Reported Decision: 74 NSWLR 700 New South Wales Court of Appeal CITATION: Valuer-General v Commonwealth Custodial Services Ltd [2009] NSWCA 143 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S): 21 May 2009 JUDGMENT DATE: 10 June 2009 JUDGMENT OF: Hodgson JA at 1; Tobias JA at 7; McClellan CJ at CL at 8 DECISION: Appeal dismissed with costs. CATCHWORDS: APPEAL - valuation of land - valuations - heritage restricted - valuation methodology - assumption of new building or actual building in its existing condition LEGISLATION CITED: Valuation of Land Act 1916 (NSW) CATEGORY: Principal judgment Commonwealth Custodial Services Ltd v Valuer-General [2007] NSWCA 365; (2007) 156 LGERA 186 CASES CITED: Valuer-General v Fenton Nominees Pty Ltd (1982) 150 CLR 160; 47 LGRA 95 Toohey's Limited v Valuer-General (1924) 25 SR (NSW) 75 PARTIES: Valuer-General (Appellant) Commonwealth Custodial Services Ltd (Respondent) FILE NUMBER(S): CA 40438/08 COUNSEL: J A Ayling SC/J B Maston (Appellant) M Craig QC/M Seymour (Respondent) SOLICITORS: Crown Solicitors Office (Appellant) Mallesons Stephen Jaques (Respondent) LOWER COURT JURISDICTION: Land & Environment Court LOWER COURT FILE NUMBER(S): LEC 30010/08 LEC 30153/08 LOWER COURT JUDICIAL OFFICER: Biscoe J LOWER COURT DATE OF DECISION: 28 November 2008 LOWER COURT MEDIUM NEUTRAL CITATION: NSWLEC 310 IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40438/08 LEC 30010/08 LEC 30153/08 HODGSON JA TOBIAS JA McCLELLAN CJ at CL WEDNESDAY 10 JUNE 2009 VALUER-GENERAL v COMMONWEALTH CUSTODIAL SERVICES LTD Judgment 1 HODGSON JA: I agree with the order proposed by McClellan CJ at CL and with his reasons. I would add some comments. 2 It was submitted for the Valuer-General that it could not be the case that the s 6A valuation of land may be affected by the actual state of improvements on the land: that must, it was submitted, be inconsistent with the assumption required by s 6A that the improvements had not been made. 3 However, once the Valuer-General has made the determination referred to in s 14G(2) of the Valuation of Land Act 1916, the assumptions in s 14G(1) must be made; and they include the assumptions that the improvements on the land when the value is determined may be continued and maintained, and that no other improvements may be made. In my opinion, the assumptions thus required are assumptions as to the improvements as they actually are at the relevant time, not as they might be if they were in an ideal condition. It follows that the s 6A valuation might vary according to the actual condition of the improvements. 4 In my opinion this is not precluded by s 6A of the Act, or the authority of Tooheys Limited v Valuer-General (1924) 25 SR(NSW) 75. 5 The land is still valued on the assumption that the improvements had not been made; but in considering the use to which the land can be put, the assumption has to be made that no improvements can be made to the land other than the improvements that are actually there. The latter assumption can then be the basis for adjusting the value of the land by comparison of the return available from it with the return available from other land that has no such restriction. 6 However, this does not mean that one must ignore any possibility of making the existing improvements more profitable by repairing or renovating them; if that would be a reasonable way of producing a return from the property then, as pointed out by McClellan CJ at CL, the potential cost of doing so can be factored in to determine the appropriate return. 7 TOBIAS JA: I agree with McClellan CJ at CL and with the additional comments of Hodgson JA. 8 McCLELLAN CJ at CL: The respondent, Commonwealth Custodial Services Limited owns Lot 120 in DP 882436 within the City of Sydney known as 120 Pitt Street, Sydney ("the land"). Erected on the land is a significant building occupied by the Commonwealth Bank and commonly known as "the money box". 9 Pursuant to s 14A(1) of the Valuation of Land Act 1916 (NSW) ("the Act") the appellant is required to determine the land value of the land each year. The correct approach to that valuation has been the subject of dispute between the parties. In Commonwealth Custodial Services Ltd v Valuer-General [2007] NSWCA 365; (2007) 156 LGERA 186 this Court resolved issues which had arisen with respect to the valuation of the land as at 1 July 2002, 1 July 2003 and 1 July 2004. The present appeal raises issues relating to valuations at 1 July 2005 and 1 July 2006. 