Land and Environment Court of New South Wales CITATION : Kremetis v City of Sydney Council [2010] NSWLEC 1054 APPLICANT: Efi Kremetis PARTIES : RESPONDENT: City of Sydney Council FILE NUMBER(S) : 10941 of 2009 CORAM: Murrell C KEY ISSUES: DEVELOPMENT APPLICATION :- conversion of premises from a boarding house to a single residence - impact on provision of low cost housing - social and economic impact on the local community Environmental Planning and Assessment Act 1979 LEGISLATION CITED: South Sydney Local Environmental Plan 1988 State Environmental Planning Policy (Affordable Rental Housing) 2009 DATES OF HEARING: 5 February 2010 and 12 February 2010 EX TEMPORE JUDGMENT DATE : 12 February 2010 APPLICANT Mr M Staunton (barrister) SOLICITOR Comino Prassas LEGAL REPRESENTATIVES: RESPONDENT Mr F Berglund (barrister) SOLICITOR M Flick of City of Sydney Council JUDGMENT: THE LAND AND ENVIRONMENT COURT OF NEW SOUTH WALES Murrell C 12 February 2010 10941 of 2009 Efi Kremetis v City of Sydney Council This determination was given extemporaneously and has been edited prior to publication JUDGMENT 1 This is an appeal under s 97 of the Environmental Planning and Assessment Act 1979 against the Sydney City Council's non-determination of a development application for the conversion of the premises known as No. 27 Roslyn Street, Rushcutters Bay, Kings Cross from a boarding house to a single residence. No building works are proposed. 2 The subject premises is a three-storey terrace, with a land area of some 160 square metres, and a rear lane vehicle access of six metres to Kellett Place, and a five metre frontage to Roslyn Street. The subject terrace is a heritage item, and I note that Nos. 25 to 33 Roslyn Street inclusive are listed in Schedule 2 - Heritage Items to the South Sydney Local Environmental Plan 1998 ('the LEP"). That is, five dwellings including the row of terraces, are heritage items and they are also within a conservation area. 3 The site is zoned 2(b) - Residential (Medium Density) Zone under the LEP, and dwelling houses are a permissible use with consent as are boarding houses. 4 The Court must be satisfied that the proposal is not contrary to the zone objectives, and the council does not contend that the proposed development is not consistent with the objectives of the zone. 5 In my assessment I have focused on the contentions between the parties as set out in the Facts and Contentions. The issue is the State Environmental Planning Policy No. 70 - Affordable Rental Housing 2009. This SEPP replaces the previous SEPP No. 10 - Retention of Low-Cost Rental Accommodation. SEPP No. 10 was far more confined and specific, whereas the new SEPP encourages the development of new affordable rental housing and assists the retention of existing affordable rental housing. As such, the SEPP contains a number of distinctive parts. Part 2 is for new affordable rental housing, which includes such things as in-fill affordable housing, secondary dwellings, boarding houses, et cetera, supportive accommodation, and homes. Part 3 is the retention of existing affordable rental housing, under which this application falls. 6 The aims of the Policy need to be considered, that is: - "(a) to provide a consistent planning regime for the provision of affordable rental housing, (b) to facilitate the effective delivery of new affordable rental housing by providing incentives, (c) to facilitate the retention and mitigate the loss of existing affordable rental housing, (d) to employ a balanced approach between obligations for retaining and mitigating the loss of existing affordable rental housing, and incentives for the development of new affordable rental housing, (e) to facilitate an expanded role for not-for-profit-providers of affordable rental housing, (f) to support local business centres by providing affordable rental housing for workers close to places of work, (g) to facilitate the development of housing for the homeless and other disadvantaged people who may require support services, including group homes and supportive accommodation." 7 The SEPP adopts the following definition of "boarding room": " a room a room or suite of rooms within a boarding house occupied or so constructed or adapted as to be capable of being occupied by one or more lodgers." 8 There is no doubt that the subject building operated as a boarding house, and that is not in dispute, and for the purposes of this SEPP it is considered to be a boarding house. 9 There is a specific provision which states that the provisions of the SEPP apply to the existing affordable rental housing irrespective of whether it is currently vacant or not. Boarding houses come under Pt 2, Div 3 for new boarding houses. Part 3 provides for the retention of existing affordable housing, including boarding houses: "(1) A person must not do any of the following in relation to a building", that is, in this part, (a) demolish the building, (b) alter or add to the structure or fabric of the inside or outside of the building, (c) change the use of the building to another use (including, in particular, a change of use to backpackers accommodation), (d) if the building is a residential flat building, strata subdivide the building. (2) In determining a development application referred to in subclause (1), the consent authority is to take into account the guidelines and each of the following: (a) whether there is likely to be a reduction in affordable housing on the land to which the application relates, (b) whether there is available sufficient comparable accommodation to satisfy the demand for such accommodation, (c) whether