Capaldo v Capaldo - [2011] SASC 28

SUPREME COURT OF SOUTH AUSTRALIA
(Land and Valuation Division: Civil)
CAPALDO v CAPALDO & ORS
[2011] SASC 28
Judgment of The Honourable Justice Kourakis
1 March 2011
REAL PROPERTY - VALUATION OF LAND - METHODS OF VALUATION - COMPARABLE SALES
REAL PROPERTY - VALUATION OF LAND - METHODS OF VALUATION - CAPITALISATION OF RETURNS
Plaintiff seeks sale and division of land - preliminary question of value to be determined. Parties agree land to be valued by capitalising market rent - how market rent determined - significance of passing rent - special value adjoining owner - capitalisation rate to be applied.
Held: value of subject land $850,000 - market rent determined by reference to comparable rentals - passing rent not determinative - special value adjoining owner relevant - capitalisation rate determined with reference to characteristics of subject land in given case and comparable yields.
Robinson Brothers (Brewers) Ltd v Houghton and Chester-le-Street Assessment Committee [1937] 2 KB 445, applied.
Redeam Pty Ltd v South Australian Land Commission (1977) 17 SASR 508; Bopark Building (No 8) Pty Ltd v Minister of Lands (1968) 70 SR (NSW) 336, discussed.
Sheath and Anor v The Valuer-General (1963) 64 SR (NSW) 415; Players Pty Ltd v City of Adelaide [2001] SASC 369, considered.

WORDS AND PHRASES CONSIDERED/DEFINED
"methods of valuation" "market rent" "capitalisation"

CAPALDO v CAPALDO & ORS
[2011] SASC 28
Civil

KOURAKIS J: The plaintiff and defendants are the registered proprietors of allotment 68 in Filed Plan 134419 being the whole of the land comprised in Certificate of Title Register Book Volume 5709 Folio 19 (the subject land). The registered proprietors of the subject land are Kevin, Christopher and Steven Capaldo of three undivided fourth parts, with no survivorship, and John Capaldo and Rosemary Lombardozzi of one undivided fourth part with no survivorship. The registered proprietors of the subject land hold their interests as trustees of their respective superannuation funds.
The plaintiff seeks the sale and division of the subject land. At the request, and with the consent, of the parties I have ordered that the value of the subject land be determined as a preliminary question.
The plaintiff and defendants are siblings. Until the recent resignation of the plaintiff as a director they were all both directors and shareholders of Capaldo Investments Pty Ltd (Capaldo Investments). Capaldo Investments operates the Glynde Mitre 10 Hardware Store (Glynde Hardware Store) at the corner of Glynburn and Montacute Roads, Hectorville. The Glynde Hardware Store stands, largely, on the land comprised in Certificate of Title Register Book Volume 5407 Folio 654 being Allotment 1000 in Deposited Plan 30115. The registered proprietors of the land are John Capaldo and Capaldo Holdings Pty Ltd. I will refer to that land by its address, 16 Glynburn Road.
The address of the subject land is 4 Montacute Road and it has a frontage, but no current access to Montacute Road. It is contiguous with 16 Glynburn Road, and has been incorporated into the Glynde Hardware Store site. It is leased to Capaldo Investments and is utilised as the garden centre of the Glynde Hardware Store and as a car park. The parties agree that the subject land should be valued by capitalising the market rent. The plaintiff contends that the passing rent should be accepted as the market rent while the defendants claim that I should find, by reference to comparable rentals catalogued by the valuer they called, that it substantially exceeds the market rent. For the reasons which follow, I largely accept the defendants’ contention but find that the valuation urged by them gives insufficient weight to the special value of the subject land generated by its importance to the operation of the Glynde Hardware Store. I value the subject land at $850,000.
The primary valuation considerations
The subject land is within the suburb of Glynde about seven kilometres north east of the Adelaide General Post Office. It is on the southern side of Montacute Road about 30 metres east of the intersection of Glynburn, Payneham and Lower North East Roads. Although the subject land lies within a residential zone, the Campbelltown (City) Zone, it is close to a local commercial zone which runs to the south along Glynburn Road.
The Glynde Hotel is on the south western corner of the intersection. A Bob Jane T-Mart occupies the north eastern corner. There are a number of restaurant and retail premises to the north west. Residences lie to the east and south.
The subject land is rectangular in shape with a total area of 1,584 square metres. An area of 515 square metres, which abuts the Glynde Hardware Store, has been improved with a partially enclosed canopy. It is that part of the subject land which serves as the garden centre of the Glynde Hardware Store. Even though there is currently no direct access to the subject land from Montacute Road, it is common ground that if the owners were to request such access, it would be granted. Nonetheless, egress from the subject land would be difficult because it must be negotiated across the turn left lane for west bound traffic on Montacute Road.