10 The Valuer-General has determined that the land is "heritage restricted" for the purpose of the Act. Accordingly the value of the land must be determined in accordance with s 6A and s 14G of the Act. Those sections are as follows: "6A Land value (1) The land value of land is the capital sum which the fee-simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona-fide seller would require, assuming that the improvements, if any, thereon or appertaining thereto, other than land improvements, and made or acquired by the owner or the owner's predecessor in title had not been made. (2) Notwithstanding anything in subsection (1), in determining the land value of any land it shall be assumed that: (a) the land may be used, or may continue to be used, for any purpose for which it was being used, or for which it could be used, at the date to which the valuation relates, and (b) such improvements may be continued or made on the land as may be required in order to enable the land to continue to be so used, but nothing in this subsection prevents regard being had, in determining that value, to any other purpose for which the land may be used on the assumption that the improvements, if any, other than land improvements, referred to in subsection (1) had not been made. (3) Notwithstanding anything in subsection (1), in determining the land value of any land, being land in relation to which, at the date to which the valuation relates, there was a water right: (a) the land value shall include the value of the right, and (b) it shall be assumed that the right shall continue to apply in relation to the land. (4) For the purpose of determining the value of a water right, the value of any water secured by, or referable to, that right is to be ignored." 14G Valuation subject to heritage restrictions under EPI (1) Land that is heritage restricted on the date by reference to which its land value is to be determined is to have its land value determined on the basis of the following assumptions: (a) that the land may be used only for the purpose, if any, for which it was used when the value is determined, (b) that all improvements on that land when the value is determined may be continued and maintained in order that the use of that land as referred to in paragraph (a) may be continued, (c) that no improvements, other than those referred to in paragraph (b), may be made to or on that land. (2) Land is heritage restricted as at a particular date if the Valuer-General has determined that it would be reasonable to make the assumptions referred to in subsection (1) in respect of the land as at that date because of any provision of a planning instrument concerned with the heritage significance or heritage value of the land or any building, work or other thing on or in the land. (3) The Valuer-General may, and on the application of the owner of land must, make a determination as to whether a particular parcel of land is heritage restricted. (4) An application under subsection (3) is to be in the form required by the Valuer-General and accompanied by such supporting information as the Valuer-General may request. (5) The Valuer-General is not to determine that land is heritage restricted as at a particular date if the land is the subject of a listing on the State Heritage Register under the Heritage Act 1977 as at that date. Note. Division 6 of Part 6 of the Heritage Act 1977 deals with heritage valuations. In certain circumstances the Valuer-General is required to make a heritage valuation of land that is listed on the State Heritage Register under that Act. 11 The issue which the court was required to resolve in the earlier proceedings was whether, when land was "heritage restricted" s 14G(1), which, if they exist, assumes that the land has improvements on it, had the effect when determining the land value of negativing the assumption in s 6A(1) that improvements upon the land to be valued "had not been made". The leading judgment was that of Tobias JA. After considering the relevant authorities, and in particular the continuing authority of the Privy Council in Toohey's Ltd v Valuer-General (1924) 25 SR (NSW) 75, his Honour concluded that land which was heritage restricted was required to be valued as vacant land, it being assumed that improvements (other than land improvements) had not been made. However, although valued as vacant land, the assumptions arising from the fact that the land is "heritage restricted", being the matters referred to in s 14G(1), had to be considered when determining the value of the vacant land. Those assumptions include the purpose for which the land may be used (s 14G(1)(a)) and, although the existing improvements may be continued and maintained, exclude any other improvements from being made upon the land (s 14G(1)(b) and (1)(c)). 