the development is likely to cause adverse social and economic effects on the general community, (d) whether adequate arrangements have been made to assist the residents (if any) of the building likely to be displaced to find alternative comparable accommodation, (e) the extent to which the development contributes to any cumulative loss of affordable housing in the local government area (f) the structural soundness of the building, the extent to which the building complies with any relevant fire safety requirements and the estimated cost of carrying out work necessary to ensure the structural soundness of the building and the compliance of the building with the fire safety requirements, (g) whether the imposition of a condition requiring the payment of a monetary contribution for the purposes of affordable housing would adequately mitigate the reduction of affordable housing resulting from the development, (h) in the case of a boarding house, the financial viability of the continued use of the boarding house." 10 For the purpose of determining "sufficient comparable accommodation", the requirement in New South Wales or in Sydney, that in three months preceding the lodgment of the DA, the vacancy factor is less than three per cent. The evidence provided by the applicant clearly demonstrates it was in fact probably half of the three per cent for the period nominated in the SEPP. 11 The SEPP provides a formula for assessing rental incomes and it is not disputed between the parties, that the use of the subject premises as a boarding house is not viable. This is an agreed fact between the parties, as the income from the property is less than three per cent, calculated by council's social planner as 2.6 per cent and calculated by the experts to these proceedings as 2.75 per cent. 12 There is an additional provision for a contribution to be made by the applicant where the rental income is between three and six per cent, however, this is not relevant in the circumstances here either. There are affordable rental housing guidelines set out by the Department of Planning and these relate specifically to Pt 3 of the SEPP. 13 In the introduction to the guidelines states that they are to ensure consistency of process and fairness of decisions. The Policy requires the assessment of criteria must be in accordance with these guidelines. 14 Also as background the guidelines state that the provisions of Pt 3 reflect those of the former SEPP No. 10 - Retention of Low Cost Rental Accommodation that now replaced by the new Pt 3. The guidelines say, however, that many of the principles and practices developed over the twenty-five year operation of SEPP No. 10 remain relevant and are reflected in the guidelines, together with improvements as such. I note, as brought to the Court's attention on behalf of the respondent, that the wording of some of the provisions has changed and I note this in my assessment. 15 Buildings to which Pt 3 applies, that is low rental residential buildings, which include boarding houses or residential flat building containing a low rental dwelling. Part 3 as I stated earlier applies to whether the building was previously operated as a low rental and is now vacant or is being used for another purpose. It is noted that there are also guidelines in terms of identifying a boarding house and distinguishing a boarding house from a residential flat building/low cost accommodation. In particular, residential tenancy agreements are not required for a lodger of a boarding house. 16 Part 3 applies to any proposal to demolish the building, alter or add to the structure or fabric of the inside or outside of the building, change of use and strata sub-division. Part 3 applies to alterations and additions which result in the structure or fabric being upgraded to a higher standard such as replacing shared kitchen or bathroom facilities with individual facilities, providing additional on-site parking or to comprehensive refurbishment of the building intended to raise the standard of accommodation and enable an increase in rents or tariffs. 17 Part 3 does not apply to routine maintenance activities needed to prevent the deterioration of the building and/or to ensure the health and safety of residents or maintain a reasonable standard of accommodation. Such work would be consistent with the aim of the SEPP to maintain low rental accommodation. Examples of routine maintenance include repairs, painting, floor coverings, light fittings, rewiring, et cetera and fire safety upgrade. 18 In my assessment of the development application I must have regard to the loss of affordable accommodation and the adverse affects on the local housing market and I may consider the social and economic impacts under 79C(1)(b) of the Environmental Planning and Assessment Act 1979. 19 When assessing a development application under Pt 3 the guidelines state: "The criteria for assessing the housing impact of development are set out in clause 49(2) of the SEPP. A balanced consideration of these criteria is required. A development assessed as having poor outcomes under some of the criteria may nonetheless warrant approval if these are outweighed by positive outcomes under other criteria." 20 In determining whether the development will result in a reduction of affordable housing under cl 50(2)(a) of the SEPP the guidelines state: "This is the most fundamental of the criteria and its determination will affect how each of the other criteria are assessed." 