behind tab 1 of Exhibit A, a bundle of documents tendered by the applicant. It adopted a capitalisation rate of 8 percent and assessed the compensation payable to the applicant under the Act at $2,860,040. I regard the tender of this report as a tender of part of a Court record, which was included in the bundle of documents simply for the assistance of the Court. It was not tendered as evidence of value. 38 The other valuation report found its way into evidence as a result of the cross-examination of Mr Coad. He agreed that in preparing his own valuation he had, in the course of investigating the facts, looked at the Preston Rowe Patterson valuation report and at another valuation report dated 25 June 2004 by John B Corbin of Alcorn Corbin Nicholson Pty Ltd, but said that he did not take them into account in preparing his report. I admitted Mr Corbin's valuation report into evidence on the limited basis that it explained the cross-examination. It adopted a capitalisation rate of 8 percent and assessed compensation under the Act at $5 million (a figure which might be thought to be more helpful to the applicant than the respondent). 39 I reject the respondent's submission that these two valuation reports are admissible as valuation evidence in the case and that I should take them into account in that context. 40 In the first place, they were not admitted as valuation evidence but only as, respectively, part of the Court record, and as an explanation of some evidence given in cross-examination. 41 Secondly, expert evidence is not admissible unless an expert witness' report contains an acknowledgment that the witness has read the Expert Witness Code of Conduct and agrees to be bound by it, or unless the Court otherwise orders: see the Expert Witness Practice Direction 2003 at [4]. These two valuation reports contain no such acknowledgement. No application was made that the Court should "otherwise order". The provisions of this Court's Practice Direction also substantially appear in Part 31 r 23 of the Uniform Civil Procedure Rules 2005, which govern other NSW courts. The importance of compliance with the acknowledgement requirement has been emphasised by the courts, although compliance has been excused in cases where the court was satisfied that the report was in fact prepared in compliance with the Code, or that the opinions in it were likely to be impartial: see Portal Software v Bodsworth [2005] NSWSC 1228 (Brereton J) and Ballina Shire Council v Jacobson [2006] NSWLEC 135 (Jagot J), where the authorities are collected. 42 Thirdly, there is a danger that it would be unfairly prejudicial to the applicant to permit the use of these reports as evidence of value when they have not been verified on oath or affirmation, there has been no opportunity to test their makers in cross-examination, their makers have not agreed to be bound by the Expert Witness Code of Conduct, and the qualifications of their makers as relevant experts have been neither proved nor admitted. If the rules of evidence applied in these proceedings, I consider that the Evidence Act 1995 (NSW), s 136 would have empowered me to limit the use of the evidence because of those dangers and I would have exercised that power, if necessary, in order to restrict the use of the reports to the limited purposes to which I have earlier referred. The rules of evidence do not apply in these proceedings, but where there is such danger, I consider that an analogous position should be taken. 43 The respondent referred me to a compulsory acquisition compensation claim case of Blacktown City Council v Roads and Traffic Authority of New South Wales [2006] NSWLEC 37, where a valuation report of a valuer who determined compensation on behalf of the Valuer-General was tendered by the respondent and considered by Bignold J, although the valuer was not called as a witness in the case. The case is distinguishable from the present case, since in those proceedings, the tender was apparently made and the report admitted and acted upon without objection as evidence of value, whereas in the present case the admissibility of the two reports to which I have referred as evidence of value is in issue. 44 For the reasons that I have expressed, in my opinion, the two valuation reports in question should not be admitted as evidence of value. 45 I would add that even if the reports in question were to be admitted as evidence of value, I would not regard them as being of any significant weight having regard to the circumstances in which they came into evidence, the absence of verification, the absence of any opportunity to test their makers in cross-examination, the absence of an acknowledgment that their authors had read the Expert Witness Code of Conduct and agreed to be bound by it, and the absence of proof of, or an admission concerning, their makers' qualifications. G. COMPARABLE SALES 46 The appropriate capitalisation rate is the rate of rental that would be a fair return on capital invested in the subject land on the acquisition date, for the assumption is that a reasonable hypothetical vendor would be willing to sell the land and a reasonable hypothetical purchaser would be willing to purchase it for a capital sum which would return this rate: Eastaway v Commonwealth (1951) 84 CLR 328 at 340. The best way to determine the appropriate capitalisation rate is to base it on evidence of comparable investment properties: Rost and Collins, Land Valuation and Compensation in Australia (3rd edition, Southwood Press, Marrickville 1993) at 317. That is what Mr Paris and Mr Coad have endeavoured to do in this case. 47 In their second joint report dated 14 March 2006, Mr Coad and Paris produced an agreed schedule of 12 comparable service station sales finally used by them in considering the capitalisation rate. A copy of the schedule, with agreed amendments, is annexed to these reasons for judgment. 