12 The debate in the previous case was essentially about valuation method. When using the comparable sales method of valuation to ascertain the value of a parcel of vacant land it is permissible to use the sale of other improved land and make the adjustments necessary to derive the value of that land without improvements. Although appropriate when analysing comparable sales, Toohey's case determined that this approach cannot be used to value the land itself. Because there were no comparable sales upon which the valuer for the Valuer-General considered he could rely he sought to depart from Toohey's case and determine the value of the land with its existing heritage improvements ("the improved value") and then deduct the value of the improvements, leaving the value of the vacant land. He determined the improved value by capitalising the rent using a discounted cash flow analysis. He assumed that the value of the existing improvements was their replacement cost, determined by a quantity surveyor, depreciated by 25% to take account of the age of the building and other matters. 13 This Court held that Toohey's case remained binding authority, and accordingly the approach of the Valuer-General was rejected. In the course of his reasons Tobias JA said: "115 Furthermore, in my view, there is nothing anomalous in permitting the use of comparable sales of improved land to be used for the purpose of deducing therefrom an unimproved value of the same land which is then applied, with or without adjustments, to the land to be valued but outlawing the use of that method with respect to the land to be valued by valuing it in its improved state and then deducting, in order to obtain its land value, the added value of its existing improvements where the statute as a matter of construction mandates that result. This is so not only for the reasons suggested by Biscoe J in Krisgay at [30] which I have recorded in [106] above and with which I respectfully agree, but also because the history, the objective and the text of ss 6A(2)(b) and 14G(1)(b) and (c) cannot, as I have already noted, be construed in a manner which has the effect of impliedly repealing of that part of s 6A(1) which requires land value to be determined upon the express assumption that the improvements upon the land at the date of valuation had never been made. 116 In the present case, it was therefore impermissible to approach the valuation task with respect to the property in the manner adopted by Mr Jackson which was the very antithesis of the assumption which s 6A(1) required to be made before the valuation exercise was commenced. That is not to say that the particular improvements upon the property were to be ignored for all purposes. In the context of the present case it required the valuers to value the property as vacant land (other than for land improvements) upon the basis first, that it would only be used for the purpose for which it was being used at the date of valuation; and, second, that the only building in which that use could be continued was the existing building upon the land with all its perceived benefits as a heritage building on the one hand and its perceived deficiencies in terms of its design, internal layout etc., on the other. 117 The valuation of the property upon those assumptions neither required nor mandated that the property be valued in accordance with Mr Jackson's methodology, which had been rejected as an available methodology by the Privy Council in Toohey's , by the High Court in Fenton Nominees and by this Court in the Trust Company case." 14 Both Spigelman CJ and Santow JA accepted the result proposed by Tobias JA but doubted whether, apart from the fact that the decision was of long standing and had been endorsed by the High Court (see Valuer-General v Fenton Nominees Pty Ltd (1982) 150 CLR 160; 47 LGRA 95), the reasoning of the Privy Council continued to be appropriate. Because the Act had been amended since Toohey's case in respect of heritage buildings and improvements were recognised in s 14G, the Chief Justice suggested they could be recognised when valuing the land itself as opposed to analysing the sales evidence. Tobias JA was firm in his rejection of that view. His Honour said: "127 Furthermore, I cannot accept his Honour's observations [referring to the reasons of Spigelman CJ] (at [9] and [16] respectively) that the effect of s 14G(1)(b) is that " removing the improvements is impermissible " or that the valuer is " now required to accept that the improvements did exist, but to value the land as if they did not ". The statutory assumption in s 6A(1) remains: the improvements on the land to be valued are to be removed and the land valued as if they had never existed. 128 However, this does not mean that the improvements which in fact exist are to be ignored. Their continuance under both ss 6A(2)(b) and 14G(1)(b) is to be assumed but only for the limited statutory purpose of ascertaining highest and best use to which the land may be put in determining its value. Contrary to the view of the Chief Justice, the text of the provisions referred to are incapable of extending beyond that consideration. Sugerman J so held in Ritchie (see [33] above) and he was one of the most experienced judges in this area of the law whose views are entitled to considerable respect. 