21 It is noted that the guidelines refer to changes and alterations to a boarding house, which results in increased rentals. As a rule of thumb the tariff level required to qualify the land tax exemption is used as a benchmark indicator of boarding house accommodation that is low rental and in that regard the applicant provided evidence on various figures for land tax exemption in terms of rentals. 22 The guidelines further state: "In determining applications that reduce low rental accommodation either by a direct loss of rooms or units or a change in their rental characteristics, care must be taken not to penalise owners wishing to take reasonable measures to maintain the value and income generating capacity of their asset or to ensure a safe, healthy and hygienic standard of accommodation for the tenants. While potentially increasing rent levels upgrading may nonetheless be necessary to ensure continued availability of acceptable rental accommodation." 23 The SEPP recognises and encourages buildings not to fall into disrepair and become substandard. As I stated, Pt 3 of the SEPP refers to the three per cent vacancy factor and it is important that a Sydney average vacancy rate of less than three per cent for the three months immediately preceding the date of lodgement of the development application is deemed to indicate that insufficient comparable accommodation is available to mitigate the impact of the development on demand for such accommodation. When this is the case no weight can be given in the assessment to information purporting to show a sufficiency of comparable accommodation and no further analysis is required to conclude that sufficient comparable accommodation is not available. 24 Nonetheless, there is evidence of surveys that have been conducted on fifty-four boarding houses of boarding houses within the vicinity. The number of rooms are not known. Nonetheless it goes without saying that the proposal has potential adverse social and economic impacts on the general community where there is a lack of low cost accommodation. 25 It is noted that there must be arrangements to assist displaced residents to find alternative accommodation and this was a matter that had also been raised by objectors. I also note that on the evidence provided by the applicant that alternative accommodation had been sought and obtained for two of the tenants. Whilst the building is currently not used as a boarding house, nonetheless I must have regard to the fact that it has been used as same and therefore this is a relevant consideration. 26 I also note that structural and fire safety upgrading as required by clause 50(2)(f) is vitally important to ensure that acceptable levels of health, amenity and safety be maintained in low rental housing. In some cases a building may be currently providing low rental accommodation only because it is in a substandard condition. The cost of undertaking work necessary to achieve acceptable housing standards needs to be considered in assessing an application for alteration or demolition of such a building. To substantiate a claim that the cost of the work required is prohibitive, work schedules should be prepared and assessed by a suitably accredited building industry professional. 27 There is no dispute between the parties that upgrading works were necessary for the subject building and photographic records were tendered. 28 The part of the guidelines that I now go to is the boarding house financial viability. The assessment of financial viability is only required for boarding house DAs and is a crucial part of the assessment of those applications: " The underlying principle is that it would be unfair and counterproductive to seek a continued operation of a boarding house where that operation could not provide a reasonable return on investment. A continued operation of a non-viable boarding house can have adverse consequences such as inadequate expenditure on maintenance leading to reduced amenity, health and safety for lodgers and neighbours ." 29 As I stated, there is a formula for the test for financial viability. Suffice to say that the experts agree, and it is not disputed, that the use of the subject premises as a boarding house is not viable, it was not viable and it is not viable into the future and that is having regard to what the maximum rents could be charged given the refurbishment as well as the rents that were collected at the time the property was purchased when the building was in need of not only general maintenance but significant maintenance works in order for it to be of an acceptable standard. 30 In my assessment I have considered all the evidence to the Court. I heard from Mr George Karavanas, town planner on behalf of the applicant, and Mr George Welling Smith, consultant town planner on behalf of the respondent council. There was also evidence given to the Court by two resident objectors who expressed concern about that the public interest would not be served by the proposal and that the conversion of the boarding house to a dwelling house will result in the loss of low rental affordable accommodation for people within the Kings Cross / Rushcutters Bay area. 31 The Court heard from a previous lodger of the building who, I understand, had lived in the premises for many years and undertaken caretaker, maintenance and cleaning works. He was concerned that he had been given a notice to vacate the premises. I also note that the applicant had provided evidence to show that alternative accommodation had been sourced and an ex gratia payment made. The co-ordinator of the Kings Cross Community Information Centre, gave evidence saying that in her opinion this is the last low cost boarding house in the area and it would be a huge loss to the community and that it has resulted in people having to leave their own community because of the loss of affordable accommodation. 