DLFCMS Nominees Pty Ltd v Commissioner of Highways

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
DLFCMS NOMINEES PTY LTD & ANOR v COMMISSIONER OF HIGHWAYS
[2024] SASC 140
Judgment of the Honourable Justice Kimber
REAL PROPERTY - COMPULSORY ACQUISITION OF LAND - COMPENSATION - ASSESSMENT
REAL PROPERTY - COMPULSORY ACQUISITION OF LAND - COMPENSATION - ASSESSMENT - MARKET VALUE - CAPITALISATION OF INCOME
REAL PROPERTY - COMPULSORY ACQUISITION OF LAND - COMPENSATION - ASSESSMENT - SPECIAL VALUE
The first applicant was the registered proprietor of land (the land) which it leased to the second applicant, a childcare business. The land was subject to a ten-year lease with four rights of renewal each for five years. On 16 April 2020, the land was compulsorily acquired by the respondent under s 10 of the Land Acquisition Act 1969 (SA) (the Act). As a result, the business of the second applicant was extinguished. On 16 July 2020, the respondent paid the first applicant interim compensation of $7,535,000 plus interest and disturbance. On 1 December 2020, the respondent paid the second applicant interim compensation of $2,000,000 plus interest in respect of the extinguishment of the second applicant’s business.
The applicants referred to this Court the question of their entitlement to compensation pursuant to the Act.
The first applicant contends, inter alia, that it should be compensated based on ‘special value’ and that, notwithstanding the lease in place, the land should be valued based on a lease term of 20 years. The respondent contends that compensation should not be based on ‘special value’ and that the land should be valued based on the lease in place.
The second applicant contends, inter alia, that the business should be valued based on an occupancy rate of 95 per cent and that the compensation should include an amount of $55,000 because of the COVID-19 pandemic. The respondent contends that the valuation should be calculated based on an occupancy rate of 82 per cent and that the amount of $55,000 should not be included.
Held, inter alia:
1. The first applicant is not to be compensated based on ‘special value’.
2.The land acquired from the first applicant is to be valued based on the lease in place on the date of the acquisition of the land.
3.The business of the second applicant is to be valued based upon an occupancy rate of 86 per cent.

4. The second applicant is not entitled to the amount of $55,000 sought.
5. The issue of the proper approach to the applicants’ legal costs and disbursements is deferred.
Land Acquisition Act 1969 (SA) ss 10, 22B, 25, 25(1), referred to.
Arkaba Holdings Ltd v Commissioner of Highways [1970] SASR 94; Boland v Yates Property Corporation Pty Ltd (1999) 74 ALJR 209; [1999] HCA 64; Director of Buildings and Lands v Shun Fung Ironworks [1995] 2 AC 111; Emerald Quarry Industries Pty Ltd v Commissioner of Highways [No 2] (1976) 18 SASR 438; Nelson v Commissioner of Highways (No 2) [2023] SASC 7; Spencer v Commonwealth (1907) 5 CLR 418, applied.
Cedars Rapids Manufacturing and Power Company v Lacoste (1914) AC 569; In re Lucas and the Chesterfield Gas and Water Board (1909) 1 KB 16; The Minister v New South Wales Aerated Water & Confectionary Limited (1916) 22 CLR 56, considered.

DLFCMS NOMINEES PTY LTD & ANOR v COMMISSIONER OF HIGHWAYS
[2024] SASC 140
Civil
KIMBER J:
Introduction
Issues
A brief overview of the positions of the parties
Background
The lease
The operating model of KKM
Ms Heron and Ms Foster – general background
Ms Heron
Ms Foster
The design of KKM
The management of the centre
The primary care model
Operation hours of the business
Principles of compensation
The value of the business – introduction
The reports
Valuation approach – the business
Capitalisation rate or earnings multiple - finding
Daily rate
Occupancy rate
Historical occupancy rates
Purchasers of a business taking into account forecasts
Maximum occupancy
The expectation of a growth in the occupancy rate by February 2020
Other evidence about occupancy rate
Ms Foster
Ms Heron
The evidence of Mr David Fitch
Staff costs
Results at IBK and KKGG
The opening of Kozy Kids Golden Grove
Competition
Discussion
The revised 2020/2021 budget
The waitlists
Some observations about the waitlists
The eight per cent deduction
The email dated 21 October 2019
End of year
Occupancy rate – conclusion
The importance of historical occupancy rates
JobKeeper
JobKeeper – conclusion
Value of the land – duration of the lease
Should the land be valued on a 20‑year lease term?
Special value
The meaning of special value and discussion
Further discussion
Aerated Water
Consideration
The market value of the land – conclusion
Orders
Introduction

DLFCMS Nominees Pty Ltd, (the first applicant or the trustee) is a company owned and operated by Mr David Fitch (Mr D Fitch). The first applicant was the registered proprietor of land at 217 Portrush Road, Magill (the land). The first applicant leased the land to the second applicant, Kozy Kids Maylands (KKM or the second applicant). KKM was a childcare business.
On 21 November 2019, the Commissioner of Highways (the respondent or the Commissioner) issued to the first and second applicants notices of intention to acquire the land under s 10 of the Land Acquisition Act 1969 (SA) (the Act). The land was ultimately acquired on 16 April 2020. There is no dispute the business of KKM was extinguished as a result of the acquisition of the land.
Under s 23C of the Act, the first and second applicants referred to this Court the question of the compensation to which each is entitled pursuant to s 22B of the Act. The claim of the first applicant relates to the land. The claim of the second applicant relates to the business. There is no dispute that the appropriate valuation date for both is 31 October 2019. While KKM continued to trade after that date and receipt of the relevant notice, there is no dispute about the following matters. Firstly, that it was appropriate for the second applicant to notify clients of the pending acquisition. Secondly, that by 21 February 2020, it was no longer commercially viable to operate the business.
On 16 July 2020, the Commissioner paid the first applicant interim compensation of $7,535,000 plus interest in respect of the land and disturbance. On 1 December 2020, the Commissioner paid to the second applicant interim compensation of $2,000,000 plus interest in respect of the extinguishment of the business.
Issues
At the commencement of the trial, the parties identified six issues for determination. Those issues were:
First applicant
1.Whether the value of the first applicant’s freehold interest in the land situated at 217 Portrush Road, Magill (Land) is to be determined by reference to the terms of the lease in place at the date of acquisition or on the assumption that the lease between the first and second applicants was for a term of 20 years.
a.     If the value is to be determined on an assumption of lease terms other than those in place at the date of acquisition, whether the first applicant is entitled to further compensation and, if so, what is the value of that further compensation.
Second applicant
2.What amount of further compensation is the second applicant entitled to on account of the loss of the value to it of the business extinguished by reason of the compulsory acquisition of the Land. Specifically:
a.     On what occupancy rate should the business be valued?
b.    On what daily fee per child should the business be valued?
c.     On what earnings multiple should value be calculated?
3.To what extent, if any, is the second applicant’s claim for compensation for lost profits between 16 December 2019 and 16 April 2020, being profit the second applicant claims it would have made until the date of the compulsory acquisition if it had not notified its customers on 16 December 2019 of the impending compulsory acquisition of the Land and closure of the business, already included in the compensation for business value, such that further compensation would be double compensation.
4.If the second applicant is entitled to compensation for lost profits, what is the amount of compensation to which the second applicant is entitled for lost profits? Specifically:
a.     By what methodology should lost profits, if any, be calculated?
b.    On what occupancy rate should the lost profits, if any, be calculated?
c.     On what daily fees should the lost profits, if any, be calculated? To what extent, if any, is the lost profit calculation impacted by the subsequent COVID-19 pandemic?
5.The amount of compensation to which the second applicant is entitled for redundancy payments to staff caused by the acquisition.
6. The extent to which a deduction from the second applicant’s compensation claim is to be made on account of the value of chattels formerly used in the business.
By the end of the trial, the issues which remained in dispute were 1, 2.a, 2.c, 4.b, and that part of 4.c which raises the impact of the COVID‑19 pandemic.
As to 2.b and that part of 4.c which relates to the daily fee, there was no dispute that fee should be $121. To the extent necessary, I so find. As to 3, the respondent accepts that the relevant lost profits are compensable. To the extent necessary, I so find. As to 4.a, all experts agree the appropriate methodology is capitalisation of future maintainable earnings. The dispute essentially relates to one input, being occupancy rate (issue 4.b) and the unresolved aspect of 4.c. As to 5, the Commissioner agrees that KKM is entitled to redundancy payments made to staff in the amount of $104,461.81. To the extent necessary, I so find. As to 6, it is agreed that an amount of $9,920 is to be deducted from the compensation claim of the second applicant on account of the value of chattels formerly used in the business. To the extent necessary, I so find.
The first applicant abandoned its claim to a sum of $10,000 over and above the disturbance paid by the respondent. That has the consequence of the further compensation sought by the first applicant, being $650,000.
In addition, pursuant to s 33 of the Act, the applicants seek interest calculated from the date of the acquisition of the land.
A brief overview of the positions of the parties
The first applicant submits that the land should be valued on the basis that the term of the lease granted to KKM was 20 years, notwithstanding that the lease was a 10‑year lease with rights of renewal. The first applicant submits that valued on the basis for which it contends, the value of the land should be determined as $8,160,000, being the higher of two expert valuations. The respondent submits the land should be valued on the basis that the lease to KKM was for 10 years, with the relevant rights of renewal. On that basis, the respondent submits the land should be valued at $7,510,000, being the higher of two expert valuations.
The primary dispute with respect to the valuation of the business relates to what should be used as the occupancy rate of the childcare centre; that rate then informing the valuation. The second applicant submits that the occupancy rate used should be 95 per cent, a rate which it says would have been achieved by February 2020. The primary submission of the respondent is that the occupancy rate used should be 82 per cent, being the average occupancy in the 52 weeks to 15 December 2019. In the alternative, the respondent submits that the occupancy rate used should be no greater than 86 per cent.
Background
Mr D Fitch is the principal of DBRB Investments, a group of companies with diverse interests in property and other investments. Mr D Fitch is the sole shareholder and director of the first applicant. Prior to acquisition, the first applicant held the land as trustee of the DLFCMS Property Trust. Mr D Fitch may be described as the driving force behind the establishment of KKM on the land.
