Capaldo v Capaldo - [2011] SASCFC 115

SUPREME COURT OF SOUTH AUSTRALIA
(Full Court: Civil)
CAPALDO v CAPALDO & ORS
[2011] SASCFC 115
Judgment of The Full Court
(The Honourable Justice Gray, The Honourable Justice Sulan and The Honourable Justice Peek)
21 October 2011
REAL PROPERTY - VALUATION OF LAND - METHODS OF VALUATION - GENERALLY
Appeal of a decision of a Judge of this Court on a preliminary issue - where the parties agreed that the land at 4 Montacute Road, Hectorville should be valued utilising the capitalisation methodology - where the Judge adopted that methodology and valued the land - whether the Judge erred in assessing the value of the land - in particular, whether the Judge disregarded relevant and probative valuation evidence, failed to have proper regard to evidence led in the trial and made errors of calculation.
Appeal dismissed - the valuation arrived at by the Judge was supported by evidence, was not permeated by error and did not lead to an erroneous valuation.
Law of Property Act 1936 (SA) s 69, s 83, referred to.
Capaldo v Capaldo & Ors [2011] SASC 28; Commissioners of Succession Duties (SA) v Executor Trustee and Agency Co of South Australia Ltd (1947) 74 CLR 358; Commonwealth v Reeve (1949) 78 CLR 410; Emerald Quarry Industries Pty Ltd v Commissioner of Highways (SA) (1978) 142 CLR 351; Commissioner of Taxation of the Commonwealth v St Helen's Farm (ACT) Pty Ltd (1980) 146 CLR 336; Crompton v Commissioner of Highways (1973) 5 SASR 301; Robinson Brothers (Brewers) Ltd v Assessment Committee for the No 7 or Houghton and Chester-le-Street Area of the County of Durham [1937] 2 KB 445; Arcus Shopfitters v Western Australian Planning Commission (2002) 125 LGERA 180; Roads and Traffic Authority of New South Wales v Blacktown City Council [2007] NSWCA 20; Garton Hunter (Valuation Officer) [1969] 2 QB 37, considered.

CAPALDO v CAPALDO & ORS
[2011] SASCFC 115
GRAY J:

In the primary proceedings before this Court orders are sought for partition of land at Montacute Road, Hectorville, and alternatively, for the sale of the land and the distribution of the proceeds between the registered owners of the land.[1] The decision under appeal related to a preliminary issue – the value of the land the subject of the proceedings.
[1] Law of Property Act 1936 (SA) sections 69, 83.
The subject land is situate at 4 Montacute Road with frontage but no current access to Montacute Road. The land has an area of 1584 square metres. The subject land is contiguous with land at 16 Glynburn Road and has been incorporated with that land into what is known as the Glynde Hardware Store site. The subject land is leased to Capaldo Investments Pty Ltd, the entity that operates the hardware store. The lease commenced on 1 July 2010 for a term of five years with an option to renew for a further term of five years. The subject land is utilised as the garden centre and car park of the hardware store.
The subject land is the whole of the land comprised in certificate of title Register Book Volume 5709 Folio 19. The parties in the proceedings, the registered proprietors of the land, are siblings. Kevin, Christopher and Steven Capaldo hold three undivided fourth parts with no survivorship and John Capaldo and Rosemary Lombardozzi hold one undivided fourth part with no survivorship. The registered proprietors hold their interests as trustees of their respective superannuation funds.
The primary issue raised on the appeal is a challenge to the valuation arrived at by the Judge. It was complained that the Judge did little more than adopt the value of the property ascribed by a valuer. It was further complained that the Judge disregarded relevant and probative valuation evidence, failed to have proper regard to evidence led in the trial and further, made errors of calculation that were said to undermine his approach, findings and conclusion.
Introduction
The subject property is undeveloped land. As noted above, its use is as a garden centre and car park. There are minimal improvements on the land. However, because of the family arrangements, it appears that the subject land was able to be utilised with the hardware store to form the one site and as such to command a passing rent in excess of the market rent. There was good reason why the hardware store would want to maintain control of the subject land and in particular to utilise the property for the purposes of the hardware store business.
At the trial of the preliminary issue, the parties agreed that the subject land should be valued utilising the capitalisation methodology – that is, by the capitalising of market rent. The Judge adopted this methodology.