32 The background is that the applicant bought the subject property as a business for her disabled brother to be run as a boarding house to provide an income. 33 Fire safety Evidence was provided to the Court by way of the notice from National Fire Engineering Pty Limited as follows: "The electrical wiring does not comply with the Australian standard. There are damaged and unsafe power points, light fittings that do not earth and they are extremely dangerous in the event one of the appliances fails within the house. In view of this, we confirm our advice that the boarding house is unsafe for occupation and should be closed immediately. Under no circumstances should any appliances be connected to the power points of the premises." 34 As such soon after purchasing the property in April 2008, the premises were then vacated in May 2008. A development application was submitted to the council for what was known as "works". The works involved the upgrading of the premises and from the photographs that were provided to the Court, it is clear that the premises were in a substandard condition. From the photographs there were maintenance issues and it transpired that on commencement of the maintenance works that further problems requiring rectification were identified in the building. One change is that an additional en suite was added to one of the bedrooms upstairs but the building layout - that is, a three storey terrace containing seven bedrooms for lodgers - remains the same. 35 In the refurbishment there has clearly been an improvement to the detailing and finishes. One could say that the finishes are not the finishes that one would put in a boarding house. Nonetheless the substantial cost is encountered for the "making the building good" in terms of its adequacy to provide for accommodation. 36 While it would appear that prior to purchase the routine checks on the property may not have been carried out, this is not a matter for me. On the evidence provided to the Court and in terms of the schedule of refurbishment costs, upgrading the building, that whilst there might be $100.000 or $200,000 maximum difference in the cost of finishes as such, however, the majority of those costs go to making good the building for habitable purposes. It is not in the public interest for buildings to be of a substandard condition and the SEPP is clear in terms of its intent that meeting the need for affordable housing is a major issue for sustainable cities. As such SEPP has cast the net wider to look at new accommodation in terms for affordable housing and not just the retention of boarding houses as such. 37 The Court has had regard to the experts' joint report. In summary, Mr Karavanas states that: "The alleged non-viability of the continued use of the premises as a boarding house has now been adequately substantiated. The SEPP guidelines for retention of existing boarding houses state that it would be unfair and counterproductive to seek the continued operation where it not provide a reasonable return. This is confirmed by the council's social affordable housing officer's assessment report which recommends consent for the conversion of the boarding house to a single dwelling on the basis of the continued use of the boarding house being non-viable." 38 Whilst the development application has not been determined by the council, there is a report from the council's social affordable housing planner and her conclusions after working through the provisions and requirements of the SEPP are that "the proposal is one that should be approved, that is, the conversion of the boarding house to a dwelling house, because the boarding house is financially unviable." 39 I have also examined the rent from the premises when purchased, which was $850 per week. I have had regard to what would be reasonable and having regard to the fact that this is a heritage item, I accept the applicant's submission that it is not unreasonable to provide for a thirty per cent reduction from revenue and even on the basis of a hundred per cent occupancy as opposed to an eighty-five per cent occupancy provided in evidence from the applicant, I am satisfied that the proposed use of the building as a boarding house is not viable and that there is no reason on the basis of an assessment under the affordable housing SEPP as to why the Court should not grant consent. 40 This is a difficult question for public interest. Public interests must be weighed not only in terms of the number but the level of accommodation provided as affordable housing. Clearly the increase in the value of properties that previously may have been traditionally used as boarding houses is a reason for the decline in the number of boarding houses. This process of change of use from a boarding house occurs not only when there is a change of ownership but if owners seek a realisation of the return in the property market. 41 The recent SEPP requires a current valuation as a boarding house - without consideration of the actual purchase price, to be factored into the assessment of economic viability. In this regard there is no dispute between the parties that the valuation of the property for a boarding house purpose is $1.75 million. This is the value factored in for the rental return and the yield or the return is less than the three per cent specified in the SEPP. The valuation tendered also provides a valuation for the premises as a dwelling house in the vicinity of $2 million. 