In about 2005, an investment vehicle part owned by Mr D Fitch owned undeveloped land at Golden Grove. With the help of others, the investment company established a childcare centre on that land. That childcare centre opened in 2007 and was known as Iddy Biddy Kids (IBK). In 2013, G8 Education Ltd (G8), an ASX listed provider of early childhood education, offered to acquire IBK. Mr D Fitch and the equity investors, his brother (Mr Matthew Fitch) and Mr Brian Carr, sold IBK. That sale was completed in about November 2013. At the time of the sale, Ms Joanne Heron (Ms Heron) and Ms Mikaeli Foster (Ms Foster) were working for IBK as the director and assistant director respectively. After the sale, Ms Foster and Ms Heron continued working for G8 at the childcare centre at Golden Grove which was rebranded as Golden Grove World of Learning (GGWOL).
The land was purchased on 7 September 2015 with the intention of building and operating the childcare centre which became KKM. Ms Heron and Ms Foster were involved in the design of KKM. In 2016, KKM was established to operate a childcare centre on the land which would be leased from the trustee. Since the incorporation of KKM, the shareholders and directors have been Mr Brian Carr, Mr Richard Fogarty, Ms Foster, Ms Heron, Mr Bill Papaioannou and Mr D Fitch. All shareholders contributed only nominal capital of $1 per share. An L class share has no right to receive dividends but provides certain voting rights at shareholder meetings.
Initially, and in the context of the establishment of KKM, it was the position of both Ms Foster and Ms Heron that they only wanted to work in a childcare centre owned by Mr D Fitch. Mr D Fitch was nonetheless adamant that both women should have equity. Mr D Fitch valued both women, their prior relationship, and their performance at IBK. Mr D Fitch arranged for entities related to him to loan KKM the startup capital without interest. With respect to KKM, Mr D Fitch was nominated as the ‘provider’ for the centre pursuant to the Education and Care Services National Law (SA).
The childcare centre operated by KKM on the land opened for business on 13 March 2017.
The lease
KKM entered a lease for the land with the first applicant. The commencement date of that lease was 1 March 2017. The term was 10 years, expiring on 28 February 2027. There were four rights of renewal, each for a further five years. The starting rent was $450,000 per annum, subject to annual review for CPI and reset to market on each renewal.
As earlier set out, the first applicant submits that, notwithstanding the terms of the lease, the value of the land should be calculated on the basis of a lease term of 20 years.
The evidence of Mr D Fitch was that, from the perspective of the first applicant, the length of the lease was not critical.[1] Mr D Fitch said that a 20‑year term was not necessary to obtain bank finance, as none was required to purchase the Maylands land (although the Maylands land was used as security for borrowings for other projects). On the evidence of Mr D Fitch, there was no reason why KKM could not have had entered into a standard 20‑year lease, or longer, with market rental reviews timed as they were under the actual lease.[2] Under the lease that was entered into, the land was committed to use by KKM for up to 30 years if the options were exercised.
[1] Affidavit of David Leo Fitch dated 14 April 2022, Exhibit A2 [28] (Joint Tender Book (‘JTB’) vol 1, 555).
[2] Ibid [29] (JTB vol 1, 555).
The evidence of Mr D Fitch was that he was completely comfortable with KKM as a tenant as he had substantial control and trusted the other shareholders and directors. He said that whilst KKM was under the ownership of its present group of shareholders and directors, there had been complete flexibility to fix a lease with any term regarded as appropriate.[3] The evidence of Mr D Fitch was that even if there had been a breakdown in the relationship between the lessor and the lessee (which he regarded as highly unlikely), or a sale of KKM or its business, on a market review at 10 years, there may have been the ability to substantially increase the annual rental, as the commencing rental was not at the top end of rentals obtainable for a premium facility such as was built on the land.[4]
[3] Affidavit of David Leo Fitch dated 14 April 2022, Exhibit A2 [30] (JTB vol 1, 555-556).
[4] Ibid [30] (JTB vol 1, 555-556).
Mr D Fitch rejected that it was not a given that every shareholder would want to remain in the business with the same structure indefinitely. Mr D Fitch also rejected a suggestion that relationships with other shareholders might break down.[5]
[5] Transcript (‘T’) 35.31-36.11.
The operating model of KKM
The evidence of Mr D Fitch was that KKM was developed and run as a ‘premium’ childcare offering. Mr D Fitch said that Ms Foster and Ms Heron were confident from the example at IBK that an offering superior to competitors could be offered successfully. Mr D Fitch said that he ‘knew’ this would achieve high occupancy rates and better performance compared to other childcare centres.[6] Mr D Fitch said that he, Ms Foster, and Ms Heron considered the high occupancy rates could be achieved by positioning KKM as a premium offering. He was of that view for three reasons.[7]
[6] Affidavit of David Leo Fitch dated 14 April 2022, Exhibit A2 [32] (JTB vol 1, 556).
[7] Ibid [34] (JTB vol 1, 556).
Firstly, a high‑spec fit out would be attractive aesthetically. In the opinion of Mr D Fitch, KKM looked better than its competitors’ centres and a more attractive, comfortable, and functional working environment would enable KKM to attract and retain better staff. Secondly, the land was a generously proportioned site, with ample car parking, and large outdoor recreation areas. It was accessible directly from a main road and in a prominent location. In the opinion of Mr D Fitch, KKM advertised itself. Thirdly, KKM had the right leadership in Ms Foster and Ms Heron to get the childcare centre performing optimally. Mr D Fitch said that in the childcare industry, a business is substantially reliant on good staff, who have good communication skills, who understand childcare, and who are empathetic to the parents’ situation. Mr D Fitch believes that parents need to feel comfortable placing their children in the care of a childcare centre and its staff. Mr D Fitch said that it was hard to find staff of that calibre and that a childcare centre needs its rapport with parents to be excellent. Mr D Fitch said that finding good quality staff, motivating and training them, and integrating them into a team, is a matter of excellent leadership and depends on excellent communication because there are multiple staff in multiple rooms. Mr D Fitch said that hiring and retaining high quality staff would enable KKM to establish the relationships with families and maintain a continuity of care that is key to parents’ satisfaction. It was the evidence of Mr D Fitch that you get a name quickly with both parents and in the industry, and so it is quite easy to get the pick of the better staff.
An aspect of the evidence of Mr D Fitch was that achieving high occupancy is ‘a matter of hard work by centre management. This is especially so when achieving the last 10 per cent’.[8] In the view of Mr D Fitch, Ms Foster and Ms Heron are ‘particularly skilled operators at managing [a childcare centre] to ensure occupancy levels are high’.[9]
[8] Affidavit of David Leo Fitch dated 14 April 2022, Exhibit A2 [45] (JTB vol 1, 557).
[9] T31.16-22.
Ms Heron and Ms Foster – general background

It is convenient at this point to say something about Ms Heron and Ms Foster. Ms Heron and Ms Foster were both employed to share the role of business manager at KKM and were in that role when KKM opened on 13 March 2017. Ms Heron and Ms Foster have considerable experience in childcare, including in the management of childcare centres.
Ms Heron
Ms Heron has worked in childcare for 40 years. She holds an Advanced Diploma of Children’s Services in Early Childhood from the Australian Institute of Technology and Transfer.
Ms Heron began working as nanny in New South Wales as a teenager. After she obtained her professional qualifications, she was employed as a child development officer for Waverley Family Day Care Services in Sydney. In that position, she was responsible for supervising family (i.e. - home based) day care operations and advising family day care workers. As part of her work, Mr Heron attended homes to check that they were fit for purpose, to monitor compliance, and to advise about the conduct of family day care. In around the late 1980’s, Ms Heron worked at various childcare centres in New South Wales, including one in metropolitan Sydney and one in a regional area with a large indigenous population.
Ms Heron moved to South Australia in the mid 1990’s. Ms Heron took a position lecturing at Elizabeth Tafe and Croydon Tafe in childcare, toddlers, and babies. Part of her role involved supervising students on their placements in childcare centres.
In 1997, Ms Heron took a position as a director of Margaret Ives Children’s Centre in Norwood (Margaret Ives). Ms Heron was in that position for 12 years. At the same time, she was engaged by the body that validated childcare services, then known as the Accreditation Council. Ms Heron would attend childcare centres and check and validate their reported performance. Ms Heron was appointed to validate the performance of six centres across Australia. Ms Heron said that position permitted her to observe a range of practices and procedures across different childcare centres.
From June 2009 until June 2010, Ms Heron was the centre director at Conyngham Street Community Childcare Centre in South Australia.
In June 2010, Ms Heron was appointed as centre director for IBK. As set out earlier, IBK was a childcare centre at Golden Grove owned by Mr D Fitch and other investors. As set out earlier, Ms Foster was the assistant director at IBK. The evidence of Ms Heron was that she and Ms Foster were successful in operating IBK. Ms Heron said that she and Ms Foster felt supported by Mr D Fitch, who respected their expertise and was prepared to back both of them. Ms Heron continued to work at IBK as a director after it was purchased by G8 in June 2013 and renamed GGWOL.
Ms Heron resigned from G8 after June 2016. Her evidence was that she had found it difficult to run a childcare centre consistent with her values and practices and Ms Heron felt unsupported by the G8 management structure to which she reported. Ms Heron had contact with Mr D Fitch after she resigned from G8. As a result, Ms Heron learned that Mr D Fitch wanted to open a new childcare centre, although he was unable to do so immediately. For a period, Ms Heron worked as an independent consultant with Ms Foster and consulted to Mr D Fitch about the opening of a new childcare centre.
Ms Foster
Ms Foster holds a Bachelor of Early Education and has worked in childcare since she graduated in around 2004. Ms Foster first met Ms Heron in about 2004 when both were working at Margaret Ives. Ms Heron was Ms Foster’s supervisor.
From about 2007, Ms Foster worked at IBK. Not long after she started there, Ms Heron became the director of that centre. Ms Foster was on maternity leave when IBK was sold to G8. After returning from maternity leave, Ms Foster worked for G8 at IBK and in so doing became familiar with the policies and procedures applied in large corporate childcare groups. After a time, Ms Foster decided she did not want to continue working for G8 and left in January 2016.
In about the middle of 2016, Ms Foster started a consulting business aimed at providing serves and advice to childcare centres. Ms Foster was particularly engaged in consulting to Mr D Fitch, who was looking at opportunities to open new centres. Ms Foster said that by that time, Ms Heron was also providing similar services and advice.
The design of KKM
In about late 2016, Ms Foster learned that Mr D Fitch had found the land at 217 Portrush Road, Maylands and was prepared to develop it for use as a childcare centre. It can be accepted that the first applicant then built a purpose‑built childcare centre on a prominent site, with features to promote the ability to manage the centre efficiently, and in a fashion that enabled delivery by the second applicant of the primary care model. It can be accepted the land was leased to a lessee within which were directors with substantial experience in childcare. At the time of valuation of the land, there is no dispute that the likely highest and best use of the land was as a childcare centre.[10]
[10] Report of Ms Parker dated 16 April 2020 [1.5], Exhibit A24 (Expert Witness Report Book (‘EWRB’) vol 2, 1088).