The Judge first addressed market rent, concluding “[p]utting aside any special value the subject land may have, I find that the market rent is $55,440.”[2] The Judge then addressed the capitalisation rate and reached the conclusion that a rate of eight per cent should be applied. This led the Judge to conclude that, subject to special value, he would fix a value of the subject land at $800,000.00. The Judge finally considered special value and in that respect, allowed a premium of $50,000.00 leading to a total value of $850,000.00.
[2] Capaldo v Capaldo & Ors [2011] SASC 28, [27].
The plaintiff, the appellant to this appeal, tendered a written valuation report from Gilbert Piccinato. The defendants, the respondents to this appeal, tendered a valuation report from Neil Bradford. Both valuers gave evidence. It is convenient to record the Judge’s summary of the effect of the valuation evidence:[3]
The plaintiff relied on the valuation report and the testimony of the expert valuer Mr Piccinato. In his report, Mr Piccinato valued the subject land by reference to comparable sales of land in nearby eastern suburbs. Because the subject land is largely undeveloped, Mr Piccinato selected property sales of land which he regarded as development land from which he derived a value of $735 per square metre price for such land. Accordingly, he valued the subject land at $1,165,000. Mr Piccinato opined that the owners of the adjoining land “would be prepared … to pay a premium of up to 20%” to secure the site. In that case the value of the subject land would be $1,395,000. In his report, as a second check, Mr Piccinato capitalised the passing rent at both 7 and 6 per cent which resulted in values of $1,159,428 and $1,352,666 respectively. Mr Piccinato defended the capitalisation rates he selected on the grounds that it was often the case that the existing return for land which was best suited for redevelopment was relatively low.
The defendants relied on the valuation report and testimony of Mr Bradford. In his report Mr Bradford valued the land on the basis of the capitalisation of the market rental of the subject land, which he assessed to be much less than the passing rent of $83,064. He assessed the market rent of the property to be $55,440 and allowed for a net income after expenses of $53,860. He capitalised that return at 8.5 per cent resulting in a valuation of the subject land at $633,647. However, to the market value so assessed, Mr Bradford added a premium to reflect the additional value of the existing advantageous lease to Capaldo Investments. Mr Bradford limited the additional value to the rent payable until 2015 because he postulated that on a renewal of the lease Capaldo Investments, acting as an independent lessee in the market, could be expected to insist on a market valuation which would bring the passing rent back to his assessment of the market rent. Mr Bradford valued the premium at $105,713 by discounting the income stream generated by the over market proportion of the rent to achieve a capital sum. Mr Bradford therefore valued the subject land together with the advantageous lease at $739,360.
[3] Capaldo v Capaldo & Ors [2011] SASC 28, [10]-[11].
The Judge rejected the valuation evidence of Mr Piccinato. On appeal this rejection was criticised. I will discuss this topic later in these reasons.
Following a full review of Mr Bradford’s report and evidence, the Judge concluded that he was prepared to act on Mr Bradford’s assessment of market rent. The Judge subjected the question of an appropriate capitalisation rate to close scrutiny. He noted that Mr Bradford had used a rate of 8.5 per cent and that Mr Piccinato had used rates of six or seven per cent.
The Judge was not prepared to accept Mr Bradford’s capitalisation rate of 8.5 per cent. Mr Bradford had reached his conclusion based on the sale of investment properties in broadly comparable locations. In the Judge’s view, an investor would seek a greater yield from largely undeveloped land because it would be more difficult to find a tenant for such land. The Judge also bought to account what he described as a high probability that the subject land could be continuously leased to the operators of the hardware store for the foreseeable future. Ultimately the Judge adopted a capitalisation rate of eight per cent.
As noted above, the Judge added $50,000.00 on account of special value in arriving at his ultimate valuation. The Judge did this on the basis that the interest of the owner of the hardware store in the subject land materially appreciated the value of the land. That special interest arose partly from the ongoing use of the land as a garden centre and car park for the hardware store, but also because of the enhanced development opportunities of the entire site. The Judge put the matter another way in observing that the special value was the value arising from the removal of any risk that the subject land might be developed independently from the hardware store and from the possibility of a redevelopment of the entire site.