Commercial use is non complying in the residential zone. The major planning objective of the residential zone is detached dwellings on individual allotments. Nonetheless, it is common ground that a non residential use is likely to be approved if the subject land were developed separately from the Glynde Hardware Store.
The subject land is leased by Capaldo Investments. The lease, which is for a five year term with options to extend it for a further two terms of five years, was executed on 1 July 2005. It provides for the rent to be fixed by agreement or by an independent calculation of the market rent, on the exercise of the renewal option. The lease provides for CPI increases in other years. The lease was renewed on 1 July 2010 without an independent valuation of the rent. The lease provides for CPI increases in other years. The passing rent in 2010 was $83,064 per annum.
The valuations
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.
Notwithstanding the comparable sales approach adopted by Mr Piccinato in his report, the plaintiff has proceeded at trial on the basis that the appropriate valuation methodology is to capitalise the rent. However, Mr Piccinato contends that the capitalisation should be undertaken on the basis of the passing rent and that the discount rate should be no more than 7 per cent. In an addendum to his primary report, Mr Piccinato was instructed to proceed on the basis that the passing rent was the market rent. He proceeded on that assumption but he deducted a greater amount for land tax than he had in his first report, resulting in a net rent of $69,189 per annum. He capitalised that rent at 6 and 7 per cent resulting in values of $1,153,150 and $988,414 respectively. In Mr Piccinato’s opinion, the subject land was of such importance to the proprietors of the Glynde Hardware Store that they would be prepared to pay a premium of between 10 and 20 per cent on the value of the land so calculated. Mr Piccinato opined that “the adjoining owners therefore could be expected to pay between $1,265,000 and $1,380,000 to secure the land”. I am not sure that a prognostication of that nature can be equated with the value of the subject land. There is very little science or empirical justification for the percentages chosen by Mr Piccinato. However, even if it be accepted that the value of property generally to adjoining owners, or others who may derive peculiar benefits from it, may be up to 20 per cent higher than the value to others generally, the question remains whether their particular interest in purchasing it will mean that the property will realise a premium of that magnitude on sale. If the property is not a particularly attractive investment, or if the market is generally flat, it may be that the interest of a special purchaser will not augment its value by much.
A problematic exercise
The size and position of the subject land, and its largely undeveloped state, make its valuation by capitalising the market rent problematic. On the one hand, it is plain that the subject land has great importance to the operators of the Glynde Hardware Store. It provides space for the garden centre and additional car parking. Perhaps most importantly it provides a continuous route for ingress and egress between Glynburn Road and Montacute Road. The advantages it provides to the operation of the Glynde Hardware Store, therefore, put the owner of the subject land in a relatively strong bargaining position.
On the other hand, if the subject land is not integrated into the operation of the Glynde Hardware Store its alternative uses are limited. It would be accessible only by vehicles travelling west from the far eastern suburbs of Adelaide, or, alternatively by vehicles which have managed a u-turn on Montacute Road. Therefore, it has difficulties for development as a retail outlet generally and more particularly as a café or for the retailing of low value goods. It perhaps has more potential as a destination retail store. The location of the subject land would appear to be reasonably well suited to office development or development as professional rooms. Of course, any such development would involve a substantial investment. For that reason, I am not persuaded that most of the comparable sales relied on by Mr Piccinato provide a good second check on the value of the property. They included existing improvements which the purchasers are, in fact, going to utilise. Those sites yielded a square metre value of between $1,689 and $1,837. I accept that the comparators might, in a general sense, still properly be characterised as a development land but the fact that the purchasers intend to use the existing improvements indicates that the improvements themselves have significant value. That cannot be said of the existing improvements on the subject land if it is to be developed separately from the Glynde Hardware Store.
I accept that the property at 60 Glynburn Road, Hectorville, referred to by Mr Piccinato is more obviously development land. However, the area of that land is 13,070 square metres; about eight times greater than the subject land. A property of that size must have much more significant development potential than the subject land. Therefore, it is not directly comparable. Nonetheless, the sale price of $524 per square metre for that land is probably closer to the market value of the subject land than the value of the improved land comparators to which I referred in the preceding paragraph.
Be all that as it may, the fundamental issue between the parties at trial is the valuation of the market rent for the subject land and it is to that issue which I now turn.
The market rent
The valuation, in Mr Piccinato’s addendum report, which was undertaken by capitalising the passing rent which he was instructed to accept as the market rent, is not an expert opinion as to the value of the subject land; it is little more than the plaintiff’s contention as to the value of the land.
