AWF Prop Co 2 Pty Ltd v Ararat Rural City Council

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMON LAW DIVISION

VALUATION, COMPENSATION AND PLANNING LIST

S ECI 2020 01986

AWF PROP CO 2 PTY LTD (AS TRUSTEE) (ACN 603 996 407) and ARARAT WIND FARM PTY LTD (ACN 158 062 358)	Applicants
v
ARARAT RURAL CITY COUNCIL	Respondent
and
VALUER-GENERAL VICTORIA	Intervener

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JUDGE:	Richards J
WHERE HELD:	Melbourne
DATE OF HEARING:	29, 30, 31 July 2020, 21 September 2020
DATE OF JUDGMENT:	16 December 2020
CASE MAY BE CITED AS:	AWF Prop Co 2 Pty Ltd v Ararat Rural City Council
MEDIUM NEUTRAL CITATION:	[2020] VSC 853

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VALUATION OF LAND – Fire services property levy – Capital improved value of leased land occupied by wind farm – Valuation methodology – Whether occupancies to be valued are to be identified by title or occupancy – Whether wind farm leases to be taken into account in valuing ‘estate in fee simple unencumbered by any lease’ – Whether wind farm assets form part of land to be valued – Whether wind farm assets are chattels or fixtures – Application of s 154A, Property Law Act 1958 (Vic) – Valuation of Land Act 1960 (Vic), ss 2(1), 2(3), 5A, 13DC.

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APPEARANCES:	Counsel	Solicitors
For the Applicants	Ms L Hannon	Herbert Smith Freehills
For the Intervener	Mr DR O’Brien and Ms E Bergin	Land Use Victoria Legal

TABLE OF CONTENTS

Introduction [1]–[11]

Ararat Wind Farm [12]–[69]

Planning Permits  [16]–[19]
AWF Leases and AWF Land   [20]–[27]
AWF Assets  [28]–[67]
Local Sales   [68]–[69]

Legislation [70]–[84]

Valuation Evidence [85]–[159]

Valuation Evidence of Geoffrey Brown   [92]–[112]
Valuation Evidence of Paul Newman   [113]–[130]
Valuation Evidence of Peter Molloy   [131]–[159]

Question 1: What is the occupancy, or occupancies, to be valued? [160]–[174]

Question 2: How are the occupancies to be valued? [175]–[196]

Question 3: Are the AWF Assets part of the land to be valued? [197]–[231]

Are the AWF Assets chattels or fixtures? [200]–[217]
Section 154A, Property Law Act [218]–[229]
Are the AWF Assets ‘improvements’? [230]–[231]

Valuation [232]–[233]

Disposition [234]–[235]

HER HONOUR:

Introduction

Ararat Wind Farm is a 75 turbine wind farm near the town of Ararat in rural Victoria, operated by Ararat Wind Farm Pty Ltd (AWFPL). The wind farm is spread across land owned by a number of different Land Owners, which it occupies pursuant to 16 leases between AWF Prop Co 2 Pty Ltd and the various Land Owners, and a sublease from AWF Prop Co to AWFPL. The wind farm spans two municipalities: 70 turbines are in the Rural City of Ararat, with the remaining five in Northern Grampians Shire.

In March 2018, the Ararat Rural City Council issued a rate notice for the fire services levy in respect of the part of the wind farm located in the Ararat municipality. The notice was addressed to ‘Windlab’, which was a reference to Windlab Asset Management Pty Ltd, a company that provides asset management services to AWFPL for the Ararat Wind Farm. The rate notice specified a site value of $14,560,000 for the ‘various allotments’ of land comprising the wind farm, and a capital improved value of $470,400,000. It sought payment of a fire services levy of $740,625.60.

The rate notice was based on a supplementary valuation of the Ararat portion of the wind farm as at 1 January 2016, returned on 24 January 2018. The supplementary valuation was undertaken by Paul Newman, a certified practising valuer, who inspected the wind farm on 31 August 2016 and 1 November 2017. By the time of his second inspection, the construction of the wind farm had been completed and it was fully operational.

AWF Prop Co objected to the valuation of capital improved value at $470,400,000, on the ground that it was too high. It contended that the capital improved value was $14,560,000, the same as the site value of the land. On 24 August 2018, Mr Newman disallowed the objection. In September 2018, AWF Prop Co and AWFPL applied to the Victorian Civil and Administrative Tribunal to review Mr Newman’s decision, under s 22 of the Valuation of Land Act 1960 (Vic).

The proceeding was managed in the Tribunal’s Planning and Environment List. The Valuer-General Victoria intervened in and was joined as a party to the proceeding. In December 2019, Senior Member Jacono made final case management orders that identified the following questions for determination:

(a)What is the occupancy, or occupancies, to be valued for the purposes of assessing CIV [capital improved value] having regard to the Valuation of Land Act 1960 and, in particular, sections 2(3), 2(3A), 13DC(6), (7), (7A), (8), (9)?
(b)For the purposes of assessing CIV, how is the relevant occupancy or occupancies to be valued having regard to the principles set out in Challenger Property Asset Management Pty Ltd v Stonnington City Council (2011) 34 VR 445?
(c)For the purposes of assessing CIV, are the AWF Assets (as defined in the statement of Agreed and Non Agreed Facts at [90]) to be valued as part of the hypothetical fee simple, having regard to:
i.common law and/or statutory interpretation principles concerning fixtures and chattels, including the decision of this Tribunal in AusNet Electricity Services Pty Ltd v Whittlesea City Council [2014] VCAT 1637; and/or
ii.the operation of section 154A of the Property Law Act 1958?

The third of these questions concerns the key issue in dispute: whether the ‘AWF Assets’ — principally the wind turbines — are part of the land to be valued. The Valuer-General contends that they are, while the applicants maintain that they are chattels that should not be taken into account in valuing the land occupied by the wind farm.

The hearing of the Tribunal proceeding was listed in April 2020, but could not commence due to the COVID-19 pandemic. On 30 April 2020, the Valuer-General applied under s 23(3) of the Valuation of Land Act for the proceeding to be treated as an appeal to the Supreme Court. The application was supported by AWF Prop Co and AWFPL, and was not opposed by the Council.[1] I granted the application on 18 May 2020, being satisfied that the matter raised questions of unusual difficulty and general importance concerning the valuation methodology for wind farms in Victoria.
[1]Subsequently, by letter dated 12 May 2020, the Council advised the Court that it did not wish to take an active part in the proceeding.

I heard opening submissions and the evidence in late July 2020, including the concurrent evidence of three valuation experts — Geoffrey Brown was called by the applicants, and Mr Newman and Peter Molloy were called by the Valuer-General. The parties then filed written submissions addressing the three questions identified by Senior Member Jacono, and made their closing submissions on 21 September 2020.

I have concluded that answers to the questions posed by the Tribunal are:

(a) The occupancies to be valued for the purposes of assessing capital improved value are the separate occupancies created by the AWF Leases over the land owned by the separate Land Owners. Section 19 of the Fire Services Property Levy Act 2012 (Vic) provides that the owner of leviable land is liable to pay the fire services property levy. The occupancy on each separate Land Owner’s land must be valued in order to determine that Land Owner’s liability to pay the levy. Title, rather than occupancy, is the starting point for valuing the relevant land.

(b) Applying the principles in Challenger Property Asset Management Pty Ltd v Stonnington City Council,[2] the occupancies are to be valued by reference to a hypothetical sale of a fee simple interest in the land, on the basis that the fee simple interest is not affected by any lease. That does not dictate that the existing leases between the Land Owners and AWF Prop Co are to be disregarded. The leases are relevant in assessing the likely future occupation of the land and the market rental for that occupation. In particular, the rent being paid under the actual leases is likely to be a guide to the market rental for occupation, unless the leases are unusually beneficial or burdensome.

(c) The above-ground AWF Assets — the wind turbines and towers, the substation, the wind-monitoring masts, and the buildings — are not part of the land to be valued for the purposes of assessing capital improved value. They are chattels, not fixtures, at common law. Even if they were fixtures, the effect of s 154A of the Property Law Act 1958 (Vic) is to exclude them from the hypothetical fee simple estate to be valued. The remaining AWF assets — the turbine foundations, the roads, fences and carpark, and the underground cabling — are part of the land to be valued.

[2](2011) 34 VR 445, [80] (Challenger).

Applying these conclusions to the valuation evidence in this case, I prefer the initial valuation of Mr Brown to Mr Newman’s supplementary valuation and to the initial valuation of Mr Molloy. Mr Brown’s valuation is preferable because it was based on instructions that provided the correct legal framework within which to assess the capital improved value of the AWF Land. Mr Molloy prepared an alternate valuation based on Mr Brown’s instructions and using his methodology. The differences between these two valuations — $10,850,000 and $20,100,000 respectively — turn on matters of valuer’s judgment, about which I am at present unable to form a view.

My reasons for reaching those conclusions follow.

Ararat Wind Farm

I was assisted by a detailed statement of agreed facts, which is the primary basis for the findings of fact set out below. The agreed facts were supplemented by the evidence of the general manager of Ararat Wind Farm, Stuart Liddell, a report of a structural engineer, Ljubisa Petrovic of GHD, and two assets valuation reports by Damian Dalton of PP&E Valuations Pty Ltd.

Overview

The Ararat Wind Farm is located on rural land approximately 180 kilometres north-west of Melbourne and between 9 to 17 kilometres north-east of Ararat in western Victoria.

Construction of the wind farm commenced in August 2015, and practical completion was achieved in April 2017. The wind farm has a total installed capacity of 240 megawatts, but typically generates electricity at 26-29% of its installed capacity.

AWFPL operates the business known as the Ararat Wind Farm. It has a contract with Windlab Asset Management Pty Ltd to provide asset management services for the wind farm.

Planning Permits

On 22 October 2010, the Minister for Planning granted two planning permits for the Ararat Wind Farm, under Pt 4, Div 6 of the Planning and Environment Act 1987 (Vic): Planning Permit 09/004799 was granted under the Ararat Planning Scheme, and Planning Permit 5.2009.94.1 under the Northern Grampians Planning Scheme. The two permits are effectively identical.

Both planning permits allow:

Use and development of land for a Wind energy facility comprising [70 and 5] generators and associated infrastructure including access roads, cabling, permanent anemometers, internal powerlines, substations, excavation of rock material, earthworks, temporary concrete batching plants, maintenance and storage facilities, car parking, removal of native vegetation and alterations to roads and access to roads within a Road Zone Category 1.

Conditions 21 and 22 of the planning permits provide for decommissioning the wind farm. Condition 21 provides:

The wind energy facility operator must, no later than one month after all wind turbines have permanently ceased to generate electricity, notify the Minister for Planning in writing of the cessation of the use. Within a further six months of this date, the wind energy facility operator, or in the absence of the operator, the owner of the land on which the relevant turbine(s) is/are located, must develop the decommissioning plan to the satisfaction of the Minister for Planning.

Condition 22 provides:

The decommissioning plan must provide for the following:
a)        the removal of all above ground operational equipment;
b)        the removal and clean-up of any residual spills or contamination;
c)        the rehabilitation of all storage, construction, access tracks and other areas affected by the project closure or decommissioning, if not otherwise useful to the on‐going management of the subject land;
d)        a decommissioning traffic management plan; and
e)        a post decommissioning revegetation management plan.
The decommissioning plan must be implemented to the satisfaction of the responsible authority within 24 months of approval of the plan or within such other timeframe as may be specified by the responsible authority.

AWF Leases and AWF Land

AWF Prop Co is the lessee of the various portions of land on which the Ararat Wind Farm is operated by AWFPL. The portions of land on which the wind farm is located sit within larger parcels of land owned by a number of Land Owners, who otherwise use their land for agriculture and primary production.