129 Although I accept that the notional removal of the improvements from the land to be valued is a requirement of the statute, that notional removal is to take place before the land is valued. This is because, as a matter of logic, the land cannot be valued until that assumption is made. Only then does the valuer know exactly what it is that he is to value." 15 At the risk of complicating the discussion for little return I am also of the view that s 14G does not impact upon the authority of Toohey's case. The Privy Council held that the statute precluded the determination of the value of the vacant land by analysing the improved value of that land. As I understand the High Court in Fenton their Honours considered that their Lordships had dealt with the issue in terms of valuation principle derived from the terms of the statute (Fenton p 165). Nothing in s 14G impacts upon whether that principle continues to be appropriate. As I endeavour to explain below s 14G is concerned with the assumptions to be made which affect the development potential of heritage restricted land and which may affect its value as vacant land. 16 The valuers for both parties approached the assessment of the value of the land in the earlier proceedings on the assumption that the existing rental for the building on the land reflected market rates. However, it is now agreed that this is not the case and a different approach to valuation is required. Each party has retained a different valuer for the purpose of the valuation as at 1 July 2005 and 1 July 2006 and a further dispute has arisen with respect to the assumptions to be made when determining the land value for those years. 17 There were a number of issues which the primary judge was required to resolve. However, only one issue was raised in the appeal. It was submitted by the Valuer-General that in determining that issue his Honour erred in law. As framed by the Valuer-General that issue was said to be "whether the requirements of s 6A(1) coupled with those of s 14G(1) were complied with in the valuation methodology adopted by the primary judge." The appellant contended that the primary judge made an error of law because he failed to make an assumption, said to be required by s 6A(1), that the improvements on the land, other than land improvements as defined in s 4(1) of the Act "had not been made." It was submitted that at any stage of the valuation exercise where it was necessary to consider the improvements on the land, rather than assume that the building or buildings which currently exist on the land are in place, it must be assumed that the land is improved with a building or buildings, with the same design and layout as the existing building, but in a new or pristine condition. 18 The approach adopted by both valuers was consistent in many respects. They both agreed that it was appropriate to first identify the value of the land upon the assumption that the site was not heritage restricted. This value could be derived by using comparable sales. It was then necessary to adjust that value to reflect the impact of the heritage restrictions. The valuers agreed that this could be done by comparing the rental per m² lettable space achieved by buildings on unrestricted sites with the rental which could be achieved on the subject site, with its heritage restrictions and adjusting the land value for an unrestricted site in the same proportion to arrive at the land value of the restricted site. Mr Dempsey, who gave evidence on behalf of Commonwealth Custodial, identified four "sales" of heritage affected buildings from which he derived the market rental per square metre of the floor space available to rent within the existing building. Using the relative difference between that figure and the rental derived from comparable unrestricted sites he derived the value of the vacant land. In so doing he assumed that the building on the subject land would be let in its existing condition. 19 Mr Hill, who gave evidence on behalf of the Valuer-General, adopted the same methodology but assumed that the building on the subject site available to rent, although heritage restricted, was a new building rather than the actual building in its existing condition. This assumption had the effect of increasing the rental return from the building with a consequential increase in the value of the vacant land. 20 The primary judge accepted the position adopted by Mr Dempsey. His Honour's reasons were as follows "33 Mr Hill's novel assumption was that a hypothetical Moneybox in new, pristine condition should be rental valued as at each valuation date. The Valuer General submits that this should be accepted because the Moneybox in its actual condition is only relevant to determining the highest and best use of the Land. Thus, the argument goes, its actual condition is irrelevant when making a rental comparison for present purposes. The Valuer General says that is clear from the