It is necessary to say something more about the development of the land by the first applicant. As the land had existing buildings, there was a need to design a centre that would work with those buildings. Architects were appointed to undertake the design. Ms Foster and Ms Heron worked closely with the architects to design a centre which would meet the needs of the desired childcare centre. What was built required a degree of internal remodelling within the buildings, especially in what was a heritage bungalow.
Ms Foster says that she and Ms Heron were able to use their knowledge of the compliance requirements for childcare centres and knowledge of childcare centre operations, to develop a design that would enable a childcare business to run efficiently and comfortably in the available space. Ms Foster said that she and Ms Heron are very familiar with the requirements a childcare centre must meet. For example, a childcare centre must offer a minimum of 3.25m² unencumbered indoor space per child, and 7m² outdoor space per child. Ms Foster said that the internal rooms of a childcare centre need to be carefully designed to ensure the centre can obtain a licence for the number of places it is targeting. KKM was ultimately able to accommodate 152 children at any one time.
KKM was divided into 10 rooms for the provision of childcare in three age groups, being babies (four rooms), pre‑kindergarten (four rooms) and kindergarten (two rooms). The centre segregated outdoor play areas for the different age groups, featuring outdoor deck areas and play equipment. It also included a commercial kitchen, administration offices, a reception area, and a carpark with 51 spaces.
Ms Foster said that she and Ms Heron wanted certain design features included because they knew they helped childcare workers perform at their best. Ms Foster said, for example, they know that in a babies’ room, a common problem is that staff need to keep leaving the room to perform task like using a kitchenette to warm food, bottles etc and that could be disruptive to babies and make it hard to provide adequate supervision. The instruction to the architects was to situate the baby rooms in pairs and locate a shared kitchenette space between the two rooms, making the kitchenette accessible directly from each room. The instruction included that the kitchenette was to be open and divided from the rest of the room only by waist‑high walls and barn doors. On the evidence of Ms Foster, this design would support continued supervision and improve babies’ wellbeing, because it would avoid the babies’ carers leaving the room. Ms Foster said that it permitted a continuous connection between staff and children. Ms Foster said that the connection between staff with whom the child is familiar is something that children and families care about, especially in babies’ rooms.
Ms Foster said that a similar approach was taken to the position of the children’s bathrooms in the baby rooms and pre‑kindy rooms. The bathrooms were to be shared between two rooms and accessible from each.
The management of the centre
Ms Foster and Ms Heron were the business managers of KKM. Reporting to them were a centre director and assistant director. Reporting to the director and assistant director were the team leaders of the four babies’ rooms, four pre‑kindergarten rooms and two kindergarten rooms.
Ms Foster said that she and Ms Heron roughly divided up the work of business manager. Ms Foster said that she looked after most of the financial aspects of the business and Ms Heron took care of timetabling, staffing and enrolments. Nevertheless, Ms Heron said that both were able to attend to the tasks ordinarily performed by the other.
The primary care model
Ms Heron and Ms Foster are committed to what is described as the ‘primary care model’.
Ms Heron described that model in the following way. When a child takes up a place at a childcare centre, a single staff member is allocated as the primary carer for that child. That primary carer builds a relationship and attachment with the child from that first visit. The primary carer should maintain physical proximity and line of sight to the child, ideally throughout the day and especially early on. After the relationship and attachment is built with the primary carer, a secondary carer can be introduced. Ms Heron said that there is evidence demonstrating that this relationship helps mitigate the stress level of a child in the childcare setting. Ms Heron said that the primary care model has a number of other advantages. Most importantly in her view, it helps the child to be settled and happy in the childcare centre. In the view of Ms Heron, it is commonplace to see a child look for their primary carer and seek reassurance from them when upset. In those situations, eye contact, or a few words, with the primary carer is often sufficient to comfort the child.
In the experience of Ms Heron, the primary care model gives comfort to parents. The parent is reassured that there is a primary carer familiar with their child who they can talk to about their child. It is the view of Ms Heron that this also benefits the child. In her view, it is critical that the parent not be stressed when their child is introduced into the childcare environment. In the opinion of Ms Heron, that stress can transfer to the child.
Ms Heron also said that the primary care model also benefits staff. Ms Heron said that childcare centre managers and staff are sometimes resistant to implementing a primary care model because they think it will be too hard. Ms Heron acknowledged that this model requires close attention to staffing. However, in the view of Ms Heron, properly implemented, once relationships are established, a primary care model makes staff members’ lives easier. It also devolves a greater degree of responsibility for decision making about the child to the primary carer.
Operation hours of the business
KKM offered childcare between 6.30am to 6.30pm.
Principles of compensation
Section 22B of the Act confers a right to compensation for the divestment of a person’s interest in land when the freehold estate is acquired. It provides:
22B—Entitlement to compensation
Subject to this Act, a person is entitled to compensation for the acquisition of land under this Act if—
(a) the person's interest in land is divested or diminished by the acquisition; or
(b) the enjoyment of the person's interest in land is adversely affected by the acquisition.
Section 25 sets out certain principles governing the determination of the amount of compensation. They include the following:
25—Principles of compensation
(1)The compensation payable under this Act in respect of the acquisition of land shall be determined according to the following principles:
(a)     the compensation payable to a claimant shall be such as adequately to compensate him for any loss that he has suffered by reason of the acquisition of the land; and
(b)     in assessing the amount referred to in paragraph (a) of this section consideration may be given to—
(i)the actual value of the subject land; and
(ii)the loss occasioned by reason of severance, disturbance or injurious affection; and
(c)     compensation shall be fixed as at the date of acquisition of the land; …
In assessing what an applicant has lost by reason of the acquisition of the land, the Court is to assess what price would be reached by a ‘willing but not anxious seller and a willing but not anxious buyer, bearing in mind all material business considerations’.[11] The Court is to have regard to the views of both the person in the position of the seller and also the approach of the willing but not anxious buyer.
[11] Emerald Quarry Industries Pty Ltd v Commissioner of Highways [No 2] (1976) 18 SASR 438, 477.
The valuation methodology set out in Spencer v Commonwealth is to be applied:[12]
… the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, ie, whether there was in fact on that day a willing buyer, but by inquiring ‘What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?’ It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together.
[12] (1907) 5 CLR 418, 432 per Griffith CJ.
The value of the business – introduction
As to the value of the business, three experts gave evidence.
The second applicant called Mr Peter Holmes. Mr Holmes is a director at KPMG with about 28 years’ experience in forensic accounting. Mr Holmes has been valuing businesses for over 30 years. Mr Holmes had valued about 12 childcare businesses in a period of about two years before giving evidence. Mr Holmes has a Bachelor of Economics, is a fellow of the Chartered Accountants Australia and New Zealand (CAANZ) and a fellow of the Forensics Institute of Australia. Mr Holmes is a member of the Financial Services Institute of South Australia, the Association of Certified Fraud Examiners and the Law Society of South Australia. He has been a member of the CAANZ, Forensic Accounting Special Interest Group since its inception in May 1999 and a member of the CAANZ Business Valuation Special Interest Group since its inception in June 2005.
Mr Martin White and Mr Michael Schwarz were called by the respondent.
Mr White is a consultant to Morris Forensic, a specialist accounting and valuation practice. He has been practising in the field of business valuations for at about 15 or 20 years. Mr White has a Bachelor of Commerce (Accounting) from Flinders University conferred in 2000 and a Bachelor of Laws and Legal Practice (Honours) from Flinders University conferred in 2001. Mr White has a Graduate Diploma in Chartered Accounting conferred in 2003 and a Graduate Diploma of Investment of Finance, Financial Services Institute of Australia 2000; Business Valuation Specialisation, Kaplan 2014 and Forensic Accounting Specialisation, Macquarie University, 2018. Mr White accepted that childcare centres were not a speciality of his accounting or forensic accounting practice.[13]
[13] T223.17-20.
Mr Schwarz is a divisional director of M3 Properties. In that role, Mr Schwarz is responsible for valuation and consulting tasks involving childcare centres and early learning properties for asset and financial reporting, mortgage security, assessments and determinations. Mr Schwarz has a Bachelor of Business (Property) from the University of South Australia. He is a certified practicing valuer, an associate of the Australian Property Institute and an associate member of the Australian Childcare Alliance. Mr Schwarz has very substantial experience in the valuation of childcare centres. Mr Schwarz has been undertaking such work for about a decade. During that time, Mr Schwarz has undertaken approximately 196 valuations, incorporating 118 early childhood centres within South Australia and Victoria.[14]
[14] Email dated 15 July 2021 of Mr Schwarz including CV, Exhibit R15.
The reports
Mr Holmes prepared three reports of his own. Those reports are dated 19 August 2020; 13 April 2022 (being a reply to reports of Mr Schwarz); and 3 November 2022 (being a reply to the report of Mr White).
The report of Mr White is dated 12 August 2022 and comments upon the first and second reports of Mr Holmes.
Mr Schwarz prepared three reports of his own with respect to the valuation of the business. Those reports are dated 16 April 2020; 16 November 2020 (in the form of a letter to the Department for Infrastructure and Transport and a review of the first report of Mr Holmes); and 1 March 2022 being an updated valuation with respect to the business.
In addition to the above individual reports, there is also a joint report of all three experts.[15]
[15] Joint Report of Mr Holmes, Mr Schwarz, and Mr White dated 23 October 2023, Exhibit A13 (‘Joint Report’) (EWRB vol 2, 983).
Valuation approach – the business
There is no dispute that the appropriate valuation approach is an income approach, using the capitalisation of maintainable earnings methodology with earnings before interest, tax and depreciation and amortisation (EBITDA) being the measures of earnings. In evidence which is not disputed, Mr Holmes described the income approach in the following way:[16]
An income approach has regard to either profit or cash flows and an assessment of what are the future maintainable cash flows or profits of a business in this case. So you determine from the analysis what is referred to as future maintainable earnings or FME and the level of earnings that you are considering could be profit before tax. It could be earnings before interest or in this case earnings before interest, depreciation and amortisation or colloquially referred to as EBITDA. So once [you] identify that, you then capitalise that assessed level of future maintainable earnings at a capitalisation rate or an earnings multiple. So there are two parts to the assessment. One is the determination of the FME and the other part is determination of the earnings multiple.
[16] T192.20–34.
The object of future maintainable earnings (FME) is to identify the sustainable earnings of the business that are valued into the future, but at a point in time. There is no dispute that the valuation date appropriate in this case is 31 October 2019.