The only expert valuation evidence before me as to the market rent is the opinion of Mr Bradford. In effect, the plaintiff’s case is that Mr Bradford’s opinion should be rejected because it is inconsistent with the passing rent which I am bound in law to treat, prima facie, as the market rent.
The way in which other sales, or rentals, can be used as comparators is set out in the following passage from the judgment of Jacobs J in Redeam Pty Ltd v South Australian Land Commission:[1]
It is unnecessary for me to say very much about the use and evidentiary value of comparable sales. The method of determining market value by comparison with sales of similar land is widely accepted. The advantages and pitfalls of the method are expounded in many texts and cases. As Lord Wilberforce pointed out in Aik Hoe & Co Ltd v Superintendent of Lands and Surveys:
In the search for evidence to show the market price of a given property on a given date, there may be a continuous spectrum of cases varying from contemporaneous sales of precisely similar properties (unlikely to be found in many cases) to sales at different dates of properties differing greatly in nature and development.
The greater the difference between the two properties, the less reliable is the evidence of the sale of the allegedly comparable property. But that does not mean that the evidence is totally irrelevant, if there remain significant points of similarity. I adopt, with respect, the summary of Wells J in Crompton v Commissioner of Highways:
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-comprable [sic] 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 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.[2] (citations omitted)
[1] (1977) 17 SASR 508.
[2] Redeam Pty Ltd v South Australian Land Commission (1977) 17 SASR 508 at 513 - 4.
The reasoning described above is inductive. The passing rent, if determined by the operation of the market, would carry significant weight in that process, as the reasoning of Scott LJ in Robinson Brothers (Brewers) Ltd v Houghton and Chester-le-Street Assessment Committee[3] shows:
… Where the particular hereditament is let at what is plainly a rack rent or where similar hereditaments in similar economic sites are so let, so that they are truly comparable, that evidence is the best evidence, and for that reason is alone admissible; indirect evidence is excluded not because it is not logically relevant to the economic inquiry, but because it is not the best evidence. (3.) Where such direct evidence is not available, for example, if the rents of other premises are shown to be not truly comparable, resort must necessarily be had to indirect evidence from which it is possible to estimate the probable rent which the hypothetical tenant would pay. (4.) This kind of estimating is a skilled business, and it is here especially that the role of the skilled valuer comes in. His employment is plainly contemplated by all the rating statutes of the last hundred years and has always been the practice in all disputes upon quantum of assessment, but, above all, wherever resort to indirect sources for assessing value is necessary. (5.) In weighing up the evidence bearing upon value, it is the duty of the valuer to take into consideration every intrinsic quality and every intrinsic circumstance which tends to push the rental value either up or down, just because it is relevant to the valuation and ought therefore to be cast into the scales of the balance before he looks to see the resultant figure on the dial at which the pointer finally rests. … (8.) The rent to be ascertained is the figure at which the hypothetical landlord and tenant would, in the opinion of the valuer or the tribunal, come to terms as a result of bargaining for that hereditament, in the light of competition or its absence in both demand and supply, as a result of ‘the higgling of the market’. I call this the true rent because it corresponds to real value.[4]
[3] [1937] 2 KB 445.
[4] Robinson Brothers (Brewers) Ltd v Houghton and Chester-le-Street Assessment Committee [1937] 2 KB 445 at 468 - 9, 470, referred to with approval in Sheath and Anor v The Valuer-General (1963) 64 SR (NSW) 415 at 420.
It appears to me that the passing rent has the importance accorded to it in the preceding passage precisely because it is the product of the competing market forces as they stood at the time the rent was struck. Of course, it might be the case that the passing rent is anomalous because it is the result of an imprudent or contrived arrangement. It may also be that the relative bargaining positions of lessors and lessees generally, or with respect to the particular land, may have altered since the rent was stuck. For those reasons the passing rent struck in the market cannot be determinative. The weight that it is accorded is premised on it truly reflecting the relative strength of the landlord and tenant. References in the authorities[5] to the passing rent, prima facie, being the market rent, simply reflect the evidential considerations to which I have referred. There is no presumption that the passing rent is the market rent which must be rebutted by a party who asserts otherwise.
[5] Players Pty Ltd v City of Adelaide [2001] SASC 369 at [53]; Sheath and Anor v The Valuer-General (1963) 64 SR (NSW) 415 at 420.