assumption in s 14G(1)(b) that the Moneybox may be continued and maintained in order that "the use of that land as referred to in paragraph (a) may be continued". The Valuer General submits that that limited relevance of the actual condition of the Moneybox was confirmed in the leading judgment of Tobias JA in the Court of Appeal in the earlier proceedings at [111]: '[T]he…assumption in s 14G(1)(b) refers to the continuance of the improvements existing upon the land as at the date of valuation only for the purpose of calling the land to be valued upon the basis, if it be the case, that the highest and best use is the continuation of its existing use…as required by s 14G(1)(a).' and in the judgment of Jagot J in Longreach Capital Pty Ltd v Valuer-General [2007] NSWLEC 721 at [40(9)]: 'In the context of sub para (b) of the definition of heritage valuation, 'continued and maintained' should be understood as a composite phrase conveying the meaning that the improvements on the land at the relevant date may remain there and be maintained by the owner so that the use may be continued.' 34 I do not accept the Valuer General's submission. In the first place, I do not think it follows from the reference to "use" in s 14G(1)(b) that, for present purposes, the rental value of a hypothetical new, pristine Moneybox should be assessed. Secondly, the dicta of Tobias JA focused on the assumption in s 14G(1)(b) and the dicta of Jagot J focused on the equivalent assumption in paragraph (b) of the definition of "heritage valuation" in s 123 of the Heritage Act . Section 14G(1) contains three assumptions, not two. The first two assumptions, in s 14G(1)(a) and (b), are expressly concerned with the "use" of heritage restricted land. The third assumption, in s 14G(1)(c), does not refer to use: "that no improvements, other than those referred to in paragraph (b), may be made to or on that land". The third assumption – as well as the second assumption – requires regard to be had to the Moneybox in its actual condition. There is no suggestion in the third assumption – nor in the second assumption – that regard should be had to improvements on heritage restricted land on the further assumption that they were in new, pristine condition at the valuation date. Thirdly, the statutory definition in s 14G(2) requires regard to be had to the very building that attracts the heritage restriction; that is, to the Moneybox as it is – not to a hypothetical Moneybox in new, pristine condition. That is because the Land is "heritage restricted" within the meaning of the definition in s 14G(2) – and thus s 14G(1) is attracted – because of provisions in the Central Sydney Local Environmental Plan of 1996 and Sydney Local Environment Plan 2005 that land is heritage restricted if it is land that is identified on which there is a building which is listed in the heritage schedule. The Moneybox is listed in the heritage schedule. Finally, the relevance of the actual condition of the Moneybox, with all its perceived benefits and deficiencies, was acknowledged in the earlier valuation proceedings in the Court of Appeal by Tobias JA (with whom Spigelman CJ and Santow JA agreed in this respect) at [116]. 35 In support of Mr Hill's assumption of a hypothetical Moneybox in new, pristine condition, the Valuer General cites Longreach (above) at [32] where Jagot J held that the cost of placing a building in a condition where it may be used for the purpose of its existing use or maintaining the building in that condition is irrelevant. The case is distinguishable. There the land was valued under the Heritage Act . The definition of "heritage valuation" in s 123 contains the same assumptions as appear in s 14G(1) of the Valuation Act . The land had formerly been used as a mental hospital. Jagot J rejected the approach of the applicant's valuer which allowed for the expenditure of a very large amount of money in order that the land might once again be used for that obsolete purpose. That was not the use of the land at the valuation date and was therefore irrelevant. 36 Accordingly, in my opinion, as at each valuation date, the rental comparison is between the current market rental value for a hypothetical new, modern building assuming that it was completed and ready for occupation on the Land at the valuation date, and for the Moneybox in its actual condition." 21 Before this Court the Valuer-General submitted that his Honour was in error. It was submitted that because s 6A(1) requires the land to be valued upon the assumption that it is vacant land, and the improvements on it have not been made, an approach which was reinforced by this Court in the earlier decision it was not open to the valuers to have regard to the existing building in its existing condition. It was submitted that only by assuming a new building could the obligation to value the land as vacant land be realised. 