Before turning to the consideration of the issues on the appeal, one further observation should be made. The passing rent immediately preceding the time of trial was $83,064.00 per annum. Mr Bradford assessed the market rent in an amount much less than the passing rent. He assessed the market rent before adjustments at $55,440.00, allowing a net income after adjustments of $53,860.00. As noted above, the Judge accepted Mr Bradford’s assessment of market rent. However, a purchaser of the property would receive the benefit of the passing rent for the term of the lease and accordingly, Mr Bradford in his valuation added in the present day value of that additional income stream. This premium had as a consequence a value of $105,713.00. This amount was added by Mr Bradford to the capitalisation of the market rent.
The Appeal
The Role of the Appeal Court
The approach to be taken by an appeal court when dealing with a complaint about a question of valuation has been the subject of judicial comment over many decades. The principles to be applied in such a case were discussed by Latham CJ, Rich and Williams JJ in Commissioners of Succession Duties (SA) v Executor Trustee and Agency Co of South Australia Ltd in the following terms:[4]
It would not be proper for this court on an appeal of this nature to substitute its own opinion for that of the court below unless it were satisfied that the court below acted on some wrong principle of law, or that the value was entirely erroneous (Rook v. Fairrie1; Lee Transport Co. Ltd. v. Watson; Federal Commissioner of Taxation v. Sagar): Cf. Charan Das v. Amir Khan, where Lord Buckmaster, delivering the judgment of the Privy Council in an Indian appeal said:—"Now this Board will not interfere with any question of valuation unless it can be shown that some item has improperly been made the subject of valuation or excluded therefrom, or that there is some fundamental principle affecting the valuation which renders it unsound." The Privy Council recently affirmed this principle in Naravanan Chettiar v. Kaliappa Chettiar.
[Footnotes omitted.]
[4] Commissioners of Succession Duties (SA) v Executor Trustee and Agency Co of South Australia Ltd (1947) 74 CLR 358, 367.
In Commonwealth v Reeve, Dixon J referred to the above passage and observed:[5]
The rule thus laid down is almost indispensable to the administration of justice in compensation cases. For the estimation of a money sum is usually so much a result of judgment and sound discretion and so little the product of analytical reasoning, that, were it otherwise, every appeal would mean an assessment of compensation de novo, without any assignment of error in the reasoning or conclusions of the court appealed from. …
Similar observations have been made in later High Court authority, including in Emerald Quarry Industries Pty Ltd v Commissioner of Highways (SA):[6]
… An appellant who seeks to disturb the assessment of compensation made by a court in a case of compulsory acquisition will not succeed merely by showing that one of the valuations on which the assessment was based contained some errors, particularly when it has not been shown either precisely what effect those errors had on the valuation, or that the errors were repeated by the court in making the assessment. …
[5] Commonwealth v Reeve (1949) 78 CLR 410, 423.
[6] Emerald Quarry Industries Pty ltd v Commissioner of Highways (SA) (1978) 142 CLR 351, 355.
More recently in Commissioner of Taxation of the Commonwealth v St Helen’s Farm (ACT) Pty Ltd, Mason J observed:[7]
… This Court has consistently applied the rule that on a question of valuation an appellate tribunal is not justified in substituting its own opinion for that of the court below unless it is satisfied that the court below acted on a wrong principle of law or that its valuation was entirely erroneous (The Commonwealth v. Milledge; Commissioner of Succession Duties (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd.; The Commonwealth v. Reeve1). See also Emerald Quarry Industries Pty. Ltd. v. Commissioner of Highways. As with the assessment of damages, especially in personal injury cases, the valuation of property by a court has many of the characteristics of a discretionary judgment. Valuation is a matter of estimation, not of precise mathematical calculation. It certainly involves the making of a value judgment in the metaphorical as well as the literal sense.
[Footnotes omitted.]
[7] Commissioner of Taxation of the Commonwealth v St Helen’s Farm (ACT) Pty Ltd (1980) 146 CLR 336, 381.
These authorities guide the approach this Court is to take to the challenge to the Judge’s valuation in the present appeal.
The Issues on the Appeal
On appeal, it was submitted that the Judge had made a significant calculation error. It was contended that the capitalisation of the market rent of $55,440.00 at eight per cent in accordance with the findings of the Judge would lead to a value of $693,000.00 and not $800,000.00. It was said that this error was symptomatic of a fundamentally flawed approach on the part of the trial Judge.