The Land Owners have entered into 16 separate AWF Leases with AWF Prop Co as tenant, 12 of which are within the municipality of Ararat. The lessors under the AWF Leases are the Land Owners, who are the registered proprietors of their respective portions of the land, and who hold an estate in fee simple in that land.

Pursuant to the AWF Leases, the Ararat Wind Farm is located on the AWF Land, which comprises:

(a) the AWF Leased Land, which is exclusively occupied by AWF Prop Co as tenant under the leases, and includes the land upon which the wind turbines, the wind monitoring masts, the substation, and various buildings are located;

(b) the AWF Road Land, land licensed to AWF Prop Co by the Land Owners on which access roads are located; and

(c) the AWF Cable Land, land under which the underground electrical cables and communication cables are located.

The total area of the AWF Land is 77.05 hectares, spread across just under 5,000 hectares of rural land owned by the various Land Owners. Of that total area, 27.25 hectares is AWF Leased Land, 31.2 hectares is AWF Road Land, and 18.6 hectares is AWF Cable Land. The area of the AWF Land within the municipality of Ararat is 73.31 hectares, on which 70 of the 75 turbines are located.

All of the AWF Land is leviable land for the purposes of the Fire Services Levy Act.

A map of the wind farm is reproduced at Annexure 1. Two aerial photographs showing the distribution of the turbines and the title boundaries of the Land Owners are reproduced at Annexure 2.[3] Wind turbines on the AWF Land to the north and south of the Pyrenees Highway are connected by underground electrical and communication cabling that travels under the Pyrenees Highway.
[3]The first image presents the land owner boundaries and wind farm turbine locations in the Northern Grampians Shire, and the second provides the same in the Rural City of Ararat, as of 2019.

One of the AWF Leases commenced on 24 September 2013, and the other 15 commenced on 26 June 2015. On 23 June 2015, AWF Prop Co 2 entered into an Agreement to Sublease with AWFPL, which operates the Ararat Wind Farm. In the Agreement to Sublease, AWF Prop Co agreed to grant AWFPL subleases of the AWF Leased Land, and a lease of ‘Affixed Plant’ (defined to include all wind turbines and electrical distribution and conditioning equipment).

The terms of the AWF Leases are effectively identical.[4] The parties agreed the following summary of their key terms:
[4]Where it is necessary to refer to a specific term of the AWF Leases, I will refer to the lease between AWF Prop Co and John Clare Stevens dated 26 June 2015 (Stevens lease).

62 The cover page to each AWF Lease states the ‘land’ that is leased to AWF Prop Co (i.e. the AWF Leased Land).
63 The cover page to eleven of the AWF Leases describes the ‘land’ as being:
Part of the land described in Certificate of Title… being the area marked A (Turbine Sites) in the attached plan and defined as the ‘Premises’ in clause 1.1.

64 The cover page to four of the AWF Leases describes the ‘land’ as being:
Part of the land described in Certificate of Title… being the area marked A (Turbine Sites) and B (Anemometer Site) in the attached plan and defined as the ‘Premises’ in clause 1.1.

65 The cover page to one of the AWF Leases describes the ‘land’ as being:
Part of the land described in Certificates of Title… being those areas also marked A (Turbine Sites), B (Anemometer Site), C (Electricity Sub-Station Site) and G (Operation and Maintenance Building Site) in the attached plan and defined as the ‘Premises’ in clause 1.1.

66 [In] the AWF Leases, the AWF Leased Land is referred to as the ‘Premises’. For the purposes of describing the terms of the AWF Leases in [67] – [72], the term ‘Premises’ is used in order to be consistent with the terms of the AWF Leases. However, the terms Premises and AWF Leased Land both refer to the area of land leased (as opposed to licensed) to AWF Prop Co.
67 The term of the AWF Leases is generally 25 years. Under the AWF Leases, the lessee generally has an option to renew an AWF Lease for a further 25 year term.
68 Pursuant to the AWF Leases, the lessee agrees to pay any additional rates taxes assessments and outgoings which are, or which shall during the term, be imposed or charged upon the land by reason of the AWF or the lessee’s occupation of the Premises.
69 Pursuant to the AWF Leases:
(a) the lessee must, upon the expiration or sooner determination of the lease, remove the Turbines and any other apparatus, equipment or works of any nature erected or installed upon the Premises or the Development Area to a depth of 0.5 metres below the level surface of the soil at the cost of the lessee and to make good any damage thereby caused to the reasonable satisfaction of the lessor and leave the Premises in accordance with all statutory and other rules and regulations applicable to the Premises and in force at the expiration of the lease;
(b) the lessee shall not be required to remove the wind turbine foundations and the access roads.

70 Pursuant to the AWF Leases, the lessee must comply with all obligations of the lessor in respect of the Premises or pursuant to any planning obligations imposed by a relevant authority for the development, management, preservation or conservation of the land in connection with the AWF and to indemnify the lessor from and against all costs, claims, liability and expenses arising from such obligations.
71 Pursuant to the AWF Leases, the rent is adjusted annually in accordance with the Consumer Price Index (All Groups) of the Commonwealth of Australia for the City of Melbourne in the State of Victoria.
72 Pursuant to the AWF Leases, the lessee can determine the term of an AWF Lease on not less than 6 months’ notice in writing.

AWF Assets

The following AWF Assets are located on AWF Land:

(a) the wind turbines and towers, including the wind turbine foundations;

(b) a substation;

(c) a multipurpose management and Administration Building;

(d) a storage shed;

(e) a hazardous materials Shelter;

(f) wind-monitoring masts;

(g) access roads and fences;

(h) a carpark;

(i) underground electrical cabling and communication cabling; and

(j) power lines including communication lines.

Wind turbines

Each wind turbine and tower is located on AWF Leased Land, and comprises:

(a) a tubular steel tower, approximately 85 metres high;

(b) the nacelle, which houses the gearbox, a 3.2 megawatt wind turbine generator, controller, and other equipment, which is installed on the top of the tower; and

(c) three rotor blades, each weighing 9 tonnes and 50 metres in length, which are attached to a rotor hub connected to the nacelle.

The rotor diameter is approximately 103 metres and the tip height of the rotor blades is approximately 135 metres high.

The components of the wind turbines and towers were manufactured off site and delivered to site in a dismantled state. Each nacelle was manufactured and delivered as a single unit, which was bolted to the top of the tower structure on site. The wind turbines and towers were each assembled and installed on site in a matter of days.

Within each wind turbine are voltage step up transformers that increase the voltage from 6kV to 33kV.

There are no fences around the wind turbines and the surrounding land continues to be farmed by the respective Land Owners.

Each tower is connected to either a rock anchored foundation or mass gravity foundation. Of the 75 wind turbines, 41 are connected to mass gravity foundations and 34 are connected to rock anchored foundations.

The mass gravity foundations consist of approximately 340 cubic metres in volume of concrete and 36 tonnes of conventional steel reinforcement, measure 17 metres face to face, and are embedded approximately three metres into the ground. Where a mass gravity foundation is used, the tower is connected to the mass gravity foundation base by 108 high-tensile bolts that are set into the foundation.

The rock anchored foundations consist of a concrete mass of approximately 120 cubic metres in volume and approximately 16 tonnes of steel reinforcement, and measure eight metres face to face. The rock anchored foundations are locked onto the ground by post-tensioned anchors drilled and grouted into the rock 20 metres below the foundation base. Where a rock anchored foundation is used, the tower is connected to the rock anchored foundation by high tensile bolts that are set into the foundation.

The wind turbines are connected to the wind turbine foundations for safety and operational reasons, including that the wind turbines do not fall over in strong wind conditions. It would be unsafe to install, use or operate a wind turbine, and a wind turbine would not be able to be operated for its intended purpose, unless it was connected securely to a foundation.

Each wind turbine and tower is demountable from the foundation and can be removed individually. In order to remove the wind turbines and towers, the bolts connecting the tower to the wind turbine foundations are unscrewed and the wind turbine and tower is dismantled by reversing the process by which it was installed. It takes approximately two days to remove each wind turbine and tower. This can be done without any substantial damage to either the wind turbine and tower, the foundation, or the AWF Leased Land. There is no material impediment to removal of the wind turbines and towers from their foundations or from the AWF Leased Land.

The wind turbine foundations cannot be removed without disturbing the AWF Land. There is no economic incentive to remove the wind turbine foundations.

Substation

The substation is located on AWF Leased Land. It collects energy generated by the wind turbines (via the underground electrical cables) and then distributes it into power cables that ultimately connect to the power grid. The substation primarily consists of two Wilson 170MVA power transformers, which convert the 33kV wind farm power electrical network to 132kV for transmission to the power grid at Elmhurst, Victoria.

The Wilson 170MVA power transformers were manufactured offsite and delivered to the AWF on a single semi-trailer. Upon arrival at the substation location, the transformers were moved into their current location using a crane to lift them onto slides, and then using hydraulic rams to push them along the slides into their current location.

The transformers are removed by reversing the process by which they were installed. They can be removed without causing damage to the AWF Leased Land, although the concrete plinth would remain.

Buildings and carpark

The Administration Building, storage shed and the Shelter are located on AWF Leased Land. Together with the carpark, the buildings are located approximately 100 metres from the substation.

The Administration Building is made of six portions that sit on six concrete plinths. It is of a steel frame construction with colorbond walls and roof, and is bolted to the concrete plinths.

The storage shed is a steel portal framed colorbond clad shed with a concrete floor, which is bolted to concrete footings set into the concrete slab.

The Shelter is used for storing hazardous material. It is a steel portal framed colorbond clad shed with a concrete floor, bolted to a concrete slab. It can be dismantled and removed without causing lasting damage to the AWF Land and, once removed, can be reassembled for use at a new site.

The carpark is an area of approximately 800 square metres, consisting of an earth hardstand capped with crushed rock.

Wind-monitoring masts

There are four long-term wind metering masts located on AWF Leased Land. They consist of lattice steel towers with steel guide strains and wind measurement devices mounted on top. The steel guide strains are connected to small concrete foundations that are approximately three square metres in size. They were installed in a matter of days.

The wind metering masts, including the concrete foundations, can be dismantled and removed in a matter of days and without causing damage to the AWF Leased Land.

Access roads

The access roads and fences are located on the AWF Road Land. There are 52 km of access roads, which are about six metres wide and are made of crushed rock.

On the southern side of the Pyrenees Highway, the access roads connect the wind turbine sites on that side of the highway, the substation, the Administration Building, the storage shed and the Shelter. On the northern side of the Pyrenees Highway, the access roads connect the wind turbine sites that are located on that side of the highway.

There are approximately 15 kilometres of fences installed as part of the wind farm, primarily to divide the access roads from existing paddocks. The only additional fencing is around the compound housing the Administration Building, the storage shed, the Shelter and the substation.

Under the AWF Leases and the Agreement to Sublease, AWF Prop Co and AWFPL are allowed by the Land Owners to access and use the access roads for certain purposes.

The access roads and fences will remain at the end of the operation of the Ararat Wind Farm. The access roads cannot be removed without disturbing the AWF Land.

Cabling

Each wind turbine is connected to underground electrical cables which are used to transport generated electricity to the onsite substation. Communication cabling runs alongside the underground electrical cables. The communication cables are connected to a Supervisory Control and Data Acquisition (SCADA) system, which provides data monitoring of the wind farm.

The underground electrical and communication cables run from the base of each wind turbine to the substation. The cables are located on AWF Cable Land, and on AWF Leased Land at those points where the cables connect to the wind turbines and the substation. The underground cables are buried approximately 80 centimetres to 1.5 metres underground, and are covered with PVC.

Once the wind farm ceases operating, the underground electrical and communication cables will likely remain. Whether AWF Prop Co decides to remove them or leave them in the ground will depend on the relative value of those assets and the cost of their removal at the time operations cease. The SCADA system will be removed. The underground cables cannot be removed without disturbing the AWF Land.