The capitalisation rate (or earnings multiple) captures several assessments of risk and growth, but, as explained by Mr Holmes in terms which are not disputed, it is a risk adjusted rate of return on those earnings. It is effectively a capitalisation of the earning stream into perpetuity that is paired back because of risk. The greater the risk, the smaller the multiple.[17]
[17] T193.20–194.17.
Mr Holmes described it as:[18]
[…]acknowledged as being a very subjective assessment, particularly in the case of small businesses. But in this case, as set out in my report, there has been some transaction evidence of comparable sales of child care centres that provide some context of the earnings multiple. But essentially it is a relatively subjective assessment.
[18] T193.24-30.

In the opinion of Mr Holmes, the earnings multiple for childcare centres involves a subjective consideration of a number of risk factors. Among those risk factors are occupancy; age cohort; staff ratio requirements; growth prospects; competition and market demand for profitable childcare centres and Government policies regarding subsidies. There is no dispute that observed, market based, transaction multiples are a fair and proper benchmark. Given the subjective nature of the assessment, there is no dispute that it is usual to consider a range of multiples.
Capitalisation rate or earnings multiple - finding
In the opinion of Mr Holmes, the appropriate capitalisation rate is in the range of 4.1–4.5, with his opinion being that the appropriate rate to be adopted being 4.3. In the opinion of Mr White, the appropriate capitalisation rate is in the range of 4.0–4.4,[19] with the appropriate rate to be adopted being 4.3. Mr Schwarz did not provide a range and in his opinion, the appropriate capitalisation rate is 4.0.[20] In its closing submissions, the respondent did not dispute that the appropriate capitalisation rate was 4.3.
[19] Report of Mr White dated 12 August 2022 [8.12], Exhibit R14 (EWRB vol 2, 858).
[20] Second Report of Mr Schwarz dated 16 November 2020 p 4, Exhibit R17 (EWRB vol 1, 490).
Given the opinions of Mr Holmes and Mr White, I find that the appropriate capitalisation rate is 4.3.
Daily rate
There was ultimately no dispute that valuation should be calculated on a daily rate of $121 per day. I am satisfied that is the appropriate rate.
Occupancy rate
The principal difference in the determination of FME is what is to be assumed about the occupancy rate at which to calculate revenue.
The second applicant submits that the occupancy rate that should be adopted is 95 per cent. I will set out elsewhere the evidence of those involved in the running of KKM about the occupancy rate and the expectation of an occupancy rate of 95 per cent by February 2020. In short, although that occupancy rate had never been achieved at KKM on a weekly or monthly basis, the second applicant submits that the occupancy rate which had been forecast by it should be accepted. I will return to that forecast.
Historical occupancy rates
For the moment, I will outline some of the evidence about what occupancy rates had been achieved.
As to the occupancy rate of KKM, there was no dispute about the following graph prepared by Mr Holmes setting out the trend and growth in the occupancy rate in the period for the weeks 19 March 2017–19 October 2019:[21]
[21] Report of Mr Holmes dated 13 April 2022 [6.1], Exhibit A11 (EWRB vol 1, 515).
In terms of the trend to 15 December 2019, having been provided with weekly occupancy data for the period 19 October 2019 to 15 December 2019, Mr Holmes determined that in the week ending 15 December 2019, the occupancy rate was 86 per cent having been 82 per cent in the previous period. Mr Holmes also determined that in the 24‑week period from 1 July 2019 to 15 December 2019, the average weekly occupancy rate was 86 per cent having been 78 per cent in the prior period.[22] There is no dispute that in the period just mentioned, weekly occupancy had never reached 90 per cent. Mr Holmes set out the weekly occupancy in the period 1 July 2019 to 15 December 2019 in the following way:[23]
[22] Report of Mr Holmes dated 13 April 2022, Exhibit A11 [6.2] (EWRB vol 1, 538).
[23] Ibid [6.2.3] (EWRB vol 1, 539).
Mr Holmes opined that the rolling 12‑month average occupancy to November 2019 was as set out in the table and graph below:[24]
[24] Ibid [6.3.1] (EWRB vol 1, 539-540).
The evidence was that a rolling average (i.e. – the sum of the occupancy over the relevant time period) is ‘generally used’ for trend purposes.[25] Mr Holmes opined that if occupancy was trending upwards (i.e. – the beginning period is lower than the ending period), then calculation of the rolling average ‘will always arrive at a lower average occupancy than the rate in the ending period, without regard to the prospects for future maintainable occupancy’.[26] There was no dispute that the rolling average determined by Mr Holmes was showing ‘an upward trend’.[27]
[25] T245.28-T246.10.
[26] Report of Mr Holmes dated 3 November 2022, Exhibit A12 [6.2.4] (EWRB vol 2, 933).
[27] T248.9-11.
Based upon a forecast provided by KKM, Mr Holmes was prepared to value KKM on the assumption of an occupancy of 95 per cent commencing in February 2020. Mr Holmes opined the assumption was reasonable.[28] As I have said, I will return later to the forecast upon which that assumption is based as it is an important aspect of determining the value of KKM. Accepting the forecast, Mr Holmes reflected the increase in occupancy through to April 2020 in the following table:[29]
[28] Report of Mr Holmes dated 19 August 2020, Exhibit A9 [4.1.1]-[4.1.2] (EWRB vol 1, 87).
[29] Report of Mr Holmes dated 13 April 2022, Exhibit A11 [6.4.1] (EWRB vol 1, 540).
It can be observed that the table assumes no drop in occupancy between December to January and a substantial increase in February 2020 (i.e. - an increase from 86 per cent to 95 per cent, being an increase of about 10 per cent from one month to the next).
In contrast to Mr Holmes, both Mr White and Mr Schwarz opined that the appropriate occupancy rate that should be used in arriving at a valuation of KKM was 82 per cent.
Mr Schwarz based this upon data available to all experts and, in particular, the weekly ‘utilisation reports’ for the period March 2017 to October 2019. In the opinion of Mr Schwarz, that showed an overall average occupancy for the 12 months to October 2019 of 73 per cent. Given that the 2019/2020 budgeted revenue ‘has been based on unaffected terms with an occupancy rate of 82 per cent’, in the opinion of Mr Schwarz, it was appropriate to adopt that occupancy rate.[30] Mr Schwarz accepted that the rolling average from 1 July 2019 to 15 December 2019 was as calculated by Mr Holmes.[31]
[30] Report of Mr Schwarz dated 16 April 2020, Exhibit R16 p 28 (EWRB vol 1, 33).
[31] T253.22-28.
Mr White opined that the average occupancy in the 52 weeks to 15 December 2019 was 82 per cent, which reflected weekly occupancy averages as set out below. As can be seen, in the period just mentioned, weekly occupancy had not ever exceeded 88 per cent, an occupancy reached for the first time in early September 2019:
Mr White compared the daily occupancy from February 2019 to mid‑December 2019 and opined: growth was being achieved in the early part of 2019 (compared to the equivalent months in 2018); the level of growth reduced over the course of the year to September; and occupancy reduced slightly in October to December (compared to the equivalent months in 2018).
In the opinion of Mr White, the above can be set out in the following table:
In the opinion of Mr White, the above table indicates that there had been ‘minimal improvement or a reduction in occupancy compared to 2018’ and that ‘is indicative of growth stagnation’ at KKM.[32]
[32] Report of Mr White dated 12 August 2022, Exhibit R14 [6.4.10] (EWRB vol 2, 832).
As will be set out elsewhere, the evidence of the second applicant is that, in the early part of 2019, occupancy rates at KKM were affected by a business decision to focus on KKGG. Mr White accepted that he had not considered whether the historical occupancy may have been impacted by a deliberate decision to allocate staff to KKGG and said that, if that had occurred, it would possibly inform his opinion about stagnation.[33] An aspect of the evidence of Mr White was the following:[34]
[33] T223.31-T224.30.
[34] T223.31–T224.38.
QYou understood, though, by reading Ms Heron and Ms Foster's affidavits that a conscious decision had been made to transition staff from Maylands to Golden Grove.
AI believe I read something to that effect, yes.
QYou understood that happened in November 2018.
AI have no recollection of that date.
QYou do know this though, that there's a relationship between the number of staff and the number of children who can be in attendance at the child care centre.
AYes, I understand that.
QSo there are statutory ratios or regulated ratios for the number of staff to students, depending on their age.
AYes, I believe that's the case.
QAnd, therefore, if you moved staff and made a business decision to move staff from one centre to the other centre with a view to kickstarting the other centre, that might have an impact upon the occupancy at, in this case Kozy Kids Maylands at the time this was occurring.
AI expect it would only have an impact if it left you below the statutory requirements such that you had to say no to additional.
QAnd you had no understanding at least at the time you completed your report that, in fact, Kozy Kids Maylands was saying no to enrolments for that very reason.
AMy understanding was from the affidavits that the staff numbers was actually sufficient, purportedly, to take the occupancy to 95% and stay within the ratio, so I wasn't aware of that being an issue.
QIf you had been aware that there had been a deliberate business decision and that had the consequence that enrolments at Kozy Kids Maylands were kept static but the business at Kozy Kids Golden Grove was being kickstarted in that way, it would have given you pause about the conclusion that you made about stagnation because there's an explanation for the numbers.
APossibly. I haven't analysed the numbers to the extent that I'd need to offer an opinion on that.
As to the evidence relied upon by the second applicant about it having techniques for maintaining and increasing occupancy (a key aspect of why the second applicant submits that an occupancy rate of 95% by February 2020 is the appropriate assumption), Mr White said that he preferred to look at ‘the historical occupancy rates that were actually achieved and make a judgment based on that’.[35] When it was suggested that he had ignored techniques to build occupancy other than new enrolments, Mr White said:[36]
Well, I think my assumption is that the techniques to building enrolments had applied throughout the life of this business, such that there wasn't anything new to offer at this point in time.
[35] T223.27-30.
[36] T228.7–13.
I agree the assumption of Mr White reflected in the evidence immediately above is appropriate. It is also important. Subject to a business decision relating to KKGG in the early months of 2019, the techniques employed at KKM to build enrolments had applied throughout. There was no new approach that had only been recently introduced, nor was there any new approach that was about to be introduced. It is also not the case that there was some external factor which would exist in February 2020 that had not previously existed and which might have contributed to increased enrolments.
Mr White also said that to calculate the impact of any focus upon KKGG early in 2019, he would have to work out how many enrolments were turned away ‘such that one could work out what the occupancy might have been in the absence of that practice’. Mr White said ‘I am not aware of any data in respect of that’.[37] Consistent with that evidence of Mr White, there is no data about how many enrolments were turned away. As will be seen, the evidence about this was only general. Consistent with the absence of data and the generality of the evidence, Mr White was not asked to assume how many enrolments had been turned away as the result of a decision to concentrate on KKGG.