It is to be observed immediately that this submission has no regard to the benefit that a purchaser would receive from the difference between the passing rent and the market rent for the period of the term of the lease. As noted above, the present day value of that income stream is $105,713.00. Once this amount is added to the earlier mentioned figure of $693,000.00, it is immediately apparent how the Judge arrived at $800,000.00. It is to be accepted that the Judge did not explicitly refer to the present day value of this income stream when nominating the value of $800,000.00. A review however of the transcript of the evidence of Mr Bradford reveals that the Judge had a clear understanding of the relevance of the income stream that would continue for the term of the lease. Further, in the Judge’s reasons he explicitly addresses this consideration. To my mind, it is self-evident that the Judge had regard to the present day value of this income stream amount in arriving at the $800,000.00 value. I do not consider there to be any substance in the suggestion that the Judge made a calculation error.
The appellant contended that the Judge had been highly critical of the comparators utilised by Mr Bradford. It was said however that notwithstanding this criticism, the Judge proceeded to adopt Mr Bradford’s market rent assessment without modification.
An analysis of the Judge’s reasons demonstrates that this criticism is unjustified. The Judge’s observations in this respect were as follows:[8]
On the other hand, I am not persuaded that the rental comparators used by Mr Bradford are so similar as to be considered the equivalents of the subject land in the sense discussed in the first sentence of the passage from Robinson Brothers (Brewers)[9] in [20] above. A higher rent may be generated by, for example, a boutique garden centre, given its eastern suburbs location.
Although, in my view, there are undoubtedly significant differences in the location and nature of the comparators selected by Mr Bradford, I am prepared to act on his assessment of the market rent. Many of the comparators are in higher traffic locations which would suggest that they are superior to the subject land. On the other hand, the socio-economic demography of the suburbs around the subject land suggests that a higher rent may be obtained from the sorts of business that might be successfully established on it.
[8] Capaldo v Capaldo & Ors [2011] SASC 28, [25]-[26].
[9] [1937] 2 KB 445.
Comparable transactions have been described as falling into three categories – where a comparator is identical to or equivalent with the subject property; where there are differences between the comparator and the subject property which are susceptible to adjustment; and, where the differences are so great and so numerous that adjustment is unsafe. This description in part was formulated by Scott LJ in Robinson Brothers (Brewers) Ltd v Assessment Committee for the No 7 or Haughton and Chester-le-Street Area of the County of Durham.[10] The observations of Scott LJ were however the subject of criticism by the Court of Appeal in Garton v Hunter (Valuation Officer).[11]The Court accepted that comparable sales could be placed in categories, but rejected Scott LJ’s dictum that where there were truly comparable sales, that evidence was the best evidence and “for that reason is alone admissible”. The Court considered that other evidence which it described as indirect evidence was admissible on the question of valuation.
[10] Robinson Brothers (Brewers) Ltd v Assessment Committee for the No 7 or Haughton and Chester-le-Street Area of the County of Durham [1937] 2 KB 445, 468-469.
[11] Garton v Hunter (Valuation Officer) [1969] 2 QB 37.
The observations extracted above demonstrate that the Judge did not consider Mr Bradford’s comparators to fall into the first category. The Judge apparently considered that Mr Bradford’s comparators were in the second category and that as a consequence, adjustments were necessary before applying rental rates to be derived from those comparators.
Mr Bradford did not treat any comparator as being in the first category. This is evident by the express statements in his written report. It is also clear from that report that Mr Bradford then proceeded to make adjustments and allowances because there was no true comparator.