Power lines

At the substation site, there is a gantry at which power lines owned and operated by the applicants intersect with power lines owned and operated by Powercor. Approximately 10 metres of the power lines owned and operated by Powercor are within the substation site. The Powercor power lines and communication lines run from the substation (which is on AWF Leased Land) to a substation at Elmhurst, Victoria (which is not on AWF Land).

The Powercor power lines and communication lines, consisting of steel poles and aluminium conductors, are owned by Powercor and not the applicants.

Ararat Wind Farm Asset Register

AWF Prop Co, at its own cost and in its capacity as a tenant under the AWF Leases, installed all of the AWF Assets, which it now owns.

An Asset Register Report prepared by AECOM Australia Pty Ltd provides a summary of the Ararat Wind Farm construction and development costs. The total contract price under the contract for construction of the Ararat Wind Farm was $413,097,180, subject to adjustments in accordance with the construction contract. The total cost of developing the wind farm was $482,022,545. The construction and development costs were paid by AWF Prop Co.

This is reflected in the ‘Property, plant and equipment’ section of AWF Prop Co’s financial statements for the 2015, 2016, 2017 and 2018 financial years, which record as follows:

(a) In 2015, AWF Prop Co had ‘plant and equipment’ valued at $98,050,000 and leasehold land valued at $619,000;

(b) In 2016, AWF Prop Co had ‘assets under construction’ valued at $423,318,000 and leasehold land valued at $619,000;

(c) In 2017, AWF Prop Co had ‘wind farm assets’ valued at $479,030,000 (after depreciation) and leasehold land valued at $619,000;

(d) In 2018, AWF Prop Co had ‘wind farm assets’ valued at $462,644,000 (after depreciation) and leasehold land valued at $619,000.

The Asset Register Report provides an allocation of the total development cost of $482,022,545 between the various AWF Assets, as follows:

(a) Wind turbines, including foundations, hardstands, and underground cables — $416,236,107.79;

(b) Substation — $36,185,432.45;

(c) Storage shed, Shelter and operation and maintenance building site — $1,687,078.91;

(d) Administration Building, including furniture and fittings — $968,865.31;

(e) Wind-monitoring masts — $771,236.08;

(f) Access roads and fences — $23,175,643.96;

(g) SCADA and communications equipment — $2,795,730.76;

(h) Spare parts — $202,449.47.

Obligations and rights to remove AWF Assets

The AWF Leases expressly provide that, during the lease term, AWF Prop Co may maintain, remove, and replace the wind turbines and towers, the substation, the wind-monitoring masts and the buildings.

The design working life of the wind turbines is between 20 and 25 years, and 25 years for all other AWF Assets. As the AWF assets suffer wear and tear during their design lives, it will be necessary to maintain and, on occasion, replace them. Already, a faulty generator and a turbine gearbox have been removed and replaced, as have some turbine blades that were damaged during installation.

Under the AWF Leases and the planning permits, AWF Prop Co must remove most of the AWF Assets from the AWF Land when the leases end, or when the wind farm ceases to operate. The AWF Assets that must be removed include the wind turbines and towers, the substation, the wind-monitoring masts, and the buildings. AWF Prop Co is not obliged to remove the wind turbine foundations, the underground cabling, or the roads.

Upon removal, some of the AWF Assets, such as the wind turbines and towers, the substation, and the wind-monitoring masts, can be sold to a third party or re-used. There is a developing market in Australia for second hand wind farm assets, and a more mature market for those assets overseas, particularly in Europe. The applicants have an incentive to sell the AWF Assets that they must remove at the end of the wind farm’s life for whatever sum they can recover to offset the cost of removal.

Local sales

After the wind farm commenced operation, the fee simple estate in Lots 1, 2 and 3 on Title Plan 392734X (Baker-Hamilton land) sold at auction for $676,950. The AWF Assets located on that land include one wind turbine and access roads.

Another property, owned by John Stevens, was listed for sale in February 2020, with an asking price of $10,000,000. There is an AWF Lease between Mr Stevens and AWF Prop Co, and 17 turbines, the substation, the depot and a wind-monitoring station are located on land leased from Mr Stevens. The Stevens property had not sold before trial. However, in February 2020, a financial group offered approximately $2,300,000 for the rental cash-flow received under the relevant AWF Lease up to the expiry of the lease.

Legislation

This proceeding had its genesis in a rate notice served under the Fire Services Levy Act. It is logical to begin with the relevant provisions of that statute.

The Fire Services Levy Act imposes a fire services property levy on all land in Victoria, unless specifically exempted, to fund Fire Rescue Victoria and the Country Fire Authority. The levy is an annual charge payable by the owner of leviable land.[5] It is generally calculated using the formula in s 17, by reference to the capital improved value of the leviable land.
[5]Fire Services Property Levy Act 2012 (Vic), s 7.

Section 16 provides:

For the purposes of calculating the capital improved value of leviable land, valuations made under the Valuation of Land Act 1960 in respect of rateable and non-rateable leviable land by a valuation authority must be used.

The phrase ‘capital improved value’ is defined in s 3 to have the same meaning as it has in s 2(1) of the Valuation of Land Act.

In most cases — including this case — the owner of leviable land is liable to pay the levy amount and levy interest on that land.[6] Section 4 defines ‘owner’, in relation to land, to mean:

(a) a person entitled to a parcel of land for a freehold estate in possession;
(b) a person entitled to a parcel of land under a lease of Crown land;
(c) a person entitled to a parcel of land under a licence of Crown land if the person has a right, absolute or conditional, of acquiring the fee simple.

[6]Fire Services Levy Act, s 19(1).

Part 3 of the Fire Services Levy Act provides for collection of the levy by a ‘collection agency’. Section 21(1) appoints each Council as a ‘collection agency’ in respect of land in its municipal district. A collection agency appointed under s 21(1) has functions including assessing the amount of the levy payable in a levy year by an owner of leviable land in the municipal district of the collection agency, and collecting the levy payable.[7]
[7]Fire Services Levy Act, s 21(3)(a)–(b).

Section 25(1) provides:

The collection agency must give a written notice (the assessment notice) to—
(a)the owner of any leviable land in respect of which a levy has been assessed as being payable (except if the owner of the leviable land is the collection agency in its capacity as a Council); or
(b) if the owner has made a written request that specifies a person in respect of whom the assessment notice should be sent—the person specified in the written request (the specified person).

Note
A collection agency is required to submit a return to the Commissioner—see section 40.

Section 9 provides for assessment and apportionment of the levy in specified circumstances, relevantly here:

(8) A collection agency must separately assess the levy in respect of each parcel or portion of a parcel of land for which the collection agency has a separate valuation.
(9) If a valuation treats as a single leviable land 2 or more parcels of land that are owned separately by 2 or more people, a collection agency may apportion any levy amount that applies to that land in accordance with the value that each separately owned parcel of that land bears in relation to the value of that land as a whole.

The Valuation of Land Act provides that the Valuer-General is the ‘valuation authority in respect of rateable land in a municipal district of a council’.[8] Under s 10, a council has the power to cause a valuation of all land in its municipal district for a specified year, subject to making a nomination for that year — in which case the council is a valuation authority.[9] It was an agreed fact that the Ararat Rural City Council was a valuation authority in relation to the AWF Land.
[8]Valuation of Land Act 1960 (Vic), s 9.
[9]Valuation of Land Act, s 2(1) — definition of ‘valuation authority’.

Section 11 of the Valuation of Land Act requires a general valuation to be made each year:

For the purposes of the Local Government Act 1989, a valuation authority must—
(a) cause a general valuation of rateable land within an area to be made as at 1 January in each calendar year; and
(b) before 30 April that year, cause a general valuation made in accordance with paragraph (a)—
(i) to be returned to it; and
(ii) to be provided to the council of the municipal district to which the area relates.

Section 13DC provides for valuations generally:

(1) In every valuation for the purposes of the Local Government Act 1989, each separate occupancy on rateable land must—
(a) be computed at its net annual value, its capital improved value and, if required by a rating authority, its site value;
(b) be allocated an AVPCC based on the Valuation Best Practice Specifications Guidelines.

(2) A council may use in respect of rateable land within its municipal district valuations in force in respect of that land immediately before the constitution of the council for such period as the latest of the valuations might have been used by the council for which it was made.
* * * * *
(5) In a general valuation, regard must be had to every circumstance affecting the land at the date the valuation is returned that, were it to occur or come into existence subsequently, would be a circumstance in which, under section 13DF(2), a supplementary valuation could be made.
(6) If several parcels of land in the same municipal district are occupied by the same person and separated from each other only by a road or railway or other similar area across or around which movement is reasonably possible, the parcels must be regarded as together forming rateable land and valued accordingly.
(7) If any person is liable to be rated in respect of 2 or more unoccupied parcels of land in the same municipal district and the parcels form one continuous area, the parcels must be regarded as together forming rateable land and valued accordingly.
(7A) If a portion of a parcel of land on which a building is erected is occupied separately, or is obviously adapted to being occupied separately, from other land in the parcel, that portion must be regarded as forming a separate rateable property and must be valued accordingly.
(8) If any portion of a parcel or parcels of land forming rateable land for the purposes of a municipal rate or of a rate to be levied by any other rating authority using the valuation is subject—
(a) to a rate levied in respect of that portion only; or
(b) to a differential rate which differs from the rate levied in respect of the remainder of that parcel or those parcels—

the value of the land must be apportioned so as to show separately the value of the portion.
(9) If land comprising one undertaking extends continuously beyond the boundaries of any municipal district the value, for the purposes of any rate, of so much of the land as is within any one municipal district, must be assessed as part of the value of the whole of the land.

The circumstances in which a supplementary valuation may be made are set out in s 13DF(2). Relevantly, these circumstances include:

(j) if by reason of the erection or construction of buildings or other improvements on land or by reason of any physical changes of a permanent nature to land or improvements or by the making of roads or any other work of man or by favourable natural causes, the capital improved value, net annual value or site value of that land has been materially increased;

(k) if there has been a change in occupancy which affects the net annual value of the land;

Significantly, ‘capital improved value’ and ‘site value’ are defined in s 2(1):

capital improved value means the sum which land, if it were held for an estate in fee simple unencumbered by any lease, mortgage or other charge, might be expected to realize at the time of valuation if offered for sale on any reasonable terms and conditions which a genuine seller might in ordinary circumstances be expected to require;
site value of land, means the sum which the land, if it were held for an estate in fee simple unencumbered by any lease, mortgage or other charge, might in ordinary circumstances be expected to realise at the time of the valuation if offered for sale on such reasonable terms and conditions as a genuine seller might be expected to require, and assuming that the improvements (if any) had not been made;

There are also definitions of ‘estimated annual value’ and ‘net annual value’ which are not presently relevant.

Section 2(3) provides guidance in the determination of capital improved value and site value in certain circumstances:

If it is necessary to determine the capital improved value or site value of any rateable land in respect of which any person is liable to be rated, but which forms part of a larger property, the capital improved value and site value of each part are as nearly as practicable the sum which bears the same proportion to the capital improved value and site value of the whole property as the estimated annual value of the portion bears to the estimated annual value of the whole property.

Section 2(3A) makes the same provision in respect of non-rateable leviable land in respect of which the fire services property levy is payable.

Section 5A sets out some matters to be taken into account in determining the value of land:

(1) Unless otherwise expressly provided where pursuant to the provisions of any Act a court board tribunal valuer or other person is required to determine the value of any land, every matter or thing which such court board tribunal valuer or person considers relevant to such determination shall be taken into account.
(2) In considering the weight to be given to the evidence of sales of other lands when determining such value, regard shall be given to the time at which such sales took place, the terms of such sales, the degree of comparability of the lands in question and any other relevant circumstances.
(3) Without limiting the generality of the foregoing provisions of this section when determining such value there shall, where it is relevant, be taken into account—
(a) the use to which such land is being put at the relevant time, the highest and best use to which the land might reasonably be expected to be put at the relevant time and to any potential use;
(b) the effect of any Act, regulation, local law, planning scheme or other such instrument which affects or may affect the use or development of such land;
(c) the shape size topography soil quality situation and aspect of the land;
(d) the situation of the land in respect to natural resources and to transport and other facilities and amenities;
(e) the extent condition and suitability of any improvements on the land; and
(f) the actual and potential capacity of the land to yield a monetary return.