The passing rent in this case is the result of a lease entered into by related parties. I can have no confidence that the passing rent struck in this case reflects the relative strength of the competing market forces. I have no evidence as to how the original rent was struck. I have no evidence as to how the parties calculated the rent that became the base rent for the renewal period from 2010. However, there is nothing to suggest that it was the product of the lessees taking the position that they would choose not to exercise the renewal unless the passing rent reflected the market rate. There is no evidence to suggest that the lessees countenanced, even for a moment, the possibility of finding an alternative site or doing without the subject land. There is no evidence to suggest that the lessors gave any consideration to finding an alternative tenant, or use, for the subject land.
Moreover, in my view, a court can take judicial notice of the commercial and taxation context in which related parties structure their financial affairs. Matters have come before this Court where it is apparent that financial and taxation planning considerations have affected the consideration struck in contracts between related parties. I acknowledge that there is no evidence to suggest that that, in fact, occurred here. Nonetheless, recognition that the passing rent in this case may be the result of non market considerations deprives it of the significant weight it would otherwise be given.
The expert opinion evidence of Mr Bradford is that the passing rent does not reflect the market rate. His opinion is not contradicted. The passing rent varies so greatly from Mr Bradford’s unchallenged valuation that I can only give the passing rent slight weight.
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)[6] in [20] above. A higher rent may be generated by, for example, a boutique garden centre, given its eastern suburbs location.
[6] [1937] 2 KB 445.
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.
Putting aside any special value the subject land may have, I find that the market rent is $55,440. I will consider the question of the special value of the subject land to Capaldo Investments when assessing its sale value.
Capitalisation rate
In order to determine the sale value of the subject land it is first necessary to fix a capitalisation rate. Mr Bradford used a capitalisation rate of 8.5 per cent. Mr Piccinato applied capitalisation rates of 6 or 7 per cent.
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.
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.
Taking into account, therefore, a market comprising of only investors, and excluding persons like the operators of the Glynde Hardware Store, who have a special reason to purchase the subject land, I would fix its value at $800,000.
Special value
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. In Bopark Building (No 8) Pty Ltd v Minister of Lands[7] Sugarman JA said:
As to the nature and extent of that market everything is dependant upon such factors as the size and shape of the land, the uses to which it may best be put, and the surrounding circumstances generally. Thus in some circumstances the land might constitute an eligible building site for which there would be a wide range of potential purchasers at the price prevailing for building sites in the locality; even in such circumstances it might possibly be that the land would present such additional advantages to an adjoining owner that he could be expected to be prepared to pay a still higher price for it. … In this event the value of the land might turn out to be the price which an adjoining owner might be expected to be willing to pay for it … and whether adjoining owners could put the land to better use than anybody else, and what that better use might be, would themselves be dependant upon surrounding circumstances. If in all the circumstances it turned out that the best use to which the land could be put would be by a particular adjoining owner as the site of an underground car-park this would be a material factor in considering its value.[8]
[7] (1968) 70 SR (NSW) 336.
[8] Bopark Building (No 8) Pty Ltd v Minister of Lands (1968) 70 SR (NSW) 336 at 344 – 5.
It should be observed that the above passage does not go so far as to equate the price which an adjoining owner might pay with the value of the land in a given case.
The interest of the registered proprietors of the Glynde Hardware Store, in my view, materially appreciates the value of the subject land. The operators of the Glynde Hardware Store or the owners of 16 Glynburn Road, either in an auction or in bidding privately, would take into account the need to make offers above the price that an un-associated investor would offer. The owner of 16 Glynburn Road would also be aware of the enhanced development opportunities of the entire site should the subject land be purchased. Similarly, an investor seeking an opportunity to make a return in the order of 8 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 landowner. That investor would also be aware of the premium which might be commanded by the subject land if the entire site were to be redeveloped.
However, the resulting increase in the value of the subject land brought about by the special interests to which I have referred is necessarily limited because of the disadvantages of the subject land such as its current zoning, the poor access it would have from Montacute Road and its underdeveloped state. Even though Mr Piccinato’s prediction that persons with an interest in 16 Glynburn Road might be prepared to pay up to 20 per cent above its value may be right, it is, in my assessment, unlikely that they would need to, in order to secure the subject land. It is also important to keep in mind that the probability of the continuing lease and use of the subject land as part of the Glynde Hardware Store has already been taken into account in fixing the discount rate. The special value now under consideration is the value arising from the removal of any risk that the subject land may be developed independently from the Glynde Hardware Store and the possibility of a redevelopment of the entire site. I will allow a premium at just over 5 per cent of the floor value to which I have referred.
Conclusion
Taking the special value referred to in the preceding paragraph into account, I determine the value of the subject land to be $850,000.