[37] T239.23-24.
In the opinion of Mr White, the data with respect to occupancy rates does not support the assumption made by Mr Holmes and sought to be established by the second applicant (i.e. – an occupancy rate of 95 per cent from February 2020). In the opinion of Mr White, there is ‘strong support’ for an assumption of 82 per cent average occupancy. Mr White said that he had noted:[38] average occupancy in the 52 weeks ended 15 December 2019 was 82%; year on year growth in occupancy reduced over the course of 2019 such that occupancy reduced year on year in October to December 2019 (indicating, in his view, that growth had stagnated); and a new centre with capacity for 110 children opened in or about February 2020 on the same road in the adjacent suburb that would have likely reduced the ability of the second applicant to increase occupancy in the short term.
[38] Report of Mr White dated 12 August 2022, Exhibit R14 [6.2] (EWRB vol 2, 834).
Later I will turn to a forecast prepared by the second applicant which is a key aspect of its evidence said to establish that an occupancy rate of 95 per cent by February 2020 would have been achieved. As set out above, what appears in that forecast has been accepted by Mr Holmes. Nevertheless, it is convenient to set out here some aspects of the evidence of Mr White about the forecast.
As will be seen, that forecast draws upon enrolments in December 2019; adds new enrolments in January and February 2020 based upon what KKM describes as waitlists; and then applies an attrition rate of eight per cent to arrive at the enrolments forecasted in February 2020 (i.e. – 95 per cent). As for the suggestion that the attrition rate of 8 per cent relied upon by the second applicant was appropriate, Mr White’s evidence was that, in his view, it was unclear what that was predicated upon; that it appeared arbitrary; and, on his analysis, it appeared too low.[39] Mr White also doubted that the waitlists were a reliable source of future enrolments.
[39] Report of Mr White dated 12 August 2022, Exhibit R14 [6.6.5] (EWRB vol 2, 837); T232.9-14.
As for the suggestion that occupancy was trending upwards in 2019, Mr White said that it was impacted by seasonality. He said that ‘it builds up over the course the of the year, and then falls away around the start of the year and then builds again’.[40] As will be seen, a fall around the start of the year is consistent with other evidence. In my view, this is also consistent with the occupancy data earlier set out. The table ‘Kozy Kids – Occupancy by Day, Week’ is consistent with occupancy being at its lowest at the beginning of each year, but then increasing throughout the year. That same table is consistent with the growth being greater throughout 2017 and 2018 than in 2019. This is not to ignore that the growth in 2017 is from nil. Although one must be cautious as it is data with respect to only a single year and about a different childcare centre, the drop in occupancy towards the beginning of the year with growth throughout the year, is broadly consistent with the occupancy data with respect to KKGG between January to December 2020.[41]
[40] T234.2-12.
[41] Report of Mr Holmes dated 3 November 2022, Exhibit A12 [6.3].
Mr White accepted that the occupancy of KKM was 86 per cent at the time of the notice of acquisition. Nevertheless, Mr White maintained that 82 per cent was the appropriate figure as it was an average. Mr White said:[42]
But if you look at what my average of 82% really means, it's talking about starting at a lower percentage than that and building to a higher percentage over the course of the year.
[42] T236.25-28.
Mr White was aware of the opinions expressed about the expectations of increasing occupancy rates to 95 per cent but said that:[43]
I preferred to look at the historical occupancy rates that were actually achieved and make a judgment based on that.
[43] T223.28–30.
Purchasers of a business taking into account forecasts
As has been mentioned, a key aspect of the evidence relied upon by the second applicant to establish an occupancy rate of 95 per cent by February 2020 is a budget forecast. Consistent with the data set out earlier, the second applicant does not suggest that an occupancy rate of 95 per cent had ever been achieved at KKM.
Nevertheless, Mr Holmes opined that purchasers did not only determine value based upon historical data. Mr Holmes opined that where a business has an increasing trend in factors affecting earnings, greater weight is usually applied to the forecast. Mr Holmes opined that adopting historic earnings is usually adopted when there is no forecast available, there is not the capacity to grow the business and/or no growth is likely.[44] Mr Holmes gave the following evidence about the appropriateness of looking at forecasts:[45]
[44] Joint Report dated 23 October 2022, Exhibit A13 [2.2] (EWRB vol 2, 989-990).
[45] T202.16–T203.32.
Q… you express the view that 'The ultimate price determined in a transaction in my experience is usually a matter of negotiation and involves hurdles if a purchaser is concerned about growth and forecast earnings.'
AYes.
QSo a purchaser will look at a forecast and then form their own view about whether that's a reliable basis for them to determine the price they are prepared to pay for the business.
AYes.
QIf the forecast involves growth the purchaser will have to make an assessment as to whether they want to factor that in to the future maintainable earnings or whether they're going to exclude that for the purposes of the price they're willing to pay.
AYes.
QI suggest to you that purchasers are going to be very careful when they're considering forecast profits which are not based on historical performance.
AWell, I disagree. Purchasers as vendors also consider all manner of things including stable management, growth forecast, industry factors, government subsidies, the whole landscape that underpins FME and risk. So again we're talking a difference between value as compared to an ultimate price that might be put on the table so to speak which evolves over a period of due diligence by the purchaser; but ultimately, yes, they'll have regard to both historic and the forecast, but ultimately they're buying a future cashflow. So what's their risk assessment of that future cashflow that's what they're trying to find out.
QWhen they're pricing in future forecast profits they're going to be thinking about the way that they would be running the business aren't they.
APossibly if there are transactions of course where the incumbent management is transferred, so you've got less risk because the people who previously run the business are still there. So some purchasers of course are investor purchasers and not management purchasers.
QIf there's to be a change in management the extent to which the profits are reliant on management input is going to be something the purchaser is taking into account.
ADepends on whether they've got their own management.
QPurchasers are likely to come in with a view about how they might run it.
AYes.
QAnd how they think they can make money.
AYes.
QA purchaser is unlikely to be willing to pay for the work that they have to do to achieve profits in the future.
AI disagree.
For his part, Mr Schwarz did not contend that a purchaser would only consider historical data. His evidence was that historical data was the first thing that would be considered and that if future growth was taken into account, there may be some adjustment elsewhere. Mr Schwarz also opined that if a business is viewed as providing a growth opportunity, purchasers are reluctant, and unlikely, to pay the vendor the full value, or anything near the full value of this growth. In the opinion of Mr Schwarz, the forecast growth is yet to be realised and will require the skill of the purchaser to achieve growth forecast by the vendor.[46] An aspect of the evidence of Mr Schwarz was the following:[47]
… And so I look at the historical - I look at how a purchaser would view this property if they were to buy it and all advice to me is that purchasers would look at, firstly, historical trade. Basically what they want to do is like what Mr Holmes said, they look at fair market earnings going forward from a purchase point of view and what they would do is look at, firstly, historical data and how that business has been trading, ideally over three years and they put significant weight on historical data. Feedback to me is that that's primary in a lot of cases the only thing that they would consider, now I think they would probably consider other things as well, in terms of working out whether that fair market earning is sustainable over the long-term and part of that is to do with the demographics, the supply and demand, where that business is in terms of its life cycle and they would look at okay, what is a sustainable fair market earnings for that business? Going through all that process, looking at the budgets and the historical data and my understanding of the centre and the size of the centre is a significant factor. A likely purchaser would consider what their budget is, is a reasonable sustainable fair market earnings.
[46] Joint Report dated 23 October 2023, Exhibit A13 [2.2] (EWRB vol 2, 989-990).
[47] T290.27-T291.13.

Mr Schwarz also said:[48]
Regarding whether a purchaser would pay for future earnings or future growth, my experience and feedback from that is no, they tend not to want to pay anymore. What they may consider is if they view a business that does have growth, and as I said before, if they look at a sustainable maintainable earnings going forward, which is above what is currently being achieved by business and they think that there is potential for that to get there and that's a reasonable amount, whatever that may be, one way of calculating that, which I would do, is adopt the sustainable maintainable earnings which might be higher than the actuals but make an adjustment to the capitalised value that comes from that for the present value of the loss of income until you reach that maintainable earnings. So a purchaser would factor in say well - and take this case as an example hypothetically that maybe 95% is considered achievable and ... but we're only at 82 now. A purchaser may capitalise the income at the 95% but what they would do, and the way I would calculate it is make an adjustment to that capitalised amount for the present value of the loss of income until you get to that and you make a call. It might take 12 months, it might take two years, and so during that period you won't be operating at that level; there will be a loss of income stage to get to there, and then the present value of that loss of income would come off the capitalised value. So you make a capital adjustment deduction from that amount. That's one way that a purchaser may look at it if they think that it's reasonable to get to that growth.
[48] T301.5-35.
For his part, Mr White agreed that a purchaser is unlikely to be willing to pay for the work they have to do to achieve profits in the future.[49]
[49] T300.5-22.
Maximum occupancy
Under its licence, KKM was able to provide a day care to 152 children each day. That maximum occupancy represents the number of paid childcare places that could physically attend KKM on any given day. However, that number does not represent the maximum number of places that could be paid for on a single day. It was possible to have booked occupancy exceeding 152 (i.e. – greater than 100 per cent occupancy). In that event, more than 152 places would be paid for on a single day. This is because day care places must be paid for even when a child booked is absent.
The expectation of a growth in the occupancy rate by February 2020
The evidence of Ms Foster was that KKM expected its occupancy rate to rise throughout the 2019‑20 financial year, with the expectation that it would reach 95 per cent by February 2020. Ms Foster said that KKM was confident of achieving higher than average occupancy rates because of its operating methods and experience. Ms Foster said that she and Ms Heron had years of previous experience managing IBK at a high occupancy level.
It was the evidence of Ms Foster and Ms Heron that KKM had advantages which KKM was confident would drive its occupancy rate well above that of the average childcare centre. Namely:
1.As touched on earlier, the building was designed by she and Ms Heron to maximise its effectiveness; was new and attractive; and was located in a highly prominent location with easy vehicle access into and out of the site;
2.KKM intensively managed room numbers and booked places to above ‘ratio’ levels. This was done by managing room places by individual transitioning from one room to another and having flexible age ranges within rooms. Ms Foster and Ms Heron had the support of the owners to use their discretion to intensively manage or staffing to ensure compliance;
3.Ms Foster and Ms Heron used the primary care philosophy which, on their evidence, encourages carer continuity for the child and builds confidence with parents, making them more likely to pick up extra days and to recommend the centre to other prospective clients;
4.The opening hours were long (6.30am to 6.30pm) and KKM catered to all pre‑school age groups (whereas some centres do not take babies).