The parties also drew attention to the definition of ‘land’ in s 38 of the Interpretation of Legislation Act 1984 (Vic). In all Acts, unless the contrary intention appears:

land includes buildings and other structures permanently affixed to lad, land covered with water, and any estate, interest, easement, servitude, privilege or right in or over land;

Valuation Evidence

The value of the AWF Land was the subject of expert evidence from three valuers:

(a) Geoffrey Brown of Sutherland Farrelly Pty Ltd, who provided reports dated 17 September 2019 and 14 February 2020 at the request of the applicants;

(b) Paul Newman of PW Newman Pty Ltd, whose supplementary valuation dated 12 January 2018 is disputed in this proceeding, and who provided a further report dated 7 February 2020 at the request of the Valuer-General; and

(c) Peter Molloy of Property Dynamics, who provided reports dated 20 September 2019, 7 February 2020, and 17 July 2020 at the request of the Valuer-General.

Between them, the valuers’ evidence addressed three different valuation scenarios:

(a) Scenario A involved a fee simple sold by a hypothetical vendor with occupancy by a wind farm operator paying market rent, with the AWF Assets being either fixtures or chattels;

(b) Scenario B involved a fee simple sold by a wind farm operator but with AWF Assets being chattels; and

(c) Scenario C involved a fee simple sold by a wind farm operator but with AWF Assets being fixtures.

The applicants contended that the capital improved value of the AWF Land should be assessed using Scenario A, or alternatively Scenario B. The Valuer-General’s position was that Scenario C should be used.

The valuations given by the valuers for the three scenarios are set out in the table below. As is clear from the table, much depends on which scenario is the correct one.

Scenario A Scenario B Scenario C

Mr Brown $10.15 million $15.16 million $445.45 million

Mr Newman Not valued $36.494 million $470.4 million

Mr Molloy
$20.1 million, or

$53.2 million, or

$90.1 million[10]
$90.1 million $572.6 million
[10]Mr Molloy prepared an alternate valuation for Scenario A based on several different assumptions, as set out at [142]–[147] below.

Joint Statement

At the direction of the Tribunal, the three valuers met on 26 February 2020. They produced a joint statement following that meeting, which helpfully set out the matters on which they were agreed, and identified the points of disagreement.

This process eliminated some potential sources of disagreement. In particular:

(a) The valuers agreed that the wind farm should be valued as single occupancy, defined by the 16 leases between the Land Owners and AWF Prop Co.

(b) Having valued the wind farm as a single occupancy, they also agreed that its value should be apportioned between the two municipalities on the basis of estimated annual value. Because Mr Brown was not asked to assess estimated annual value, he apportioned by the number of turbines in each municipality. The valuers agreed that this method produced the same result as using estimated annual value, and that this variation was inconsequential.

(c) They agreed that a difference between the annual rental figures used by Mr Brown and Mr Molloy was immaterial, and that the variation was effectively dealt with in the rounding of their calculations.

(d) They also agreed that the influence of the power purchase agreement in place for the Ararat Wind Farm was to be ignored in valuing the land.

The important points of disagreement between the valuers were:

(a) There was a different approach to the title to be valued. The valuers characterised this difference to be that Mr Brown valued the lessor’s interest in the land, while Mr Molloy and Mr Newman valued the land on an unencumbered fee simple basis. Later in this judgment, I will consider the meaning of ‘estate in fee simple unencumbered by any lease’ in the definition of ‘capital improved value’ in the Valuation of Land Act, and the application of that definition in this case.[11]
[11]See [175]–[179], [185]–[196] below.

(b) Mr Brown did not have regard to the AWF Assets in assessing capital improved value, on the basis that they are not owned by the Land Owners. Mr Newman and Mr Molloy considered them to be fixtures, and part of the land to be valued. This difference significantly affected their respective assessments of capital improved value.

(c) They disagreed whether the added value of the planning permits was included in the rents being paid under the AWF Leases. Mr Brown considered that it was, while Mr Newman and Mr Molloy took the opposite view. Because of this disagreement, the valuers did not agree whether the leases were an encumbrance to the land. Mr Brown considered they were not burdensome, while Mr Newman and Mr Molloy considered them to enhance the value of the land beyond the rental paid under the leases.

(d) They also disagreed on the usefulness of windfarm sales evidence in assessing capital improved value, in particular evidence regarding sales of operational wind farms. They agreed that, with the limited information that was publicly available about these sales, it was difficult for them to use the evidence to undertake a definitive analysis. They agreed that the goodwill factor was unknown, but disagreed on the extent to which this mattered. Mr Brown believed that this sales evidence was not useful in the valuation, and did not use it at all. Mr Newman made a substantial adjustment for this factor, while Mr Molloy made no adjustment.

I now turn to the detail of each valuer’s evidence.

Valuation Evidence of Geoffrey Brown

Mr Brown’s initial report of 17 September 2019 gave his answers to a series of questions posed by the applicants’ solicitors, as follows:

Question 1
1. Do the terms of the AWF Leases represent:

(a) an unusual benefit to; or

(b) an unusual burden or liability on,

the value and enjoyment of the fee simple estate in the AWF Land?

We are of the opinion the AWF Leases represent a benefit to the enjoyment of the fee simple estate. However we consider they do not represent an unusual benefit as they are generally reflective of Ground Leases for Wind Farms.
The AWF Leases are of benefit due to the annual market rental being received for the various occupancies for the land on which the AWF Assets are situated (including the turbines, offices, maintenance shed and anemometers), plus carriageway rights for access roads and transmission of electricity respectively.
They are not an unusual burden or liability as the Lessee is paying a market rental.
2. If the answer is ‘yes’, please explain why, and quantify the nature of the adjustment or allowance that should be made to neutralise the effect of the AWF Leases so as to derive the capital improved value of the AWF Land.

Not Applicable
Question 2
3. What is the capital improved value of the AWF Land at the Relevant Date (namely, the sum which the AWF Land, if it were held in an estate in fee simple unencumbered by any lease, mortgage or other charge, might be expected to realise at the Relevant Date if offered for sale on any reasonable terms and conditions which a genuine seller might in ordinary circumstances be expected to require?)

Ten Million, One Hundred and Fifty Thousand Dollars ($10,150,000)
4. In answering Question 2, you should have regard to, and expressly address, the following matters:
(a) please assume:
i. the value of the AWF Land is to be assessed by reference to a hypothetical sale of a fee simple interest in it, and on the basis that the fee simple interest is not affected by any actual lease;
ii. the hypothetical sale should assume the actual physical state of the AWF Land;
iii. subject to the matters set out in (b), below, the hypothetical sale should assume the occupation of the AWF Land;
iv. the hypothetical sale should take into account the likely future occupation of the AWF Land;
v. the hypothetical sale should assume that the occupation of the AWF Land is at market rates; and
vi. subject to the conclusion that you have formed in answering Question 1, the rentals being paid under the AWF Leases are likely to be a guide to actual market rates for occupation of the AWF Land.

(b) We appreciate that the nature of the actual occupation of the AWF Land for valuation purposes is a question of some difficulty in the context of the valuation of the hypothetical estate in fee simple.
In this regard, we ask that you assume the actual occupation of the AWF Land and the actual realities of possession at the Relevant Date, that is:
i. the hypothetical sale would take place in circumstances where the AWF Land is occupied in the same manner as its current occupation – namely, that it is occupied by an entity such as AWF Prop Co/AWFPL (Occupier), and that the Occupier is operating a wind farm on the AWF Land. That is, the AWF Land need not be valued as if the owner of the hypothetical estate in fee simple (the Vendor) was presently entitled on that date to actual physical possession of the land;
ii. the hypothetical purchaser of the AWF Land (Purchaser) would be entitled to the rents derived from that occupation upon settlement of the sale;
iii. the AWF Land would be occupied subject to terms that:
a. permit the Occupier to remove the AWF Assets during the course of, and at the conclusion of, their occupation; and
b. oblige the Occupier to remove all the AWF Assets (except for the wind turbine foundations and the access roads) to a depth of 0.5m below the level surface of the soil at the end of its occupation, and the Purchaser is aware of this obligation; and

iv. the Vendor does not own the AWF Assets (other than the access roads), nor does it have rights to operate the wind farm.

Question 3
5.Does your answer to Question 2 materially change depending on the extent to which the AWF Assets are characterised as fixtures or chattels?

No
6. If the answer to Question 3 is “yes”, please ensure that your report also includes a valuation assessment in response to Question 2 that:
(a) assumes all the AWF Assets (other than the access roads) are chattels; and
(b) explains how that assessment would change if some, or all, of the AWF Assets (or part or parts of the AWF Assets) are properly characterised as fixtures.

Not applicable.
Question 4
7. Do any of your answers to Question 2 and Question 3 materially change if the valuation is undertaken on the basis that each parcel that comprises the AWF Land is valued separately (rather than on a collective or aggregate basis)? If yes, how do your answers change?

No Change.

Mr Brown’s first report explained how he had arrived at these answers, in particular the answers to Question 1 and Question 2.

In relation to Question 1, he summarised the impact of the AWF Leases as follows:[12]

(a) The freehold properties are generally subject to Leases for a term of 25 years, generally commencing on 26 June 2015, with an associated option for a further term of 25 years. The demised occupancy associated with the Lease Agreements comprise tower and pad sites (approximately 2,500 square metres each), road network connecting the turbines, plus a subterranean and overhead electricity network. Also, a number of the leases are affected by construction sites, plus there are the operations and maintenance buildings, substation and anemometer sites.
(b) Lessee has unfettered access to the demised land including employees and contractors.
(c) Loss of grazing land, therefore productivity to the freehold owner of the land is subject to the roads and pad sites for the turbines.
(d) Visual impact of the turbines and electricity equipment on the freehold.

[12]Valuation report of Geoffrey Brown, Sutherland Farrelly, 17 September 2019 (First Brown Report), [138].

While these matters involve a ‘considerable impact’ on the freehold property, it was Mr Brown’s opinion that the rent payable under the AWF Leases was a market rental that neutralised the burden of that impact. He based this opinion on a comparison of the annual rentals under the AWF Leases and the rents paid by eight other wind farms.

Mr Brown considered the AWF Leases to be beneficial to the freehold owners, although not unusually so, because:[13]

(a) Freehold owners (farmers) would not enter into the Agreement unless they considered it was a benefit.
(b) Consideration payable (rental) by the Lessee (AWF), pursuant to the Lease represents compensation for the negative impacts of the occupation of the land granted by the Lease tenure.
(c) The land generally occupied by the pad sites for the turbines predominantly comprises ridge land, which is generally less productive due to the limited depth of top soil and climate conditions.
(d) Rental provides consistent cashflow for a primary producer.
(e) Sales evidence of agricultural holdings that are impacted by the turbines do not indicate a diminution in value in comparison to sales of properties within the district that are not impacted by wind farm ground leases. …

[13]First Brown Report, [138].

On that basis, Mr Brown considered that the AWF Leases did not provide for an unusual benefit or burden to the land, as they were generally reflective of a typical lease to a wind farm operator.[14]
[14]First Brown Report, [138].

In relation to Question 2, Mr Brown considered the nature of the occupancy under the AWF Leases, with the following general characteristics:[15]

• Principally, 25 year term commencing in June 2016 with an option for a further term of 25 years, taking into account the condition of the land as at 12 January 2018.
• Commencing rentals of $9,000 per annum per turbine site, plus additional rental for the operations and maintenance building site, substation and other components, which equate to a total passing rental at the relevant date of $809,376 per annum.
• Annual rental reviews to CPI with no option of a market review.