42 The applicant purchased the subject property for $970,000 and has spent a considerable sum of money on the property, in the vicinity of $400,000 to $500,000. In my assessment of the development application the fact that there is currently a conditional contract for the sale of the property is not a matter for my merits assessment under the SEPP. 43 Mr Welling-Smith's evidence is that "it appears that the applicant acquired a non-viable boarding house and that the large sum spent on upgrading it further eroded that position, however non-viability carries no greater weight in the assessment than the other factors to be taken into account under cl 50(2)". 44 Investment decisions by an applicant are not a matter for my consideration of an application under the SEPP and I must assess the application as required under the SEPP. The SEPP sets out criteria to provide a basis for the assessment of all development applications for change of use from a boarding house. 45 The SEPP requires viability to be taken into consideration as "critical and crucial" to the assessment process. Under the SEPP if the revenue/return for this property was in the vicinity of six per cent or between the three per cent and six per cent it may require further balancing. Whilst it is regrettable that this will no longer be a boarding house and contribute to affordable housing in the inner city, at the same time one cannot force people to conduct a business that is no longer viable and this is also a matter of public interest. 46 In my overall assessment I have determined that the application does not warrant refusal under the SEPP or s79C of the Environmental Planning and Assessment Act. The determination of this application on the merits and in the circumstances should not be seen as a precedent. 47 While the applicant may or may not have made a prudent decision to purchase the boarding house as a business as such this is not a reason to refuse consent. Rather, I must assess the facts and merits of the application under the SEPP. Refusing this development application would serve no purpose, as it would not guarantee the continuation of the premises being used for a boarding house given the agreed facts of a return of less than 3% on the current valuation. 48 As I stated the SEPP is one that is a relatively new instrument and it casts the net further for the provision of affordable housing and how it may be provided. The objective and purpose of the recent SEPP is not for boarding houses be retained that are not viable and that are not maintained to a reasonable standard. 49 The concerns of the objectors on the depletion of the number of boarding houses and affordable accommodation in the community are an important issue to be addressed. However in my consideration of this development application I must assess it under the statutory planning regime. That is, the Environmental Planning and Assessment Act and the SEPP of 2009 for affordable housing. The SEPP does not require the owner of a property that is not economically viable to be responsible to maintain premises for use as a boarding house. Clearly the use of the premises as a boarding house is not financially viable on the basis of the evidence as agreed between the parties to these proceedings and in my assessment there is no reason that would warrant refusal of the application. 50 Accordingly, on the basis of my assessment above the formal orders of the Court are: 1. The appeal in respect of the property known as 27 Roslyn Street, Rushcutters Bay / Kings Cross is upheld; 2. The development application submitted to the Sydney City Council is determined by the granting of consent subject to the conditions in Annexure "A". 3. The exhibits are returned except for 1 and 4. ___________________ J S Murrell Commissioner of the Court ljr Annexure 'A' Conditions of Consent Kremetis v City of Sydney Council (1) APPROVED DEVELOPMENT (a) Development must be in accordance with Development Application No. D1200911232 dated 6 August 2009 and Plan showing the use of the ground, first and second floor, received 6 August 2009; New Ground Floor Detail, received 27 November 2009; and Attic Store plan and section, received 27 November 2009: and as amended by the conditions of this consent. (b) In the event of any inconsistency between the approved plans and supplementary documentation, the plans will prevail. (2) NO APPROVAL FOR WORKS This development consent does not include any works to the existing building. Note: A Building Certificate shall be lodged with Council regarding any unauthorised works. (3) USE AS A SINGLE DWELLING The building must be used as permanent residential accommodation only and not for the purpose of a hotel, motel, serviced apartments, private hotel, boarding house, tourist accommodation or the like, other than in accordance with the South Sydney Local Environmental Plan 1998. (4) ATTIC STORE SHALL NOT BE USED AS A HABITABLE ROOM The attic store room shall not be used for habitable purposes. (5) USE OF CERTAIN ROOMS The cleaner's room shall be used as storeroom as shown on New Ground Floor Detail, received 27 November 2009. (6) VENTILATION MINOR WORKS The toilet located in the ground floor storeroom must be ventilated in accordance with the Building Code of Australia and AS1668.1-1998 and AS 1668.2-1991. (7) CLASS 1A (DWELLING HOUSES) - BCA CONDITIONS Smoke alarms complying with the requirements of the Building Code of Australia - Vol. 2 - Housing Provisions must be installed in the dwelling. ________________________ J S Murrell Commissioner of the Court ljr 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.