Later, I will set out some of the evidence with respect to the above factors. For the moment, it can be observed that all of the above had been in place since KKM opened. These were all matters that had, subject to the business decision with respect to KKGG, been in place throughout the life of KKM. Any business decision with respect to KKGG was not a consideration in the period 1 July 2019 to 15 December 2019. As set out above, in the period 1 July 2019 to 15 December 2019, the average weekly occupancy had reached 86 per cent, significantly below 95 per cent. In short, in the time that KKM had been open it had not grown its occupancy to 95 per cent. The submission of the second applicant is that it has established KKM would have done so by February 2020, bearing in mind that the occupancy had only reached 86 per cent in the period just mentioned.
Other evidence about occupancy rate
As set out above, Mr Holmes was prepared to accept a budget forecast prepared by KKM which set out an occupancy in February 2020. The witness who prepared the forecast occupancy of KKM was Ms Foster, but her evidence must be viewed in light of all the evidence, including the evidence of Ms Heron and Mr D Fitch.
Ms Foster
As set out earlier, KKM was able to provide daycare to 152 children at a time each day, but it was possible to have more than 152 children attend on a single day.
Ms Foster gave evidence that it was expected the occupancy rate would rise throughout the 2019/2020 financial year and reach 95 per cent by February 2020. That projection was said to be based upon ‘our operating methods and experience’. In particular, ‘years of previous experience managing Iddy Biddy Kids at a high occupancy level’. On the evidence of Ms Foster, KKM had advantages which would drive the occupancy rate well above that of the average childcare centre. Her evidence included the following:[50]
The building was designed by [Ms Heron] and me to maximise its effectiveness, it was new and attractive, and was located in a highly prominent location with easy vehicle access and egress.
We intensely managed room numbers and booked places to above “ratio levels”. We managed room places by individual transitioning and flexible age ranges within rooms. We had the support of the owners to use our discretion to intensively manage out staffing to ensure compliance.
We used a primary caring philosophy which encourages carer continuity for the child and builds confidence with parents, making them more likely to pick up extra days and to recommend the centre.
Our opening hours were long (6:30am to 6:30pm) and we catered to all pre‑school age groups (whereas some centres do not take babies).
[50] Affidavit of Mikaeli Kelda Foster dated 13 April 2022, Exhibit A5 [59.1]–[59.4] (JTB vol 1, 43).
As above, Ms Foster also relied upon the performance at IBK where she said that high occupancy rates were achieved and sometimes exceeded 100 per cent occupancy. The evidence of Ms Foster also included that KKGG achieved, or exceeded, a 95 per cent occupancy rate in the latter half of 2020.[51] Ms Foster also gave evidence that in November 2023, KKGG had achieved an occupancy of over 100 per cent on two days a week.[52]
[51] Affidavit of Mikaeli Kelda Foster dated 13 April 2022, Exhibit A5 Annexure MKF12 (JTB vol 1, 464).
[52] T146.31-37.
The evidence about occupancy rates at IBK and KKGG can be accepted. Nevertheless, the techniques for maximising occupancy which were employed at IBK and KKGG had been employed at KKM. What the second applicant seeks to establish is that the occupancy which should be assumed in February 2020 is 95 per cent after a weekly average occupancy that did not exceed 87 per cent in December 2019 and after an average weekly occupancy of 86 per cent in the six months up to 15 December 2019. I consider that it is one thing to point to evidence of occupancy rates of 95 per cent and above 100 per cent being achieved elsewhere, but it is another thing to say that such rates say much at all about the reliability of an expectation of growth to 95 per cent in February 2020 at KKM from an average occupancy of 86 per cent in the last six months of 2019. I will later make some additional observations about occupancy rates at IBK and KKGG.
As to the primary care model, Ms Foster accepted that it was a model that was becoming ‘more common’, but how it was implemented and what was considered to amount to such a model is very different from one centre to another’.[53]
[53] T104.27-30.
Ms Heron
Consistent with other evidence, the evidence of Ms Heron included that although KKM was listed to provide childcare for 152 children each day, that did not mean there could not be more than that number of children on a given day. She explained that a fee is paid by parents (and a Government subsidy received) on days the child is to attend the centre but does not do so. She explained this included days when a child who is booked is absent due to a public holiday; illness, appointment; some other holiday; or other reason. In light of the issue of public holidays, she explained that occupancy on Mondays is always the lowest. It can be noted that is reflected in the data with respect to historical occupancy rates set out earlier.
Ms Heron said that the number of children present is invariably lower than the number of children booked. She explained this presents an opportunity to ‘over book’ without exceeding the 152 places for which KKM was licenced. It was the evidence of Ms Heron that:[54]
This presents the opportunity for a well‑run child care centre to “overbook” its rooms. It is possible for a centre to do so without exceeding the number of children permitted under its licence. Miki and I always abide by the regulations and we are quite clear that it is in the best interests of the business to do so. To run a centre at higher occupancy levels requires careful attention to the staff‑child ratios, which cannot ever be allowed to fall below mandated levels, however it is quite possible to do so provided that sufficient staffing levels are maintained, and staff and child numbers in each room are continuously managed with care.
[54] Affidavit of Joanne Ella Heron dated 13 April 2022, Exhibit A4 [46] (JTB vol 1, 9).
Ms Heron’s evidence was that she and Ms Foster used a number of techniques to maximise occupancy rates, not just at KKM but at IBK and at KKGG. In evidence similar to that of Ms Foster, Ms Heron identified those techniques in the following way:[55]
[55] Ibid [48]–[56] (JTB vol 1, 10-11).
The first is to run a successful centre which satisfied the parents. This drives demand for places. A very important driver of new business for any child care centre is word of mouth. Parents’ choices about child care centres are highly likely to be affected by positive (or negative) reports from their peers.
At Kozy Kids Maylands, our other advantages were:
·The centre’s visibility – its prominent location. This was also an important driver of new business.
·The centre’s appearance – the centre was attractive and we were careful to maintains its appearance. Indeed, about the beginning of 2019, before we received notice of the compulsory acquisition, I had a discussion with David in which I said we might need to think about repainting; David agreed. At about the same time we were also planning to resurface some of the floors. Photographs of the centre taken at around the time of its opening are exhibited hereto and marked “JEH-1”.
·The maturing and experience of the centre’s directors, their compassion and welcoming disposition.
·The consistency of staff in the rooms.
The primary care model feeds directly into occupancy, because parents tend to be satisfied with the level of care their child is receiving. It increases children’s happiness and comfort at the centre. This directly impacts on families. They recommend the centre. Sometimes parents pick up extra days at work because they are so comfortable with their care their children are receiving. Once we had families in the door they rarely left the centre.
The second technique is to operate with flexible start dates and flexible transitioning of children between rooms.
When children start at the centre, they come for visits (orientation) which generally last an hour. These visits did not count towards staff rations, and they were not funded places. The first visit might be with the parent present in the room, then there might be a number of visits where the parent departs for a while, and comes back. Under a primary care model, the primary carer would be allocated to a child at the first visit. G8 applied pressure to have the child start from a fixed start date, and having a child enrolled in a paid place as early as possible. I like to use a case‑by‑case approach which allows for as many orientation visits as are required to ensure the child is reasonably settled, even if that means pushing back the paid place by a week or two. This flexibility and care for each child’s needs produces better outcomes in the long run.
When transitioning a child from one room to the next, I apply the same, flexible case‑by‑case approach. I continually shuffle the schedule of children’s transitions between rooms. We transition a child on an individual case by case basis.
By maintaining the fluidity of our transition schedules, and flexibility in our orientation visits, we were more likely to be able to accommodate families requests to pick up additional days, or to enrol new children from our waiting list, or take up “walk in:” enrolments. We could take a flexible look at which children were ready to transition, to create space and accommodate others. This is hard work, because it requires constant juggling, and most centres don’t do it. In my experience, most other centres transition children between rooms in large groups, on a rigid timetable.
The third technique is to actively manage casual bookings. It often happens that parents want to pick up extra days, because of their work commitments. Families would often ask us about casual places, and sometimes we would know in advance that there would be places (for example, because a child was going away on holidays), and sometimes places would arise at late notice (for example, when a child was called in sick). When we heard from a parent that their child wasn’t coming in, we would telephone families on the casual booking sheet. I actively managed the casual booking sheet and I was always looking to accommodate them.
Finally, where many centres seek to manage staff hours to minimise costs, we generally staff the rooms at levels that permit full occupancy. We carefully manage our lunch breaks roster to ensure staff ratios are met at all times. Each day we formulate our lunch roster, but we also adjust it in real time over the course of a day. Form time to time Miki and I, and the centre directors and assistance directors we oversee, step into a room ourselves ensure staff ratios are met. We also engage administrative staff who are qualified in child care and can fill in if required.
Ms Heron’s evidence was that sometimes vacancies were filled at the last minute.[56]
[56] T67.17-34.
Ms Heron said that utilising the techniques above, she had been able to achieve occupancy rates above those of other childcare centres and sometimes up to 105 per cent. I have already made some observations about the significance of occupancy rates at IBK and KKGG. I will say something more about that later. As observed more than once already, on the evidence, the techniques for maximising occupancy had been employed at KKM.
The evidence of Mr David Fitch
It was the evidence of Mr D Fitch that he believed that positioning KKM as a ‘premium’ offering would lead to high occupancy rates, and better performance than ‘an average childcare centre’.[57] Mr D Fitch considered there were three reasons that ‘high occupancy rates’ would be achieved:[58]
First, a high-spec fitout would be attractive aesthetically. Kozy Kids Maylands looked better than its competitors’ centres. Additionally, a more attractive, comfortable and functional working environment would enable us to attract and retain better staff.
Secondly, the Maylands land was a generously proportioned site, with ample car parking, large outdoor recreation areas. It was accessible directly from a main road. It was prominent – it advertised itself.
Thirdly, we had the right leadership in [Ms Foster and Ms Heron] to get a childcare centre performing optimally. In the childcare industry, your business is substantially reliant on good staff, who have good communication skills, who understand childcare, and who are empathetic to the parents’ situation. Parents need to feel comfortable placing their children in your care. It is hard to find staff of that calibre. You need your rapport with parents to be excellent.
[57] Affidavit of David Leo Fitch dated 14 April 2022, Exhibit A2 [32] (JTB vol 1, 556).
[58] Ibid [34]-[36] (JTB vol 1, 556).
As set out earlier, it was the evidence of Mr D Fitch that achieving ‘high occupancy is a matter of hard work by centre management [and] is especially so when achieving the last 10 per cent’.[59]
[59] Ibid, [45] (JTB vol 1, 557); T31.11-15.