[15]First Brown Report, [139].

It was Mr Brown’s opinion, based on local sales evidence, that the residual value of the land occupied by the wind farm would have a market value of $5,000 per hectare. As to the AWF Assets that would remain after the leases had ended, the roads would have some residual value, but the turbine foundations would be obsolete and of no value. He calculated the capital improved value of the AWF Land to be $10,850,000, as follows:[16]
[16]First Brown Report, [139].

Therefore, based on the assumptions pursuant to Section B of your question, in assessing the Capital Improved Value of the fee simple, we have undertaken a net present value calculation of the future cashflow, having regard to the terms and conditions of the Lease, being the residual period from the date of valuation of 1 January 2016 (taking into account condition of land as at 12 January 2018), plus the known considerations of a low interest rate and low inflation rate environment. Our assumptions and calculations are as follows:
Adopted Discount Rate, being 6%
Rental Payable in quarterly instalments as per lease agreements
Passing Rental at the relevant date of $809,376 per annum
Rental is reviewed annually to the Consumer Price Index as detailed in the leases
Added Value of AWF Leased Land 27.25 Ha @ $5,000/ha, which equates to $136,250
Added Value of Road Network — Cost of $23,175,644 @ 10% utility at expiry of the leases
Cash Flow period from 1 January 2016 to 25 June 2044 (expiration of first term)
Based on the characteristics of the lease and assumptions associated with the future cashflows associated with the Lessee’s interest, we have calculated the Capital Improved Value of the occupancy of the Ararat Wind Farm to the freehold owners to be $10,850,000 exclusive of the GST.

Mr Brown’s first report also explained why he did not consider comparative wind farm sales to be a useful basis for assessing the value of the land occupied by the Ararat Wind Farm:[17]
[17]First Brown Report, [133]–[136].

From our research, there is a significant market for wind farms, however the transactions are to infrastructure companies, business operators, investment funds, superannuation funds, among other parties, including both local and off shore purchasers. Accordingly, details of sale transactions are extremely difficult to ascertain and generally the sales are for the business enterprise, which incorporate supply agreements, pricing contracts, intellectual property, plant and equipment, fixed structures and the benefit of ground leases. The sales represent prices of the purchaser’s view of the future income and profit to be generated from the facility rather than the cost to construct.

This is a significantly different market to the ground leases of the wind farm, as the Capital Improved Value to the land owner (farmer) is limited to the value of the cash flow and residual assets, as they do not own nor have any rights over the plant and equipment associated with the operations of the wind farm. Their asset is the cash flow provided by the terms and conditions of the lease agreement, plus the residual assets.
In assessing the market associated with the subject occupancy and the approach to valuation, we consider the highest and best use is for the land owners to lease to the operators to allow the ongoing use of the wind farm. Therefore, in assessing the Capital Improved Value, we have had regard to the interest that the freehold owners have in the Wind Farm, which comprises the following:
(a) Rental income stream pursuant to the Lease Agreements.
(b) Residual value of the road network and the foundations of the turbines, which are not required to be decommissioned or removed at the expiry of the lease term.
(c) Freehold rights of the land occupied by the Ararat Wind Farm.
(d) Rights associated with the use of the access roadways in the farming activities including grazing of the road verges.
(e) Rights to farm the agricultural land below the transmission lines and above the subterranean transmission lines.

The value of the fee simple is a financial model with the inherent risk of default by the tenant, notice of termination of the lease, being six months’ notice at any period during the term of the lease and the potential for the Lessee to exercise their option for a further 25 year term.

Alternate valuations

Mr Brown’s second report of 14 February 2020 was prepared following the Tribunal’s direction that the valuers provide alternative valuations based on each other’s instructions and assumptions. He was also asked to provide valuations based on the methodology of Mr Molloy in his amended valuation report dated 20 September 2019,[18] varied on the basis that capital improved value is to be assessed on the separate occupancies created by each lease, rather than as a single occupancy, and that the AWF Assets do not form part of the land to be valued.
[18]Discussed at [101]–[106] below.

Mr Brown’s alternative valuation of capital improved value based on the instructions and assumptions of both Mr Newman and Mr Molloy was $445,450,000. He arrived at this valuation using the summation method, rather than the comparable sales method used by Mr Newman and Mr Molloy.[19] He explained his choice of methodology as follows:[20]
[19]Outlined at [101]–[116] and [117]–[138] below.
[20]Supplementary valuation report of Geoffrey Brown, Sutherland Farrelly, dated 14 February 2020 (Second Brown Report), [74]–[79].

To undertake a sales analysis approach, we have investigated comparable sales evidence, which was detailed in Section 5.1 of this Report. The sales evidence is of fully operational wind farms and included the occupancy rights, fixtures, plant and equipment, supply agreements and effectively the business of the wind farm, which would include goodwill. We are aware that a number of the sales relate to a partial interest only, with the vendors retaining the management and administration rights of the operations of the wind farm for a term certain.
We consider it is extremely difficult to analyse these sales to illustrate the underlying value of the associated fixtures, as they comprise going concern sales. We have been unable to obtain sufficient information to analyse these sales to exclude the goodwill and supply agreements.
In order to determine whether the sales are comparable and relevant to the CIV of the wind farm. We reiterate that we would need to know the following information:
•Supply/Take off agreements including pricing and other revenue information
•Details of the terms of the ground leases and annual rental payable
•Efficiency of the facilities
•Age of the assets
•Details of the management agreements and associated management costs and fees, as well as other operating expenses.

In relation to the sales evidence, we provide the following summaries:
•The available sales that have occurred over an extended period between 2010 and September 2015 with wind farm operators as lessees rather than freehold owners.
•Most sales have occurred for recently completed facilities.
•Sales have occurred on a going concern basis, therefore incorporate additional value components that we consider should not be captured in the Capital Improved Value including:
(i) Supply/take off agreements
(ii) Agreed price levels for power
(iii) Business goodwill
(iv) Furniture and fittings to buildings
(v) Plant and equipment including motor vehicles
(vi) Spare parts
(vii) Management Rights
(viii) Sales generally involved a vendor that was the wind farm operator.
•In summary the sales include a business value which should not be included in a CIV calculation as they comprise going concern sales.

Obviously, we do not have the required information, nor is it publicly available, therefore we consider this approach to valuation is not appropriate.
Due to the above we consider the most appropriate methodology pursuant to Mr Molloy’s instructions and associated assumptions to be the summation analysis of the Site Value (Mr Molloy assumes freehold), plus the depreciated replacement cost of the assets, which are assumed to be fixtures. Noting the assets are new, we have had regard to the actual construction cost.

Adopting Mr Molloy’s assumption of freehold title held by a wind farm operator, a passing annual rental of $809,376 and a capitalisation rate of 5%, Mr Brown assessed the site value of the land occupied by the wind farm to be $16,200,000. To this he added the replacement cost of the AWF Assets, on the assumption that they were fixtures, which he assessed to be $461,055,219. The capital improved value of the wind farm’s entire occupancy was therefore $477,250,000, with $445,450,000 attributable to the land in the municipality of Ararat.

Mr Brown explained that the significant variation between his valuation and Mr Molloy’s were because:[21]

•Mr Molloy in his summation analysis makes an allowance for development profit of 20%, which equates to a sum of $90,513,763, which we exclude.
•Mr Molloy includes the financial costs of $20,967,325.74, which we exclude.

In summary we have utilised the cost methodology as defined in the Specialist Property Guidelines for Plant and Equipment issued by the Department of Sustainability and environment, whereas Mr Molloy utilises the sales methodology.

[21]Second Brown Report, [90].

Mr Brown also assessed the capital improved value of the twelve separate occupancies within the Rural City of Ararat, rather than the AWF Land as a single occupancy, to a total of $426,570,000. This alternate valuation was done on the basis of a hypothetical sale of freehold title by a wind farm operator, incorporating all of the AWF Assets. There was a reduction in the total value of around 5%, due to issues of economy of scale and variations in value between different occupancies.

Finally, Mr Brown assessed the capital improved value of the twelve separate occupancies using Mr Molloy’s assumptions, with the variation that the AWF Assets do not form part of the land to be valued, either because they are chattels at common law, or due to the operation of s 154A of the Property Law Act. On that basis, he considered that the total capital improved value of the twelve occupancies in the Rural City of Ararat was $15,160,000. He valued the Stevens occupancy at $3,980,000.[22] Mr Brown considered that there would be only a nominal variation if the land was valued as a single occupancy, using the same assumptions.

Cross-examination

[22]Second Brown Report, [101].

In cross-examination, Mr Brown was taken to some of the terms of the AWF Leases. He agreed that the leases prevent the Land Owners from granting any lease or other right in the land for a use similar to the wind farm, dealing with the land in a manner that could prevent or interfere with the wind farm project, impeding or restricting the free flow of air and wind to the turbines, and doing various other things that might interfere with the development and operation of the wind farm. He agreed that these were restrictions or encumbrances imposed under the leases. However, he pointed out that any encumbrances associated with the AWF Leases were offset by the payment of a market rental by the lessee. For that reason, he did not consider the leases to be either burdensome or beneficial.

Mr Brown agreed that he had not taken the sublease between AWF Prop Co and AWFPL into account in valuing the occupancy. He accepted that the annual rental paid under the sublease was considerably higher than the total rentals paid by AWF Prop Co to the Land Owners under the AWF Leases. He said: ‘… but you’ve got to spend $470m to get that rental. The farmers, the registered proprietors of the land have not spent that money’.[23] He reiterated that he had assessed the capital improved value of the freehold title of the Land Owners for the separate occupancy created by the AWF Leases.
[23]Transcript 258:20–23.

It was put to Mr Brown that his valuation based on the ground lease rental was less than the cost of constructing the roads and the turbine foundations, which would remain in place. He accepted that proposition, but did not agree that it undermined the soundness of his valuation approach. He argued that cost doesn’t always equal added value, and ‘if you took the wind farm away, the added value of those components to the farmer are very small’.[24] Further, it was his opinion that if the farmers’ freehold interests were put to the market, the market would not pay the full construction cost of $23,000,000 for the roads.
[24]Transcript 261:25–27.

Mr Brown agreed that the issue of a planning permit for a wind farm increased the value of the land to be occupied by the wind farm. He also agreed that this added value could be discerned by a comparison of sales of greenfield wind farms with sales of surrounding farm land. However, ‘significant analysis is required, because in my opinion those sales have significant components of a business interest associated with them, just not the planning permit interest’.[25] While the planning permit runs with the land, the intellectual property associated with it remains with the permit applicant, who also bears the considerable cost involved in applying for the permit.
[25]Transcript 266:30–267:2.

Asked about the hypothetical purchaser of the AWF Land, Mr Brown agreed that it could be another wind farm operator. He did not agree that assessing capital improved value required him to assume the sale of a separate title after a notional subdivision. He identified this as the difference between his approach and that taken by Mr Newman and Mr Molloy — he did not assume an individual separate title, while they did. He thought that would be an unusual title, although he was aware of separate titles issued for parts of wind farms, for example the land on which the substation is located for the Mt Gellibrand wind farm. He was taken to the transfer for the Mt Gellibrand substation land, and noted that the sale price of $136,684 for the freehold interest in 9,000 square metres supported his valuation of the AWF Land at about $141,000 per hectare.[26]
[26]That is, $10,850,000 for the entire 77.05 hectares of AWF Land, including the AWF Road Land and the AWF Cable Land. See, Transcript 278:5–19.

Mr Brown agreed that comparable sales of operating wind farms could provide a basis for assessing capital improved value, particularly where the wind farm operator has a long lease and the lessee’s interest approximates the freehold value of the land. However, it was necessary to separate out the value attributed in those sales to goodwill, power purchase agreements, and other proprietary matters. While he accepted that the difficulty of the task was no obstacle to attempting it, he considered that in this case there was no meaningful way to break down the sales evidence into the land component and the proprietary or business component.