48 I had a view with the parties and their valuer witnesses of all the properties in the schedule, except for those numbered 4, 5 and 6. We also viewed the now vacant site of the subject property. 49 Mr Coad and Mr Paris agreed that there was a firming trend in the yields from the twelve comparable sales. This is illustrated when they are placed in chronological order as follows: Sale # Address Sale Price Contract Date Passing Rent Yield 6 Woolworths Petrol Plus $4,950,000 04/01 $417,000 8.42% 522 Pacific Highway, Wyoming 1 7 Eleven $3,000,000 05/01 $263,400 8.78% 103 Reservoir Road, Arndell Park 3 7 Eleven $3,440,000 05/01 $321,400 9.34% 98-104 Heathcote Road, Moorebank 4 7 Eleven $2,540,000 05/01 $265,000 10.43% 20 Richmond Road, Windsor 2 7 Eleven $2,600,000 10/01 $295,800 11.38% 361-363 Vardys Road, Kings Park 8 Woolworths Petrol Plus $3,171,000 01/02 $250,000 7.88% 34 Third Avenue, Blacktown 7 Woolworths Petrol Plus $5,350,000 06/02 $418,152 7.82% 97 Hume Highway, Chullora 11 Mobil Quix $4,920,000 05/03 $336,952 6.85% 187 Wilson Road, Green Valley Liberty 5 317 Pacific Highway, Charlestown/ $3,340,000 06/03 $319,000 9.55% Highfields 12 Metro Branded $1,700,000 08/03 $144,000 8.47% 63-69 Richmond Road, Blacktown 9 Woolworths Petrol Plus $2,965,000 04/04 $210,246 7.1% 218 King Georges Road, Roselands 10 Volume Plus $2,350,000 04/04 $240,000 10.2% 2 Acacia Avenue, Ruse 50 Mr Coad regarded the firming trend as significant. Mr Paris preferred to say that it was gradual, or definite, but would not accept that it was significant. However, he said that except for the trend, he would have adopted a capitalisation rate of about 9.5 percent, rather than a capitalisation rate of 8.5 percent. In my opinion, it was a significant trend and the trend was a weighty factor to be taken into account when assessing the appropriate capitalisation rate. 51 Mr Coad and Mr Paris agreed that sale 8 is the best comparison. Mr Coad considered that the most comparable sales were those numbered 7, 8, 9 and 11. Mr Paris said that the most comparable were those numbered 1, 2, 8 and 12. 52 The sales said by Mr Coad to be the most comparable yielded the following capitalisation rates: 7 June 2002 7.82 percent 8 January 2002 7.88 percent 9 April 2004 7.1 percent 11 May 2003 6.85 percent 53 The sales said by Mr Paris to be the most comparable yielded the following capitalisation rates: 1 May 2001 8.78 percent 2 October 2001 11.38 percent 8 January 2002 7.88 percent 12 August 2003 8.47 percent 54 However, in his statement in reply of 1 December 2005, Mr Paris said that sale 12 is an inferior investment overall and cannot be regarded as a comparable sale. His evidence in cross-examination was to a similar effect. In my view, it is a poor comparison and not entitled to much weight. 55 The main focus is on the remaining six comparables, which the valuers, between them, have identified as the most comparable. I consider that sale 10 (the Volume Plus site) is the least comparable. It is generally inferior to the acquired land and I think it should be given the least weight. 56 In considering comparability, one important aspect is the security of the lease covenants. In my opinion, having regard to the evidence, Woolworths, BP and Mobil Quix are all blue chip tenants of similar quality, whose lease covenants are very secure; 7 Eleven, a family owned company, is of lesser strength, but still a good tenant; while the covenants of Metro Branded and Volume Plus are of similar and still lesser strength. 57 As for the Woolworths sites, I think that the Woolworths sites would tend to have lower capitalisation rates than the acquired land because of their generally longer tenancies (taking into account the options), higher volume turnover opportunities, due to petrol discounting vouchers, and the Woolworths brand name. Mr Paris thought that the Woolworths brand name provided stronger security than that of BP or Mobil Quix. Mr Coad thought they were indistinguishable. I would conclude that any greater strength of the Woolworths brand name itself, as compared with the BP and Mobil Quix brand names, is of marginal and therefore limited significance. 58 I have taken into account the agreed factors bearing on the capitalisation rate and their application to the acquired land (referred to in pars 21 and 22 above). I have endeavoured to apply those factors to the comparable sites, taking into account what I observed on the view of those sites. The respondent submitted that the Business or Industrial zoning of comparable properties was a preferable zoning than the 2(a) Residential A zoning of the subject site, that has to rely on existing use rights. (I was referred to Fodor Investments v Hornsby Shire Council (2005) 141 LGERA 14). There was no contrary submission. I think that factor is entitled to a little weight. 