It is also relevant to refer to the observations of Wells J in Crompton v Commissioner of Highways on the topic of comparable sales:[12]
It will be convenient to interpose here some comments about what is meant by the phrase "comparable sales", and how comparable sales are to be used. Upon reading some works on comparable sales, one might be pardoned for supposing that, within narrow limits of tolerance, sales of land similar to the subject land must fall into two rigid categories: comparable sales and non-comparable sales. Such a supposition would, in my opinion, be an over-simplification and could lead to error. It seems to me that, ideally, the valuer should, in the first instance, look at the sales of land over a wide geographical and temporal range, and from these select those that appear potentially useful as a basis for comparison. Those selected should then be carefully analysed by reference to an extensive list of characteristics of land sales the compilation and assessment of which fall clearly within the province of the experts. Whether or not one or more of those sales is, and how it or they ought, to be compared with the subject land becomes then a matter of degree, and a final decision is reached, often by those same experts drawing a series of nice distinctions. Obviously, no two sales of land will be found to be the same, or even similar in all respects. Those that bear a close similarity to the assumed sale of the subject land will be more reliable than those whose similarity is less proximate and in respect of which adjustments or allowances must be made before they can be safely introduced into the valuation process. At a particular point it will be found that, in respect of the remaining available sales, the adjustments and allowances that would need to be made are of such a magnitude that it ceases to be safe or sound to treat them as sufficiently similar to the assumed sale of the subject land, and they must thenceforward be rejected.
Mr Bradford’s approach to his valuation accorded with these observations.
[12] Crompton v Commissioner of Highways (1973) 5 SASR 301, 317.

As earlier mentioned, the Judge rejected Mr Piccinato’s evidence. The appellant criticised this rejection. In this respect, the Judge observed:[13]
Mr Piccinato’s capitalisation rate was derived from a calculation which commenced with his assessment of the sale value of the land. The passing rent, when applied to his predetermined sale value, represented a 6 or 7 per cent yield. Accordingly, Mr Piccinato’s nomination of a 6 or 7 per cent capitalisation rate is not the product of his expert assessment as to the capitalisation rates sought by investors in comparable properties as at the date of his valuation.
Mr Piccinato testified that a rate lower than the yield rate sought by investors was justifiable because the property was a development property. However, acceptance by the plaintiff of the capitalisation of rent methodology means that I cannot act on Mr Piccinato’s discount rate, which is calculated on the premise that the subject land has, as development land, the market value he assessed by reference to comparable sales.
[13] Capaldo v Capaldo & Ors [2011] SASC 28, [29]-[30].
The appellant asserted that Mr Piccinato’s evidence was expert, relevant and probative notwithstanding the limitations that had arisen because of his initial approach. However, a close examination of the evidence in my view demonstrates that the Judge’s observations extracted above were justified and appropriate. Mr Piccinato’s valuation methodology – a comparable sales methodology – was not adopted by either party. However, the rejected methodology remained the basis underlying Mr Piccinato’s evidence. His suggested capitalisation rates were expressly derived, at least in part, by reference to an assumed market rent which, as noted above, he equated to the passing rent. Also as noted above, this he assumed to be the passing rent. The Judge was correct in his observation that the premise on which Mr Piccinato’s discount rate was calculated was “that the subject land has, as development land, the market value here assessed by reference to comparable sales”. It is to be accepted that Mr Piccinato did generally assert that his experience confirmed the appropriateness of his capitalisation rates. However, a review of that evidence shows that on critical matters, he seemingly made general statements without condescension to particularity.
The Judge, as noted above, addressed the main factors giving rise to the need to make adjustments and noted that those factors tended to point in opposite directions. Having undertaken this exercise, the Judge was satisfied as to the reliability of Mr Bradford’s analysis of the market results. The Judge undertook a process that demonstrates that he decided to adopt Mr Bradford’s conclusion as to market rent because he was persuaded by the evidence. He did not consider there to be an obligation to simply adopt Mr Bradford’s conclusion or adopt that conclusion without proper analysis and consideration. I do not consider that any proper basis has been established to reject the Judge’s findings and conclusions as to market rent.
The appellant challenged the Judge’s selection of a capitalisation rate of eight per cent, contending that a rate of six per cent or thereabouts should have been adopted. Again the argument was put that the Judge, having been highly critical of the comparators used by Mr Bradford, was wrong to accept his capitalisation rate as a starting point with some “tinkering”. Submissions were put challenging the approach to the evidence and the factual findings of the Judge. It was said that Mr Bradford had used inappropriate developments as comparators, that the average capitalisation rate from Mr Bradford’s report was about six per cent and that this should have guided the Court in selecting a capitalisation rate at about that level.