Valuation Evidence of Paul Newman

In his Supplementary Valuation dated 12 January 2018, Mr Newman assessed the value of the wind farm within the Rural City of Ararat to be:[27]

Site Value   $14,560,000
Capital Improved Value         $470,400,000
Net Annual Value                   $37,800,000

[27]Supplementary Valuation of Paul Newman dated 12 January 2018 (First Newman Valuation), [9].

Mr Newman valued the wind farm as a single occupancy, and apportioned the value between the two municipalities. He conducted his valuation on the basis that ‘the components of the wind farm are fixtures and thus form part of the land for rating purposes’.[28] He adopted the direct comparison approach to assess the value of the property, which he explained as follows:[29]

This method of assessment has been adopted as the primary method of valuation having regard to the type of the property, with the highest and best use being as a largescale commercial windfarm. The most significant common metric between all windfarms is the installed megawatt (MW) capacity of the facility. For analysis and comparison on a direct comparison basis the sales have been analysed to show the dollars per installed megawatt capacity ($/MW). In the analysis of the sales and the application of values for the Site Value (SV) and Capital Improved Value (CIV) of the subject property adjustments have been made for points of difference including the date of the sale and age, size, type and specification of the fixtures for the facility relative to the subject property.
The sales of the operating windfarms are of facilities as a going concern including some items of plant equipment and chattels which are not fixtures and do not form part of the rateable land under Section 154 of the Local Government Act 1989. Where necessary for analysis purposes an allowance has been made by way of a deduction from the gross sale price to account for these items.

[28]First Newman Valuation, [6.8].

[29]First Newman Valuation, [8.1].

Mr Newman analysed sales of six wind farms:

(a) Oaklands, Victoria, sold in June 2011;

(b) Stockyard Hill, Victoria, sold in July 2017;

(c) Lal Lal, Victoria, sold in May 2017;

(d) Moorabool, Victoria, sold in June 2016;

(e) Taralga, New South Wales, sold in March 2016; and

(f) Macarthur, Victoria, sold in September 2015.

From these sales, he derived a rate of $65,000 per megawatt[30] for site value, and a rate of $2,100,000 per megawatt for capital improved value.

[30]The phrase ‘per megawatt’ is shorthand for ‘per installed megawatt capacity’.

Applying these rates to the Ararat Wind Farm, which has an installed capacity of 240 megawatts, Mr Newman calculated the site value of the entire wind farm to be $15,600,000 and the capital improved value to be $504,000,000. He apportioned this between the two municipalities to arrive at a capital improved value of $470,400,000 for the part of the wind farm in the Ararat municipality.

Alternate valuations

Mr Newman provided a second valuation report dated 7 February 2020, in response to the Tribunal’s direction that each valuer prepare an alternate valuation based on the other valuers’ instructions and assumptions. However, because he did not accept the instructions and assumptions that underpinned Mr Brown’s valuation, he did not undertake an alternate valuation on that basis. He explained the reasons for his position:[31]

After consideration of this method of assessment for CIV, I am of the opinion that an alternative method of assessment is required to assess the CIV, of the property. The method of valuation applied by Mr Brown confines the CIV Value to the equivalent of the present value of the future income from ground rentals. The method applied does not address the value of the rateable occupancy as an unencumbered fee simple, with fixtures that form part of the land for rating purposes, under the provision of Section 154 of the Local Government Act 1989.
In my opinion, a prudent vendor of an unencumbered fee simple, for an operating windfarm that contains rateable fixtures, would be guided by the sales of operating windfarms and not ground lease values.
I am directed to provide an alternate CIV and for the reasons outlined, I have not adopted the method applied by Mr Brown. I have previously assessed the CIV for the property using an analysis of windfarm sales to derive a rate per installed megawatt for comparison and application of the CIV returned. As a check method a summation approach was also utilised. For the summation check valuation, the value of the rateable fixtures was added to the assessed site value to calculate a check CIV.
Having regard to the definition of CIV, the availability of comparable sales evidence and the access to agreed construction cost data I am of the opinion that these methods remain as the correct valuation methods for analysis of sales and assessment of the CIV.

[31]Valuation report of Paul Newman dated 7 February 2020 (Second Newman Valuation), [8.3].

Instead, Mr Newman analysed sales information for operating wind farms and updated the data that informed his original valuation employing the direct comparison method. In addition to the sales information in his first valuation, he included information about the sales of three additional wind farms:

(a) Cherry Tree, in Victoria in December 2018;

(b) Silverton, in New South Wales in January 2017; and

(c) Bald Hills, in Victoria in February 2017.

This confirmed his assessment of site value at $65,000 per megawatt, and capital improved value at $2,100,000 per megawatt. As a check, Mr Newman used the summation method to arrive at a capital improved value of $2,073,333 per megawatt, and a total capital improved value of $497,600,000.

Mr Newman was also asked to assess capital improved value having regard to the occupancies created by each lease, rather than as a single undertaking or occupancy. Again, he declined to do so, stating:[32]

The occupancies created by the relevant land parcels do not function as separate entities. Each occupancy created by the lease of the relevant land parcels is joined by roads and cabling of various types to undertake the process of electricity generation and transfer of the electricity to the electricity grid from one location. Each occupancy is managed and maintained from a central compound containing the administration and works shed. Taking this form of operation into account I have assessed the CIV value [of] the AWF as a whole and then apportioned the CIV to the respective occupancies for the relevant land parcels using the assessed NAV and the installed capacity of each occupancy as a percentage of total installed capacity.

[32]Second Newman Valuation, [9.6].

This alternate valuation used a figure of $120,000 per megawatt, derived from sales of greenfield windfarm projects, amortised over 50 years at a 5% discount, to give a market value of the ‘leasehold interest’ of $6,576 per megawatt. To this was added $3,188 per megawatt, representing a passing ground rental of $10,200 per annum. The annual equivalent land rate of $9,764 per megawatt was capitalised at the rate of 6% to give a land value rate of $162,725 per megawatt, and a site value for the entire wind farm of $39,100,000.

Mr Newman then assessed the capital improved value of the land, based on sales of operating windfarms. Using the direct comparison method, he adopted $2,150,000 per megawatt as the ‘leasehold interest’ of an operating windfarm, which included the land component of $120,000 per megawatt. His calculation of capital improved value was as follows:[33]
[33]Second Newman Valuation, [9.8].

Nevertheless, what distinguishes the present case is not the extent of annexation of the chattels which seemed on the surface to be not insubstantial, albeit that methods for removal were clearly built into them, but the object of annexation which on this occasion appears to be unusual. The land was leased for a purpose largely unrelated to the tenant’s own business and its needs. Although Co-Gen had a right to sell off the balance of its electricity into the state grid, the primary purpose of the lease was solely to enable it to generate steam and electricity for the landlord’s own use on land adjacent to the tenant but which formed part of the whole of the subject land. No case of that kind was to my knowledge cited to us, but the relationship between landlord and tenant in this case is significant in several ways. First, although the original term is extensive in duration, any renewal depends upon agreement between the parties — it is not simply a commercial choice for the tenant. Secondly, the terms of the lease … were such as to make it abundantly clear that not only did the tenant have the right to remove the plant and equipment at the end of their commercial arrangement, but that it was under an obligation to do so. In terms of intended permanence, or the contrary, there could be no more emphatic statement of the parties’ objects in allowing the plant and equipment to be brought onto the land than their mutual desire to see it removed at the end of that relationship. Thirdly, the landlord agreed that all improvements and fixtures remained property of the tenant, regardless of the degree of annexation. Fourthly, the object of annexation was not related to any enjoyment of the land for the tenant’s own purposes: rather the plant and equipment was brought on solely to produce power for the landlord.

[108](2004) 9 VR 523.

[109]Uniqema, [48] (Ormiston JA, Phillips and Callaway JJA agreeing).

[110]Uniqema, [48] (Ormiston JA, Phillips and Callaway JJA agreeing).

The parties referred me to several other cases involving disputes about whether plant and equipment brought onto land by a lessee were fixtures:

(a) Pegasus Gold Australia Ltd v Metso Minerals (Australia) Ltd[111] concerned heavy mining equipment bolted to concrete slabs embedded in the soil on a mining tenement. While the equipment was heavy, it could be removed, and there was a statutory obligation to remove it at the end of the lease. The Northern Territory Court of Appeal concluded that the ‘purpose or object of annexation was not for the better enjoyment of the mineral lease’[112] and that the equipment was not a fixture. Decisive considerations were that it was not the objective intention of the lessee that the equipment should become a fixture, given that both the lease and the legislation required it to be removed, that it was economic to do so, and that it could be done without damage to the soil or the equipment.[113]
[111](2003) 16 NTLR 54 (Pegasus Gold).
[112]Pegasus Gold, [22] (Mildren J, Martin CJ and Thomas J agreeing).
[113]Pegasus Gold, [26] (Mildren J, Martin CJ and Thomas J agreeing).

(b) In ReOrigin Energy Power Ltd and Commissioner of State Revenue,[114] there was an issue whether a cogeneration plant that produced electricity and steam was a fixture that should be included in assessing the value of property owned by a company. The plant was on land occupied by the company under a site licence granted by the holder of a Crown lease over the land. The components of the plant were fixed to the land so that they could be safely used, but could be disassembled, removed from the site, and sold. The Western Australian State Administrative Tribunal distinguished the case from the ‘special circumstances’ in Uniqema, in part because of the particular terms of the site licence and the Crown lease.[115] The Tribunal considered that the plant and equipment were fixtures, ‘having regard to the degree of annexation of the plant to the land and the manner in which the plant and equipment serves the use of the land’.[116]

(c) TEC Desert involved a dispute about whether the sale of power generation assets located on a mining lease was a sale of land on which stamp duty was payable — that is, whether the assets were fixtures that formed part of the land. The High Court set out some basic principles of the law of fixtures,[117] and observed that it followed from these principles that ‘items affixed to land do not become, merely because of their affixation, “fixtures” in the technical sense’.[118] One reason for this conclusion was that the legislation governing the mining lease provided for the removal by the lease holder of mining plant at the end of the lease. Another reason was that a mining lease is not an interest in land.

(d) In Agripower Australia Ltd v J&D Rigging Pty Ltd,[119] there was a question whether mining plant on a mining lease formed part of the land. The lessee was obliged to remove the items on the expiry of the lease. Applying the analysis of the High Court in TEC Desert, Wilson J held that the plant was not part of the land to which it was physically attached.[120] It was significant that the plant was brought onto that land for the purposes of the mining leases, and had to be removed before their expiry.

[114](2007) 70 ATR 64 (Origin Energy).

[115]Origin Energy, [130]–[131].

[116]Origin Energy, [131].

[117]TEC Desert, [22]–[27].

[118]TEC Desert, [38].

[119][2013] QSC 164 (Agripower v J&D).

[120]Agripower v J&D, [68]–[73].

It is also necessary to mention AusNet,[121] the decision of the Tribunal referred to in the third question identified by Senior Member Jacono. That case concerned ‘the value of a small parcel of land containing a kiosk substation that facilitates the distribution of electricity’.[122] The land was owned by AusNet, and there was a dispute about whether the substation formed part of the capital improved value of the land. The substation rested on a concrete slab under its own weight and was not bolted or affixed to the land; its connection to electricity cables was necessary for the flow of electricity, rather than to keep it in place. It could be removed from the site within a few hours.
[121][2014] VCAT 1637.
[122]AusNet, [1].

Although the Tribunal was of the view that the limited degree of physical annexation favoured AusNet’s contention that the substation was a chattel, that was not determinative of the objective intention of annexation.[123] On that question:[124]

… despite the absence of bolting or affixation, there is evidence of an objective intention that the equipment has been installed on the land on a semi-permanent basis, rather than temporarily. It is necessary to the long-term distribution of electricity within the catchment area. The equipment components each have a lifespan of 40 years or more. Absent any technological change that renders the equipment obsolete, and subject to repair and upgrading over time, we are satisfied that the kiosk substation equipment would be intended to remain in situ indefinitely.