59 I agree with the valuers that sale 8, which yielded 7.88 percent in January 2002, is the best comparison. It has a strong tenant, similar area and similar location. On the other hand, its lease term was somewhat longer, it had a superior layout of improvements, with a large convenience store and forecourt and better access due to a deceleration road lane, and is a Woolworths site. These factors tend to result in a lower capitalisation rate than the acquired land. I take into account that sale 8 is rather dated compared with the acquisition date. 60 Sale 7 in June 2002 yielded 7.82 percent. It has a somewhat longer lease term (in total). It has a Red Rooster outlet (as does sale 5), which would tend to increase the security of the tenancy, as it creates a second income stream. It has superior improvements, with a larger and better laid out forecourt. These factors tend to result in a lower capitalisation rate than the acquired land. The property shared a right of accessway with a motel, but I do not think this had a significant impact. Again it should be taken into account that this sale is rather dated compared with the acquisition date. 61 Sale 9 in April 2004 yielded 7.1 percent and was the sale dated closest to the acquisition date (apart from sale 10, which is otherwise the least comparable). It is a Woolworths site and has a longer lease term and superior layout of improvements, including a larger forecourt and a canopy which is connected to the convenience store (unlike the acquired land). These factors tend to result in a lower capitalisation rate than the acquired land. 62 Sale 11, the Mobil Quix sale in May 2003, yielded the lowest rate of 6.85 percent. The property had similar improvements to the subject site, including a convenience store and a detached canopy. On the other hand, it is located virtually in a shopping centre and I think its location is superior to that of the subject site. According to Mr Paris, the yield was out of line with the market. He considered that the yield on this sale was lower than market rate by a "good one percent" and advanced reasons for this view. Mr Coad accepted that the capitalisation rate was slightly, but not significantly, lower than market rate. Taking into account its location, the trend of the comparables and Mr Paris' reasons, I accept Mr Paris' conclusion on this point. 63 Comparable sales 1 and 2, which were favoured by Mr Paris, are among the earliest comparable sales. The auction sale price for sale No 2, the 7 Eleven service station at Kings Park, was $2,750,000, which produced a yield of 10.76 percent; but this sale was not completed and the property was resold in October 2001 at a lower price, as recorded in the schedule annexed to this judgment. Sales 1 and 2, two of the four comparable 7 Eleven service stations, were among twenty five 7 Eleven service stations all auctioned on the same date in May 2001 in New South Wales, Queensland and Victoria (sales 1 to 4). An auction catalogue stated: "A number of the 7 Eleven stores are leased pursuant to long term leases from Burmah Fuels Australia Limited. As part of BP Australia's acquisition of Burmah Fuels Australia Limited, the Australian Competition and Consumer Commission required BP to sell those Burmah sites which were leased to 7 Eleven. The sale by BP of these sites leased to 7 Eleven is part of that required disposal…." 64 I accept that this event led to significantly more such investment properties being in the market than in any other comparable period (although I would not describe the market as being "flooded", as Mr Coad did). Mr Coad said he did not take these sales into account as comparables in his first report because of their dates and the effect of having a number of auctions on the same day. In cross-examination, he said that he was not suggesting that the sale prices were lower than would normally be achieved. I consider that the reliability of these sales is somewhat diminished because of the significant variations in their yields. The respondent submitted that the variations in their yields are capable of being explained by logical considerations, such as differences in the quality of improvements. That may be sound in principle, but little light was cast upon this aspect in the evidence put forward in this case. The helpfulness of the four 7 Eleven sales is also somewhat diminished because they are rather dated. They are among the earliest in time, having taken place some three or so years before the compulsory acquisition date. I have taken into account the fact that both valuers considered sale 8 to be the most comparable, despite the fact that it occurred not long after the 7 Eleven sales, in January 2002. I consider that the 7 Eleven sales are of assistance in confirming the significant firming trend in capitalisation rates over the whole period. H. CONCLUSION 65 I disagree with Mr Paris' 8.5 percent capitalisation rate. In my view, it does not sufficiently reflect the firming trend. Nor does it sufficiently take into account the capitalisation rates of 7.88 percent, 7.82 percent, 6.85 percent and 7.1 percent recorded between January 2002 and April 2004 from sales 8, 7, 11, and 9, after allowing for the factors discussed earlier which would tend to lower those capitalisation rates compared with the acquired land. As discussed above, two of the sales which Mr Paris regarded as the most comparable were among the oldest and had widely differing yields of 8.78 percent and 11.38 percent: sales 1 and 2 in 2001 of 7 Eleven sites. 66 I also consider that Mr Coad's final capitalisation rate of 7.2 percent and his earlier adopted rate of 7.5 percent do not make sufficient allowance for features attaching to sales 8, 7, 11 and 9 (discussed above), which would tend to lower their capitalisation rate compared with that of the acquired land. 67 In my opinion, having regard to the whole of the evidence and all the competing considerations, a capitalisation rate of 7.75 percent should be adopted. Applying that rate to the agreed rental of $281,000 produces a market value, on my calculation, of $3,625,806. To this should be added the agreed sum of $228,431.41, to which the applicant is entitled under s 59(d) of the Act. I note that there is a claim for statutory interest. 68 I direct the parties to bring in short minutes which reflect my reasons for judgment and to list the matter before me for final orders at a time within three working days, to be arranged with my Associate. On that occasion I will hear the parties on costs if costs have not been agreed. 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.