The evidence of Mr D Fitch was that, as at October 2019, he expected growth in occupancy to reach 95 per cent.[60] Mr D Fitch rejected that an occupancy of 95 per cent by 1 February 2020 was unrealistic.[61]
[60] T42.25-30
[61] T43.11-17.
Staff costs
As to staff costs, being the most significant cost component of KKM, Ms Foster said that its philosophy was that it would over‑staff the centre. Ms Foster said this was done as quality care was key to families’ satisfaction levels and as it was families’ satisfaction that would drive occupancy levels. Ms Foster said that she and Ms Heron would pre‑emptively over‑staff so that they could be ready to provide a primary carer for any new enrolments straight away. In this way, the availability of staff did not inhibit the ability to accept children and the growth of the occupancy rate.
Results at IBK and KKGG
As set out above, the second applicant lead evidence suggesting that the likelihood of the predicted occupancy rate of 95 per cent by February 2020 was to be considered in light of past performance at IBK and the performance at KKGG.
Ms Foster said that she and Ms Heron had consistently achieved high occupancy rates and sometimes met or exceeded 100 per cent occupancy at IBK. This may be accepted, but the significance of that evidence must be considered in light of at least the following matters. While the management was the same, IBK was a different centre in a different area and the evidence related to no later than 2016. Further, when IBK was established the area in which it opened was underserved by childcare centres.[62] For reasons to be given, it would not be an appropriate characterisation of the area within which KKM was operating and from which children were drawn to say that it was ‘underserved’.
[62] Affidavit of David Leo Fitch dated 14 April 2022 [5] (JTB vol 1, 552); T27.28-38.
Ms Foster said that she and Ms Heron had also equalled, or exceeded, a 95 per cent occupancy rate at KKGG in the latter half of 2020. That evidence is supported by the data with respect to the historical monthly occupancy of KKGG from January 2020 to December 2020. Nevertheless, in my view, of significance is the period over which growth from about 87 per cent (broadly equivalent to the 86 per cent at KKM) to 95 per cent (the assumed growth at KKM for which the second applicant contends) was achieved. It was not over a period as short as one or two months.[63] To the contrary, it had been achieved over about eight months. An aspect of the position of the second applicant about the significance of the occupancy rate achieved at KKGG was that it operated in an area where competition was high.[64] As will be seen, the competition to KKM was of a broadly similar nature (i.e. – relatively high).
[63] Report of Mr Holmes dated 3 November 2022, Exhibit A12 [6.3.2] (EWRB vol 2, 933).
[64] T155.8-31.
The opening of Kozy Kids Golden Grove

There is no dispute that compensation for ‘special value’ is permissible pursuant to s 25 of the Act. It is necessary to consider the meaning of special value.
In Arkaba Holdings Ltd v Commissioner of Highways,[126] Bray CJ said of ‘special value’:[127]
It is, of course, well established that it is the value to the owner which must be paid, even if that value exceeds the market value. The additional element is commonly called “special value to the owner”. But this special value must in my view arise from some attribute of the land, some use made or to be made of it or advantage derived or to be derived from it, which is peculiar to the claimant and would not exist in the case of the abstract hypothetical purchaser. Would a prudent man in the position of the claimant have been willing to give more for this land than the market value rather than fail to obtain it or regain it if he had been momentarily deprived of it? A typical case of special value is whether land is peculiarly adapted to a particular kind of use made or intended to be made of it by the claimant, e.g. a doctor’s consulting rooms, or agricultural land worked in conjunction with a neighbouring residence or farm buildings.
(footnote omitted)
[126] [1970] SASR 94.
[127] Ibid 100.
In Boland v Yates Property Corporation Pty Ltd,[128] Gleeson CJ (with whom Gaudron J relevantly agreed) said:[129]
It was established in Pastoral Finance Association Ltd v The Minister, which has been followed in many subsequent cases, that in some circumstances land may have a special value to the owner which exceeds the market value. If, in a given case, it is contended that such special value exists, that also raises an issue for factual judgment…
…
The idea that an item of property may have a value to one person which exceeds the price it would bring if sold to a third party in an open market is not peculiar to this area of discourse. It is also reflected in insurance law and practice, where a distinction is sometimes drawn between the market value of property and its value to an insured.
… Market value, or the amount that would be realised from a sale in a market where the price is agreed by freely contracting parties, provides a measure of value from the perspective, not only of the particular purchaser and vendor, but also of others in the market who are not parties to the particular transaction. Special value to the owner directs attention to the perspective of the vendor. What is insisted upon is that, leaving to one side any claim for damages founded upon the relevant statutory provisions, what is in question is the value of the land or other resumed or acquired asset, not the fixing of compensation for all loss resulting from the resumption or acquisition.
(footnote omitted)
[128] (1999) 74 ALJR 209; [1999] HCA 64.
[129] Ibid [80]; [82]; [83].
In the same case, Callinan J described special value as follows:[130]
The special value of land is its value to the owner over and above its market value. It arises in circumstances in which there is a conjunction of some special factor relating to the land and a capacity on the part of the owner exclusively or perhaps almost exclusively to exploit it. … There will in practice be few cases in which a property does have a special value for a particular owner. Obviously neither sentiment nor a long attachment to it will suffice. The special quality must be a quality that has an economic significance to the owner. A possible case would be one in which, for example, a blacksmith operates a forge in the vicinity of a racetrack on land zoned for residential purposes as a protected non-conforming use, the right to which might be lost on a transfer of ownership or an interruption of the protected use. Such a property will have a special value for its blacksmith owner, and perhaps another blacksmith who might be able to comply with the relevant requirements to enable him to continue the use but to no one else.
(footnotes omitted)
[130] (1999) 74 ALJR 209; [1999], [292].
Special value comprises the excess (if any) of the economic value to the owner over the market value. It is, in other words, the additional economic advantage the owner obtains from ownership that is not reflected in the market value. In Nelson v Commissioner of Highways (No 2) (Nelson),[131] Blue J described it as ‘the amount that a prudent purchaser in the position of the owner would be willing to pay to obtain the relevant interest in the land rather than fail to obtain it in excess of its market value’.[132]
[131] [2023] SASC 7.
[132] Ibid [405].
The first applicant has not established that he should be compensated on any basis other than market value. I am not satisfied that the matters identified by the first applicant should be characterised as ‘some attribute of the land, some use made or to be made of it, or advantage derived or to be derived from it, which is peculiar to the claimant and would not exist in the case of the abstract hypothetical purchaser’[133] or as ‘some special factor relating to the land and a capacity on the part of [the first applicant] exclusively or perhaps almost exclusively to exploit it’.[134]
[133] Arkaba Holdings Ltd v Commissioner of Highways [1970] SASR 94, 100.
[134] Boland v Yates Property Corporation Ltd (1999) ALJR 269; [1999] HCA 64, [292].
Those matters relied upon by the first applicant which relate to the location of the land and the improvements that had been made are matters that a new owner would be in a position to exploit. The balance of the matters relate to the business practices of KKM and the childcare industry more broadly. As to the former, I am not satisfied that the prudent purchaser would not be able to exploit those practices. It is not suggested that others in the childcare industry did not have knowledge of, or ability to implement, the primary care model. It may be accepted that Ms Foster and Ms Heron had skill in seeking to maximise occupancy rates and in otherwise managing a childcare centre. Nevertheless, on the evidence, I am not satisfied that they were skills unique to those managing KKM. The remaining matters relate to the industry as a whole and would be as much in place after purchase as before.
For the above reasons, the land should only be valued on the basis of market value.
Further, and separately, I am satisfied that the valuations that have been done have taken into account many of the matters said by the first applicant to amount to special value. For example, Ms Parker had regard to the buildings having been refurbished; being located at the intersection of Portrush and Magill Roads; the land being ‘ideally suited to its current childcare use, and that this is the likely highest and best use as at the date of valuation’; assumed that ‘no significant capital expenditure was required’; and that the lease covenant was considered sound.[135] Matters of substantially the same nature were also taken into account by Mr Schwarz, including, but not limited to, the site providing a high level of exposure to traffic; the property being substantially refurbished in 2017; and that the highest and best use of the land was as a childcare centre (and office accommodation).[136]
[135] Report of Ms Parker (nee Rofe) dated 16 April 2020, Exhibit A24 [1.5]; [8.5]; [9.3] (EWRB vol 2, 1088; 1105; 1107).
[136] Report of Mr Schwarz dated 21 January 2020, Exhibit R26 pp 5; 8; 10 (EWRB vol 2, 1016; 1018; 1021).
Further discussion
The failure of the appeal of the first applicant to special value does not mean that it is not necessary to consider whether the first applicant has established that the land should be valued on the assumption that the term of the lease was 20 years. Putting aside the question of special value, the first applicant submits that the adequate compensation demanded by s 25(1)(a) of the Act permits consideration of the likelihood of the lease being renewed twice and therefore being treated, for valuation purposes, as if it was a 20‑year lease. The first applicant submits that it has established that it was almost certain that at least those renewals which would have had the effect of a 20‑year lease would have been taken up.
As set out earlier, the applicant submits that, as a matter of valuation principle, the risk posed by lease expiry is a factor to be taken into account.[137] The first applicant also directs attention to the following undisputed aspect of the evidence of Mr Schwarz, which I accept:[138]
Q.So, holding all other factors constant, would you accept that the fact that a tenant is in premises that are designed specifically for that tenant makes renewal more likely.
A.Yes.
Q.Would you accept, holding all other things constant, that if premises are configured to optimize the tenant’s operations, that makes renewal more likely.
A.Yes.
Q.Again on the same basis, do you accept that if premises are fit out to a high standard, that makes renewal more likely.
A.Yes.
[137] T313.7-14; T338.4-20.
[138] T343.20-32.
The first applicant also submits that 20-year leases were not uncommon in the childcare sector. For the purposes of his report, Mr Schwarz identified seven childcare centres sold in 2018 and 2019 with 20‑year leases.[139] For the purposes of her report, Ms Parker identified three childcare centres sold with 20‑year leases.[140] The first applicant submitted that this indicated that such businesses can be expected to stay in operation for longer than 10 years.
[139] Report of Mr Schwarz dated 21 January 2020, Exhibit R26 pp 28-31 (EWRB vol 2, 1039-1042).
[140] Report of Ms Parker (nee Rofe) dated 16 April 2020, Exhibit A24 pp 30-33 (EWRB vol 2, 1115-1118).
The first applicant accepts that resort cannot be made to the subjective intent of the parties to the lease, but submits its contention about a valuation on the basis of a 20-year lease does not involve resort to that subjective intent. The first applicant describes the assumption of a 20‑year lease because of at least two renewals as an ‘objective fact’ which is relevant to the valuation principle in Spencer v Commonwealth.[141] That is, the first applicant submits, it is relevant to the point at which the desirous purchaser and willing but not anxious vendor would come together. The first applicant submits that what it submitted to be the ‘near certainty’ of two renewals is part of the value to the owner in that assessment.