[123]AusNet, [65].

[124]AusNet, [77].

Further, the Tribunal considered that the substation was installed by AusNet on the land for the better use and enjoyment of the land, in circumstances where the valuers agreed that the highest and best use of the land was as an electricity substation. This factor weighed heavily in favour of the conclusion that, objectively considered, the substation was intended to be a fixture.[125] On balance, the Tribunal reached that conclusion:[126]

Despite the equipment resting by its own weight on the land, and its capacity to be removed without high cost or damage, we consider that the nature of the equipment, its function and use, the period of time it is to remain on the land, and its objective purpose for the better enjoyment of the land having regard to its particular use, all favour its characterisation as a fixture.

[125]AusNet, [88]–[90].

[126]AusNet, [91].

The Valuer-General relied on the Tribunal’s reasoning in AusNet in support of its contention that the above ground AWF Assets are fixtures, given that all three valuers agreed that the highest and best use of the AWF Land is as a wind farm. The Valuer-General submitted that the objective facts and circumstances supported a finding that the primary purpose of affixation of all of the AWF Assets is to benefit the land, by harnessing wind to generate electricity. He pointed out that, unless the wind turbines were securely attached to the land, it could not be used as a wind farm and could not achieve its highest and best use. If it is accepted that the foundations are fixtures, then it follows that the objective purpose of annexing the remainder of the AWF Assets to those foundations was to securely attach them to the ground for the benefit of the AWF Land.

The Valuer-General submitted that the degree of annexation is substantial, designed to withstand significant shear force. He relied on the evidence of Mr Petrovic, the structural engineer, which explained how the wind turbines were designed to harness wind energy. Based on Mr Petrovic’s evidence that bolting is a common way of connecting structural elements, the Valuer-General submitted that the primary purpose of the bolts was to secure the turbines to their foundations, in order to produce electricity from wind, and not to ensure that they could later be removed. He argued that each of the above ground AWF Assets is an integral component of one interconnected, interdependent wind farm, by means of the underground cabling that connects the turbines to each other and to the substation. It was not to the point, he submitted, that the wind turbines could operate independently of each other.

Consideration

I accept that the wind turbines and the other above ground AWF Assets are very firmly attached to their foundations, and that the foundations may be considered to be part of the land. I also accept that they have been securely fixed to the land in order to generate electricity using wind energy, as component parts of an interconnected wind farm. However, the evidence compels the conclusion that these assets were not attached to the land with the objective intention that they become part of it. There are a number of reasons why that is so:

(a) First, the planning permits require the removal of the above ground assets when the wind farm is decommissioned. The obligation to decommission the wind farm rests primarily with the wind farm operator but, in the absence of the operator, it falls to the relevant Land Owner to develop and implement the decommissioning plan.[127] The planning permits were in place before AWF Prop Co entered into the AWF Leases with the Land Owners, and before the wind farm was constructed. From the outset, the planning permission that enabled the development of the AWF Land as a wind farm required that the turbines and other above ground assets were not to be permanently affixed to the land.
[127]See [18]–[19] above.

(b) Second, the AWF Leases oblige AWF Prop Co to remove the above ground AWF Assets at the end of the lease. Before the wind farm was constructed, each of the Land Owners had agreed with AWF Prop Co that the foundations and access roads would remain, but that everything above ground must be removed when the lease ends.[128]
[128]See [27] above.

(c) Third, the AWF Assets were installed by AWF Prop Co at its own cost, in the order of $480,000,000. They appear on its assets register and in its financial statements.[129] They are part of the security provided for the $200,000,000 loaned by AWF’s banks to fund the construction of the wind farm.[130] There is no suggestion that any of the Land Owners asserts ownership of the above ground AWF Assets on their land. To the contrary, in the AWF Leases, the Land Owners acknowledge the interest of AWF Prop Co’s financiers, and agree if requested to enter into a ‘Tripartite Deed’ to protect the financiers’ rights.[131]
[129]See [61]–[62] above.
[130]Statement of Stuart Liddell dated 30 July 2019, [48]–[53], SHL14–SHL19.
[131]See e.g. Stevens lease, cl 4.19 — Tripartite Deed.

(d) Fourth, the above ground AWF Assets are all designed and installed in such a way that they can be removed from the AWF Land without damaging either the land or the assets. This was confirmed by Mr Petrovic’s report.

(e) Fifth, the design working life of the wind turbines is between 20 and 25 years, and 25 years for all other AWF Assets.[132] This corresponds with the term of the AWF Leases, and is a further indication that it was not intended to permanently affix the assets to the land.

(f) Sixth, the AWF Leases permit AWF Prop Co to ‘erect maintain repair renew replace and use or remove’ the turbines, the substation, and the wind monitoring masts during the lease term.[133] Mr Liddell’s evidence was that, as the AWF Assets reach the end of their design lives, they would increasingly suffer from wear and tear and would require maintenance and, in some cases, replacement. Over time, it would become uneconomical to use the current AWF Assets. He said that exercising the option to extend the AWF Leases for a further 25 years would probably involve rebuilding the whole wind farm.

(g) Seventh, the above ground AWF Assets could, if removed, be redeployed at another wind farm site, or sold on the developing market for second-hand wind farm parts. While it is not possible to predict whether their value would exceed the cost of removing them from the AWF Land, I accept that they would have some residual value after removal.[134]

[132]See [65] above.

[133]See e.g. Stevens lease, cl 7.4 — Development Area.

[134]Statement of Stuart Liddell dated 30 July 2019, [115]–[124]. While Mr Dalton queried the depth of the Australian market for second hard wind farm parts, he accepted that it existed and could be expected to mature over time. He also accepted that the Ararat Wind Farm had an incentive to sell the AWF Assets at the end of the lease to offset the mandatory removal costs. See transcript, 29 July 2020, T128:6–130:3.

While land tenure may not be determinative of whether an asset remains a chattel or becomes a fixture,[135] I consider it to be significant in this case that the assets are on leased land. The AWF Assets were brought onto the land by a lessee, under terms of leases that require their removal on termination. Every indication is that the parties to the AWF Leases intended that the above ground AWF Assets would remain the property of AWF Prop Co, and would not become part of the land and hence the property of the Land Owners.
[135]AusNet, [72]–[74].

I have not overlooked that the valuers agreed that the highest and best use of the AWF Land was as a wind farm, and that the installation of the AWF Assets achieved that use. However, there was a subtle but important difference between Mr Brown’s articulation of the highest and best use, and that of Mr Newman and Mr Molloy:

(a) Mr Brown’s opinion was that ‘the leasing of the land by the Lessee for a Wind Farm represents the highest and best use of the AWF Land’.[136] This was consistent with his approach of valuing the wind farm occupancies created by the AWF Leases, taking title rather than occupancy as his starting point. It also avoided the error of conflating ownership of the land with ownership of the AWF Assets.[137]

(b) Both Mr Newman and Mr Molloy took the view that the highest and best use of the AWF Land was as a wind farm,[138] and each assumed that the operator of the wind farm was the owner of the land. Hence, both of them hypothesised the sale of the AWF Land by a wind farm operator that owned both the land and the assets. As discussed, there were a number of flaws in this approach.[139] It also blurred the distinction between ownership of the AWF Land and ownership of the AWF Assets.

[136]First Brown Report, [63].

[137]First Brown Report, [117]–[121]; Transcript, 30 July 2020, 244:8–25.

[138]First Newman Valuation, [3.9]; First Molloy Report, [4.4].

[139]See [170]–[175], [192]–[196] above.

For these reasons, I find that the above ground AWF Assets are not fixtures and are not part of the land to be valued. The objective intention of the parties that they not be permanently affixed to the land displaces the presumption that they are fixtures.

For completeness, I note that my conclusion is consistent with that reached by the Australian Taxation Office, in two private binding rulings concerning wind farm assets located on leased land.[140] Both rulings were to the effect that the wind farm assets are not ‘real property situated in Australia’ or taxable real property for the purposes of s 855-20 of the Income Tax Assessment Act 1997 (Cth). In both rulings, it was significant that the lease terms required removal of the wind farm assets at the end of the lease.
[140]Private Binding Ruling 1012811534095, undated but issued in 2015 and cited in Private Binding Ruling 1051377156530, 28 May 2018, [48]; Private Binding Ruling 1012939775381, 24 February 2016.

Section 154A, Property Law Act

In the alternative, the applicants contended that, even if all of the AWF Assets are fixtures, the effect of s 154A of the Property Law Act is that the assets have not become part of the AWF Land. Section 154A provides:

Tenant may remove buildings and fixtures
(1) A tenant who at his or her own cost or expense has installed fixtures on, or renovated, altered or added to, a rented premises owns those fixtures, renovations, alterations or additions and may remove them before the relevant agreement terminates or during any extended period of possession of the premises, but not afterwards.
(2) A tenant who removes any fixtures, renovations, alterations or additions under subsection (1) must—
(a) restore the premises to the condition they were in immediately before the installation, renovation, alteration or addition, fair wear and tear excepted; or
(b) pay the landlord an amount equal to the reasonable cost of restoring the premises to that condition.

(3) This section does not apply to the extent that—
(a) the lease otherwise provides; or
(b) the landlord and the tenant otherwise agree.

Section 154A was inserted into the Property Law Act on the repeal of the former s 28(2) of the Landlord and Tenant Act 1958 (Vic).[141] That section provided:

If any tenant holding lands by virtue of any lease or agreement … at his own cost and expense erects any building either detached or otherwise or erects or puts in any building fence engine machinery or fixtures for any purpose whatever (which are not erected or put in in pursuance of some obligation in that behalf) then, unless there is a provision to the contrary in the lease or agreement constituting the tenancy, all such buildings fences engines machinery or fixtures shall be the property of the tenant and shall be removable by him during his tenancy or during such further period of possession by him as he holds the premises but not afterwards; notwithstanding the same consist of separate buildings or that the same or any part thereof may be built in or permanently fixed to the soil; so as the tenant making any such removal does not in anywise injure the land or buildings belonging to the landlord or otherwise puts the same in like plight and condition or in as good plight and condition as the same were in before the erection of anything so removed.

[141]Consumer Affairs Legislation Amendment Act 2010 (Vic), s 41.

Section 28(2) of the Landlord and Tenant Act was considered in Vopak Terminals Australia Pty Ltd v Commissioner of State Revenue,[142] in which there was a dispute about whether fixtures installed by a tenant were part of the land sold by the landlord. The Court of Appeal concluded that the intention of s 28(2) was ‘to alter the consequences of the initial affixation of chattels by tenants’, notwithstanding that this was ‘a significant inroad into accepted principles relating to fixtures and the law of property’.[143] The effect of the section was that the tenant’s fixtures had not become part of the realty owned by the landlord; since they remained the property of the tenant, there could not at the same time be property rights or title in the landlord.[144]
[142](2004) 12 VR 351 (Vopak).
[143]Vopak, [38] (Ormiston JA, Warren CJ and Buchanan JA agreeing).
[144]Vopak, [42] (Ormiston JA, Warren CJ and Buchanan JA agreeing).