22 To my mind this submission should be rejected. Section 6A(1) is concerned with the value of vacant land and, for this reason, the valuer must assume that the improvements, if any, have not been made. However, the Act recognises that the value of vacant land, which will be a product of its commercial or other potential, may be affected by the purpose or purposes for which it may be lawfully used. Where land has the benefit of existing use rights, s 6A(2) requires the benefit if any, conferred by those rights, including the right to use an existing building to be considered when determining land value. In the case of heritage restricted land that effect may come from the restraint on the purpose for which the land may be used as well as the fact that the improvements are confined to the building or buildings presently on the land. Although the restrictions are likely to be the consequence of the particular improvements on the land, because they impact on its potential they affect the value as vacant land. For this reason s 14G requires the valuer to make assumptions consistent with the heritage restrictions when assessing the land value. 23 One of the assumptions which s 14G(1) requires the valuer to make is that the improvements which are on the land when the value is determined may be continued and maintained. To assume, as Mr Hill has done, that a new building, although consistent with the design of the existing building, is on the land is to assume a building other than the building contemplated in s 14G(1)(b). The statutory assumption is consistent with the reality. Most heritage buildings will be of some age which, even if carefully maintained, will be apparent in the materials, finishes and general condition of the building. All of these matters may affect the building's marketability and, because of the cost of maintenance they impact upon the available return. No building which is subject to heritage restrictions will be entirely new and in pristine condition. 24 To my mind nothing said by this Court in Commonwealth Custodial about s 6A requires the outcome for which the Valuer-General contends. There is no difficulty in valuing the land upon the assumption that it is vacant land but with its potential development and ultimate return confined by the existing building and the purpose or purposes for which it may be used. That existing building may be more or less marketable than a new building and may have greater maintenance costs, but it is that building which the statute assumes will remain and accordingly defines the potential of the land as vacant land. 25 Although it must be assumed that the existing improvements continue, the section does not mandate any particular approach to the condition of the improvements The methodology adopted by the valuers in the present case required a comparison of the rental return from an assumed building, developed without heritage restrictions, with the return which can be achieved from the building as heritage restricted. The latter figure can be determined by consideration of the rental return from comparable buildings with the disadvantages and advantages inherent in heritage restrictions. The analysis must assume that the rental return determined for the building on the land, with its heritage restrictions, is the optimum return available from that building in the market place. Although this could not be a new building it may be that the optimum return would be achieved by an extensive refurbishment of the existing building. The potential cost of that refurbishment would be factored in to determine the return from the refurbished building. 26 In the present case as I have indicated, Mr Hill for the Valuer-General contended that the statute required the valuer to assume a new pristine building. The primary judge rejected this approach and consistent with my analysis of s 14G he was correct to do so. Having rejected Mr Hill's approach his Honour accepted the approach of Mr Dempsey. Although Mr Dempsey did not indicate whether he had considered that the optimum return might be available from a refurbished building, rather than the building in its existing condition, by reference to the rentals of comparable buildings he derived the rental return which in his judgment was appropriate for the building on the land. 27 The approach taken by Mr Dempsey was not inconsistent with the assumptions a valuer was required to make under the statute and, there being no other available alternative, his Honour was entitled to accept it. In these circumstances his Honour has made no error of law. 28 In my judgment the appeal should be dismissed with costs. ********** 02/12/2009 - s14G(1)(a); s 14G(1)(b) and (1)(c); "affect' should be "effect" - Paragraph(s) [10]; [11]; [17]; [20]; [22] DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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