[141] (1907) 5 CLR 418.
The respondent submits that valuation on this basis is inconsistent with the approach of the High Court in The Minister v New South Wales Aerated Water & Confectionary Limited (Aerated Water).[142] The respondent submits that compensation is to be calculated based upon the 10‑year lease and the residual term. The respondent submits that it would be an error to take into account the expectation of renewals, notwithstanding the related nature of the landlord (the first applicant) and lessee (the second applicant). The respondent submits that compensation is payable for the interest in the land without regard to how the first applicant could have contracted, but did not.
[142] (1916) 22 CLR 56.
Aerated Water
In Aerated Water, the plaintiffs were a company which had carried on the business of cordial manufacture for many years at Newcastle. The plaintiffs did so on land held under successive leases from the freeholder, Mr Redman. The land was resumed by the Government of New South Wales whereupon the interest of the plaintiffs in the land became extinguished and converted into a claim for compensation. The amount of compensation fell to be determined by a jury which, pursuant to the Public Works Act 1900, was to assess the compensation according to what it found to be the ‘value of the interest’ at the time of publication (or notification) of the land being resumed. The lease at the date of that publication was for a term of seven years and three months. The lease had two years to run at the date of the publication and there were no rights of renewal.
The plaintiff company and Mr Redman were related with Mr Redman holding 4,237 of the 4,707 shares issued by the company. The plaintiffs claimed compensation on the basis that, in the circumstances, it was highly probable that Mr Redman would grant it a new lease at the expiration of the existing lease. At trial, the Minster (the defendant) objected to evidence showing the fact and nature of the interest of the lessor in the plaintiff company. The trial Judge admitted the evidence and left it to the jury as a material element in the estimation of value. The trial Judge directed the jury that it was a question for them whether they were to regard the plaintiff ‘as having a substantial interest based on their expectancy that the lease would be extended or renewed’. The jury were directed that it was to assess the interest of the plaintiff as persons having a leasehold title for two years and such expectancy of contingency as it may find to be a reasonable thing to take into account in the circumstances of the case.
The Minister appealed. The High Court held that the evidence of the lessor’s relationship to the company was irrelevant and that the evidence about that relationship was inadmissible.
Griffith CJ illustrated the position by two examples relating to the subjective personalities of the parties to a lease and which might weigh in favour of an existing lease being renewed. Griffith CJ held that such matters could not be brought into account:[143]
I venture to illustrate this position by two concrete instances. The present lessee of land may be a highly desirable tenant whose occupancy of the premises adds to the general reputation of the locality, so that it is extremely unlikely that he will be called upon to vacate the premises at the expiration of his lease. Or the lessor may be a person of amiable character, who has an extreme dislike to disturbing a tenant. Both these considerations relate to personal matters, depending in the one case on the personality of the tenant and in the other on the personality of the landlord. Neither of them is a matter "depending upon the nature and circumstances " of the land itself. Neither of them, therefore, can be taken into consideration in estimating the value of the term.
[143] (1916) 22 CLR 56, 63–64.
Barton J held that the considerations to be admitted in assessing the value of the property taken are not susceptible of any narrow and literal enumeration but cautioned against any measure of value other than market value. Barton J held that the position was that once market value was obtained, it was not appropriate to add to that an estimate of other considerations. Barton J held:[144]
I grant that a probable purchaser of an unexpired term such as existed in the present case might well have in mind, in reckoning what price he ought to offer, the question whether he was likely to be allowed to occupy the land for a time no longer than the residue of the lease. But it is one thing to say that such a consideration may operate upon the calculations of a more or less sanguine bidder and another thing to admit them as factors of separate and specific valuation.
[144] (1916) 22 CLR 56, 70.
Barton J further held:[145]
The owners are entitled to that which a prudent man in their position would have been willing to give for the interest sooner than fail to obtain it. I agree that the jury should take into consideration every element of value which an average man desiring to buy the property and to use it for the same or similar purposes would himself reasonably take into consideration in fixing the price he would offer.
[145] Ibid 71.
Isaacs J held that the relationship between the company and Mr Redman was a personal matter not to be taken into account. Isaacs J held:[146]
We are all agreed that it is impossible to sustain the direction in so far as the jury were instructed to include Redman’s shareholding interest in the company as a factor in determining the company’s chance of getting a renewal.
…
Now, should Redman's shareholding interest in the Company have been considered? It is plain that such interest, though it might or might not impel him to grant a further lease to the Company, is a personal matter, and therefore, as we all concur, is not, to be considered as influencing the value of the interest actually taken. But as the law says nothing affirmatively about excluding personal matters, the exclusion must be due to some negative consideration. The exclusion must be because, being personal, it necessarily is not inherent in or bound up with the interest taken so as to run with it in the hands of a purchaser for the Company.
(footnotes omitted)
[146] Ibid 76–78.
Consideration
Aerated Water was not a case involving the valuation of land. It was a case involving the proper approach to be taken to the valuation of the interest of a lessee when the lessor and lessee were related. In this case, what is in issue is the proper approach to the valuation of land owned by the first applicant which has granted a 10‑year lease to the lessee with rights of renewal, when the first applicant is related to the lessee.
While the facts of this case can be distinguished from those in Aerated Water, the High Court cited with approval[147] the approach of the Judicial Committee in Cedars Rapids,[148] which had approved of the following general statement of the law by Lord Moulton in In re Lucas and the Chesterfield Gas and Water Board:[149]
The principles upon which compensation is assessed when land is taken under compulsory powers are well settled. The owner receives for the lands he gives up their equivalent, i.e., that which they were worth to him in money. His property is therefore not diminished in amount, but to that extent it is compulsorily changed in form. But the equivalent is estimated on the value to him, and not on the value to the purchaser, and hence it has from the first been recognized as an absolute rule that this value is to be estimated as it stood before the grant of the compulsory powers. The owner is only to receive compensation based upon the market value of his lands as they stood before the scheme was authorized by which they are put to public uses. Subject to that he is entitled to be paid the full price for his lands, and any and every element of value which they possess must be taken into consideration in so far as they increase the value to him.
[147] The Minister v The New South Wales Aerated Water and Confectionary Company Ltd (1916) 22 CLR 56, 62-63, 67.
[148] Cedars Rapids Manufacturing and Power Company v Lacoste (1914) AC 569.
[149] (1909) 1 KB 16, 29-30.
As set out above, it can be accepted that the land had been developed to a high standard, was situated in a prominent location and that the land was particularly suited to the running of a childcare centre. It had been designed in a way expected by the first applicant and KKM to be appealing to caregivers. KKM was led by persons with considerable experience in the childcare sector and with skills in managing a childcare centre. The land is being valued with all of the features emphasised by the first applicant. At the same time, it remains the case the lease was not for 20 years. I am unable to determine why the first applicant contracted in the way that it did, but it is not necessary for me to determine that.
The willing but not anxious seller is not selling land that was subject to a 20‑year lease. In this case, the willing but not anxious seller is selling land that was subject to a 10‑year lease with the relevant rights of renewal. The desirous purchaser is purchasing land which was subject to a 10‑year lease with the relevant rights of renewal, not purchasing land with the additional value provided by a 20‑year lease. The desirous purchaser would know that once the land was purchased, there would no longer be the relationship between the lessor and lessee which, before the purchase, might have weighed in favour of the near certainty at least two renewals of five years contended for by the first applicant.

While the first applicant might have expected renewals, I am not satisfied that they were objectively certain when the initial term of the lease was for a term of 10 years. Certainty of at least two renewals demands, at least in part, the success of KKM for many years into the future.
In my view, little of substance in support of the position of the first applicant can be drawn from the fact that other lessors had chosen to enter into 20-year leases. It may be accepted that may reflect, at least to some extent, an expectation of the prospects of success of those lessees over such a period. Nevertheless, of much greater significance in evaluation of market value is that a 20‑year lease term is not a feature of this land.
In the circumstances, the first applicant has not established on the balance of probabilities that the land should be valued on the assumption that it was subject to a lease period of 20 years. To proceed on that basis would be to give the land a value greater than market value.
The market value of the land – conclusion
The difference in the two valuations on the basis of a 10‑year lease term is very limited. Both valuations are based upon the same methodology. I am unable to favour one over the other.
It follows the first applicant should be compensated for the land at the figure of $7,510,000 determined by Mr Schwarz. I so find.
Orders
I make the following orders:
1.The value of the first applicant’s freehold interest in the land is to be determined by reference to the terms of the lease in place at the date of acquisition. On that basis, the land value is $7,510,000.00 plus interest calculated from the date of acquisition.
2.The second applicant is entitled to compensation on account of the loss of the value to it of the business extinguished by reason of the compulsory acquisition of the land on the basis of:
a)     an occupancy rate of 86 per cent;
b)     a daily fee per child of $121;
c)     an earnings multiple of 4.3.
3.The second applicant is entitled to lost profits arising from its decision to inform clients on 16 December 2019 of the impending acquisition and to cease trading on 21 February 2020.
4.As to the amount of compensation to which the second applicant is entitled for lost profits:
a)     the appropriate methodology is a comparison of EBITDA in fact earned between 16 December 2019 and 16 April 2020 as against the counterfactual revenue that should have been earned in the same period;
b)     the occupancy rate to be used to calculate revenue is 86 per cent;
c)     the daily fee used to calculate revenue is $121;
d)     the calculation of lost profits is not impacted by the COVID‑19 pandemic. The amount of $55,000.00 should not be included.
5.The second applicant is entitled to an amount of compensation in respect of redundancy payments to staff of $104,461.81.
6.A reduction of $9,920.00 is to be made from any further compensation to the second applicant.
7.Pursuant to s 33 of the Act, interest is calculated on any amounts payable to the first and second applicants and from the date of acquisition.
8.The issue of whether the applicants’ legal costs and disbursements (legal and expert valuers) are part of the compensation under the Act payable to one or both of the applicants and, if so, the basis on which each applicant is entitled to calculate its claim for legal costs and disbursements is deferred until the parties have considered orders 1–7 above. Specifically, the following issues are deferred:
a) Does compensation under ss 22B and 25(1) of the Act include fees to lawyers and expert valuers?
b)     Are legal costs incurred by the applicants prior to the referral of questions into Court to be assessed differently from legal costs incurred by the applicants after the issue of proceedings, and if so, how?
I will hear the parties as to any further orders that may be appropriate.

[2024] SASC 140

5 December 2024