The operation of s 28(2) was further considered by the Court of Appeal in Uniqema, as an alternative basis for holding that the plant and equipment was not part of the land sold. The Court did not accept the appellant’s invitation to depart from its earlier decision in Vopak; it considered itself bound to follow Vopak, given that the critical issue in each case was identical.[145] The arguments put for the appellant were dealt with in some detail:[146]

Counsel relied heavily on three matters. First, they said that the decision in Vopak meant that in Victoria alone, but nowhere else in Australia, tenant’s fixtures do not form part of the realty and are “excised” from the title which a vendor can pass on transfer. Of course that is so, but the consequence follows from the fact that only in Victoria has there been a section passed in the unusual form which s 28(2) has taken: indeed there is no jurisdiction now in which a section like s 28(1), making similar provision for agricultural fixtures, is presently in operation. The unique effect of s 28(2) was not merely noted, but considered carefully: see especially [38]–[44] of Vopak. Secondly, it is said that, though it was conceded that the interpretation might lead to “unfortunate consequences in practice” (see [39]), those consequences were “wholly unexplored”. The consequences on conveyancing practice were, on the contrary, considered briefly both at [39] and [44], but were not thought sufficient to lead to any different outcome. Fixtures, whether tenant’s fixtures or otherwise, may well have an effect on what in practice can be transferred, but the Torrens system has found no easy solution. The rights of a tenant in possession are expressly recognised in s 42 of the Transfer of Land Act, but, whatever the correctness of Vopak, a purchaser will inevitably find it hard to divine whether attached chattels are fixtures or not. It may, under the Torrens system, have been desirable to confine the question to be asked to the “degree of annexation”, as it is called, for the “object” and the other relevant circumstances, howsoever they be identified, are primarily known only to landlord and tenant. If Vopak be correct, purchasers will know that tenant’s fixtures within s 28 are not capable of being transferred and so they should make special provision for them in any contract of sale.
Thirdly, it was reiterated by counsel that s 28(2) was intended only to deal with the relationship of landlord and tenant but was not intended to affect the landlord’s estate or interest in the land nor to affect the landlord’s dealings with third parties with respect to the title. I cannot accept that contention. Any change to the property rights of landlord and tenant vis-à-vis each other relating to fixtures will ordinarily have further consequences. To the extent that the tenant’s rights are expanded, so also are the landlord’s rights as proprietor of the land diminished. Even assuming that the section did no more than extend the tenant’s time to take away the fixtures to the moment he or she actually gave up occupation, so also the landlord’s power incidentally to transfer the fixtures as part of the real property was restricted. That which at common law forms part of the realty is extracted upon severance by the tenant, so that the landlord’s practical rights in and over the land are diminished, as are those of any purchaser who takes subject to the rights of a tenant in possession. In other words the “right of removal”, referred to by counsel, necessarily affects the interest of the holder of the reversionary estate in the land. The change effected by s 28(2) may have been greater than some thought, but the change was one which affected “property” in the fixtures. By permitting that property to remain with the tenant in unqualified form, that which the landlord could otherwise have claimed, particularly in his or her dealings with other parties, must, pursuant to the subsection, be treated as no greater than a right to claim those affixed chattels as part of the realty after the tenant has departed without removing them pursuant to his or her rights.

[145]Uniqema, [51] (Ormiston JA, Phillips and Callaway JJA agreeing).

[146]Uniqema, [52]–[53] (Ormiston JA, Phillips and Callaway JJA agreeing). Citations omitted.

Section 154A of the Property Law Act was intended to replace s 28(2) of the Landlord and Tenant Act,[147] and to operate in a similar manner.[148] It is clear that Parliament intended s 154A to displace the common law of fixtures, as described by the Court of Appeal in Vopak and Uniqema. Although s 154A is expressed in more modern language than its predecessor, it has the same effect. Section 154A(3) replicates the proviso in the former s 28(2), ‘unless there is a provision to the contrary in the lease or agreement constituting the tenancy’.
[147]Explanatory Memorandum for the Consumer Affairs Legislation Amendment Bill 2009, cl 41.
[148]Victoria, Parliamentary Debates, Legislative Assembly, 26 November 2009, 4330 (Mr Robinson, Minister for Consumer Affairs).

The Valuer-General made a number of submissions as to why, in this case, s 154A did not have the effect of excluding the AWF Assets from the land to be valued.

First, the Valuer-General submitted that s 2(1) of the Valuation of Land Act required the land to be valued as if it were unencumbered by the AWF Leases, and therefore unaffected by s 154A. He argued that, to the extent of any inconsistency, the Valuation of Land Act prevailed over s 154A of the Property Law Act, and the right of a tenant to remove fixtures. I cannot accept that submission, which appears to me to misunderstand the effect of s 154A. For the reasons explained by the Court of Appeal in Vopak and Uniqema, the effect of s 154A is that any fixtures installed by a tenant on rented property remain the personal property of the tenant, and do not become part of the realty owned by the landlord. This means that, even if the above ground AWF Assets are fixtures, they remain the property of AWF Prop Co, and do not form part of the AWF Land. Accordingly, they do not form part of the fee simple estate to be valued in accordance with the Valuation of Land Act.

Further, the effect of s 2(1) of the Valuation of Land Act is that the capital improved value of leased land is to be assessed in accordance with the Challenger principles, on the basis that the fee simple estate is not affected by any lease. As discussed above, it does not require the existence of a lease to be completely disregarded.[149] Equally, it does not alter the property interests of a lessor and a lessee, or somehow enlarge the lessor’s interest in land for the purpose of assessing capital improved value.
[149]See [186] above.

Second, the Valuer-General submitted that s 154A does not apply to the AWF Assets because the AWF Leases ‘otherwise provide’, by stipulating that AWF Prop Co is not required to remove the foundations of the turbines and the access roads when the leases end.[150] He argued that this had the effect that, by virtue of s 154A(3), s 154A did not apply. The difficulty with this submission is that the AWF Leases do not provide, to any extent, that AWF Prop Co is not entitled to remove the AWF Assets — including the foundations and the roads — during the lease.[151] Agreeing that AWF Prop Co is not obliged to remove certain assets at the end of the lease is not the same thing as agreeing that they belong to the relevant Land Owner, or that they may not be removed before the end of the lease. Further, s 154A(3) excludes the application of s 154A only ‘to the extent that’ the lease otherwise provides or the landlord and tenant otherwise agree. Even if AWF Prop Co had agreed with the Land Owners that it could not remove the foundations and the roads, s 154A would not apply to that extent, but would still apply to the remaining AWF Assets.
[150]See e.g. Stevens lease, cl 2.15 — Removal of Fixtures and Fittings.
[151]It is expressly agreed that AWF Prop Co may remove the access roads: see e.g. Stevens lease, cl 7.1(d).

Third, the Valuer-General sought to distinguish Vopak and Uniqema on the basis that they concerned liability for stamp duty under the Stamps Act 1958 (Vic), and did not concern the valuation of land for rating purposes, in accordance with the Valuation of Land Act. I do not agree that they can be distinguished on that basis. In Vopak and Uniqema, as in this case, the critical issue was whether the assets in question were part of the land, or remained the property of the tenant.

Finally, I understood the Valuer-General to submit that I should not follow Vopak and Uniqema because Ormiston JA’s explanation of the effect of s 28(2) was obiter, or alternatively was not correct.[152] I cannot accept that submission. The critical passages in Vopak formed part of the ratio of that judgment, in that Court of Appeal held that the effect of s 28(2) was that the tenant’s fixtures had not become part of the realty. In Uniqema, the application of s 28(2) was one of two grounds on which the Court of Appeal held that the plant and equipment were not part of the land that had been sold. The same applies in this case. I consider both Vopak and Uniqema to be binding authorities in relation to the effect of s 154A of the Property Law Act, and I can see no basis on which they can be distinguished in this case.
[152]Valuer-General Victoria closing submissions, VGV Answer to question 3: ‘To the extent that Ormiston JA expressed obiter dicta opinions in Vopak and Uniqema that the predecessor to section 154A means that “tenant’s fixtures” are chattels, this dicta is not correct and/or distinguishable.’

The effect of s 154A is that the AWF Assets do not form part of the AWF Land, and are not to be taken into account in assessing its capital improved value.

Are the AWF Assets ‘improvements’?

In his closing submissions, the Valuer-General developed an argument based on the concept of ‘improvement’ in the Valuation of Land Act. He submitted that, whether the AWF Assets were characterised as chattels or fixtures, they were nevertheless improvements to and on the land, and were therefore to be taken into account in assessing capital improved value. Referring to Griffith CJ’s judgment in Morrison v Federal Commissioner of Land Tax,[153] the Valuer-General submitted that installation of the AWF Assets were ‘an operation of man on land which has the effect of enhancing its value’ and hence were improvements to the land.
[153](1914) 17 CLR 498, 503.

This argument did not assist the Valuer-General’s case, because it focused on the definition of ‘improvement’ for the purpose of assessing site value. The definition of capital improved value in s 2(1) of the Valuation of Land Act does not include the word ‘improvement’. It is not necessary to identify the improvements to land in order to assess capital improved value; rather, it is the value of the unencumbered fee simple estate in the land that is to be valued. In order to do that, it was necessary to determine whether the AWF Assets — in particular the above ground assets — formed part of the fee simple estate. For the reasons I have already given, they do not. They are therefore not ‘improvements’ that must be ignored in assessing the site value of the land.

Valuation

I accept the initial valuation of Mr Brown, in preference to the supplementary valuation of Mr Newman and the initial valuation of Mr Molloy. My reasons for doing so are, in summary:

(a) Mr Brown correctly identified the occupancies to be valued, being the wind farm occupancies on the titles of each of the Land Owners, created by the AWF Leases. Mr Newman and Mr Molloy instead valued the AWF Land as a single occupancy, taking occupancy rather than title as their starting point.[154]
[154]See [169]–[174] above.

(b) Mr Brown valued the AWF Land in accordance with the principles set out in Challenger, while Mr Newman and Mr Molloy did not.[155]

(c) Mr Brown assessed the capital improved value of the AWF Land on the basis that the above ground AWF Assets did not belong to the Land Owners and were not part of the land to be valued. Both Mr Newman and Mr Molloy proceeded on the incorrect assumption that the AWF Assets were fixtures and were to be taken into account in assessing capital improved value.[156]

Overall, the instructions on which Mr Brown based his valuation provided him with the correct legal framework for assessing the capital improved value of the AWF Land.

[155]See [185]–[196] above.

[156]See [213]–[216], [229]–[233] above.

Both Mr Newman and Mr Molloy were asked by the Tribunal to prepare alternate valuations based on Mr Brown’s instructions. Mr Newman declined to do so. Using the same method as Mr Brown, Mr Molloy’s alternate valuation based on Mr Brown’s assumptions was $21,500,000, with $20,100,000 apportioned to the wind farm within the Ararat municipality.[157] The reasons why this valuation was higher than Mr Brown’s valuation of $10,850,000 are matters of valuer’s judgment as to the period over which the ground rentals should be capitalised, and the residual value of the access roads.[158] I am unable to form a view as to which judgments are to be preferred on those two matters, and am reassured by the applicants’ statement in opening that they do not seek to ‘quibble about the detail at that level’.[159]
[157]Second Molloy Report, 3.
[158]See [142] above.
[159]Transcript 93:16–17.

Disposition

The applicants’ appeal against the supplementary valuation of Mr Newman will therefore be allowed.

The parties should confer and seek to reach agreement on the form of orders to be made under s 25(1) of the Valuation of Land Act to give effect to these reasons. They should also seek to reach agreement on the question of the costs of the proceeding, having regard to the matters set out in s 26(2) of the Valuation of Land Act. In the event that these matters cannot be agreed, I will hear submissions about the form of the orders to be made, and on the question of costs, at a mutually convenient time in the new year.

Annexure 1 – Ararat Wind Farm Site Map

Annexure 2 – Landowner boundary map (Northern Grampians Shire) with turbine locations

Annexure 2 – Landowner boundary map (Rural City of Ararat) with turbine locations

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Scenario A	Scenario B	Scenario C
Mr Brown	$10.15 million	$15.16 million	$445.45 million
Mr Newman	Not valued	$36.494 million	$470.4 million
Mr Molloy	$20.1 million, or $53.2 million, or $90.1 million[10]	$90.1 million	$572.6 million

[2020] VSC 853

16 December 2020