In the ideal world, a capitalisation rate could be determined by reference to recent sales of similar properties let at market rents. The difficulty that arose in the present proceeding was that no truly comparable sales existed. In this circumstance, it was necessary to cast a wider net to provide a basis for the forming of an opinion. Mr Bradford did this. Mr Bradford’s approach was consistent with accepted principle.[14] The yields demonstrated by Mr Bradford’s traditional investment comparators ranged between 7.62 per cent and 8.41 per cent.
[14] See Roads and Traffic Authority of New South Wales v Blacktown City Council [2007] NSWCA 20, [47]-[51].
The Judge ultimately selected a capitalisation rate of eight per cent. The following extracts from the reasons for judgment demonstrate that the Judge made his own assessment having regard to the evidence. This evidence included Mr Bradford’s written report and his expert testimony. In my view, those reasons demonstrate that the Judge independently arrived at his conclusion having regard to his own assessment of the relevant factors, assisted by the expert evidence of Mr Bradford:[15]
Mr Bradford assessed the development on the basis of the percentage yields shown on the sale of investment properties in broadly comparable locations. Those yields varied between about 7 and 8 per cent. However, the properties compared by Mr Bradford were developed properties on which stood significant improvements. In my view, an investor would seek a greater yield from largely undeveloped land because it is more difficult to find a tenant for such land. The lessor of largely undeveloped land must find a tenant who is prepared to expend a capital sum to make such improvements as are necessary to operate a stand alone business from it. In short, undeveloped land poses a greater risk, in terms of the lay periods during which it would not be let and in the achievable rent, than the comparators selected by Mr Bradford.
On the other hand, in my view, the subject land has become an integral part of the operation of the Glynde Hardware Store. Both by reason of the land providing space for the garden centre, additional car parks and important ingress and egress, it is difficult to imagine the operators of the hardware store making do without it. Mr Bradford accepted that there was little risk that the operator of the Glynde Hardware Store would not exercise its option to the lease even beyond the last renewal period at a market rent. In my view, the capitalisation rate of 8.5 per cent applied by Mr Bradford does not adequately take into account the high probability that the subject land could be continuously leased to the operators of the Glynde Hardware Store into the foreseeable future. In my view, a capitalisation rate of 8 per cent applied to the market rent of the subject land would present an attractive real property investment in the market.
In my opinion, the Judge’s approach to the selection of the capitalisation rate was supported by the evidence and represented an approach that accorded with conventional valuation methodology.
[15] Capaldo v Capaldo & Ors [2011] SASC 28, [31]-[32].
The Judge commenced his consideration of the final topic of special value with the following observation:[16]
If the subject land were to be placed on the market, the value it represented to an investor by reason of its reasonably certain return of market rent from the operators of the Glynde Hardware Store, or any other retail complex which might replace it, represents what I would describe as its floor value. However, I accept that the operators of the Glynde Hardware Store, or the owners of 16 Glynburn Road, would enter the market place in an attempt to purchase the property should it be placed on the market. The importance of the subject land to the profitability of the Glynde Hardware Store and to the rent which 16 Glynburn Road would command respectively would necessarily attract their interest. Their interest as potential purchasers augments the value of the subject land and therefore must be taken into account.
[16] Capaldo v Capaldo & Ors [2011] SASC 28, [34].
In the Judge’s view, the interest of the registered proprietor of the hardware store materially appreciated the value of the subject land. In part, the Judge had regard to this special interest in his selection of a capitalisation rate. However, in my view it remained appropriate to consider this aspect of the matter when addressing special value. Ultimately, the Judge concluded that an investor seeking an opportunity to make a return in the order of eight per cent would appreciate that, to be successful, it may be necessary to go beyond an amount strictly justified by that return because of the interest of the adjoining land owner. As the Judge pointed out, that investor would be aware of the premium which might be commanded by the subject land if the entire site were to be redeveloped.
The Judge made an allowance of $50,000.00 on this account. This represents a premium of about seven per cent on the otherwise value of $800,000.00 and was well within the discretion of the Judge when assessing special value.
Conclusion
I consider that the valuation arrived at by the Judge was supported by the evidence and was not permeated by error and did not lead to an erroneous valuation. I would dismiss the appeal.
SULAN J: I agree with the reasons of Gray J. I would dismiss the appeal.
PEEK J: I would dismiss the appeal for the reasons given by Gray J.