Ge Cominos & Co Pty Ltd v Chief Executive, Department of Lands
[1996] QLAC 105
•15 August 1996
|
Re:Appeal against a decision of the Land Court - Determination of unimproved value -
City of Cairns. (AV93-213).
BETWEEN:
G E COMINOS AND CO PTY LTD
Appellant
and
CHIEF EXECUTIVE, DEPARTMENT OF LANDS
Respondent
J U D G M E N T
Delivered at Brisbane this Fifteenth day of August 1996.
This is an appeal by GE Cominos and Co Pty Ltd against the decision of the Land Court affirming the determination by the Chief Executive, Department of Lands, of the unimproved value of $6,400,000, of certain commercial land in the City of Cairns. The land the subject of this valuation had been valued by the respondent under the provisions of the Valuation of Land Act 1944, as at 31 March 1992. That valuation was made by Mr P F Goodman-Jones, a registered valuer employed in the Department of Lands (now Department of Natural Resources).
The subject land and the "Golden Block"
The subject land has an area of 3,054 square metres and is described as Lot 12 on Registered Plan 749587, Parish of Cairns. It is situated in what is known as the "Golden Block" in the Central Business District of Cairns. This tightly-held retail area is bounded by Abbott, Lake, Shields and Spence Streets. The subject property is rectangular in shape, being a through- block between Abbott and Lake Streets, with frontages of 30.18 metres to each street.
The land is zoned "B1 Main Business Shopping" under the Town Planning Scheme for the City of Cairns which was gazetted on 11 September 1971. A Development Control Plan, gazetted on 19 October 1989, provides for a plot ratio of 4:1 and a height limitation of 48 metres. The land is the site of the "Orchid Plaza", an arcade-style development completed in October 1991. Orchid Plaza comprises a basement area accessed from Abbott Street, with 64 car parking spaces and 58 square metres of lettable storage area. The ground, or Plaza level, comprises a plaza retail shopping area with 1,641 square metres of lettable area. The second, or Gallery level, is accessed by six escalators, and has a further 1,549 square metres of retail and food outlet area. The third, or Office Court level, is accessed by two lifts and two stairwells and
provides 1,206 square metres of lettable office space.
The "Golden Block" has traditionally been the hub of the Cairns Central Business District. In the late-1970s, with the establishment of regional shopping centres, there was a movement of local shoppers away from the Central Business District to the regional centres which provided air-conditioning and ease of parking. Although it experienced some vacancies in the recession of 1982, the "Golden Block" remained popular. With the opening of the Cairns International Airport, the Central Business District changed from local shopping to tourist shopping and the "Golden Block" was the first to benefit, with boom conditions being experienced in late 1987 and early 1988.
Cairns suffered a severe setback during and after the industrial dispute known as the Pilots' Strike which commenced in August 1989. That dispute had a lasting effect on all real estate values, but confidence gradually returned, first to the residential market, then to the tourism market and finally to the retail market. At the date of valuation, however, values in the Central Business District of Cairns were still depressed.
Land in the "Golden Block" is held by only a few owners and the development comprises mainly older-style buildings. The redevelopment of the subject land in 1991 was the first new development for many years. It is the only property with more than single-level retailing. The redevelopment cost approximately $20.8 million.
Sales in and around the "Golden Block"
There was only one sale of land in the "Golden Block" in the 12-month period prior to the date of valuation. On 19 September 1991, land described as Lots 407 to 411 and Lot 427 on Plan C1981 and Lot 2 on Registered Plan 709874, Parish of Cairns, containing an area of 4,037 square metres, was sold by the AMP Society Limited to Chorley Properties Pty Ltd for
$6,400,000. That property adjoins the subject land to the north and is also a through-block, with a frontage of 60 metres to Abbott Street and a frontage of 20 metres to Lake Street. It has the same zoning as the subject land and is developed with a ground level retail supermarket and associated loading dock and storage facilities, and some administration and plant room space on a small first floor section. It is leased to Woolworths (Queensland) Limited on a long-term lease. Throughout the hearings in the Land Court and before us that property was variously known as "the Woolworths' property" or "the Woolworths' sale".
There were various other sales in the surrounding commercial and fringe commercial areas. However, it was common ground that those sales were not directly comparable to the properties in the "Golden Block".
In the Land Court and before us, evidence for the appellants was given by Mr TJ Gould, a registered valuer and director of the firm Baillieu Knight Frank. Evidence for the respondent was given by Mr Goodman-Jones.
For reasons which he explained in the Court below, Mr Gould relied almost entirely upon his analysis of the Woolworths' sale as his basis for assessing the unimproved value of the subject land at $4 million. Mr Gould reasoned that it would cost in the vicinity of $3,150,000 to replace a single-storey retail structure of the size of the Woolworths' building as at the date of sale. Despite its age, Mr Gould considered the building to be sound and he assessed the added value of existing improvements at $1,100,000, leaving an unimproved land value component of
$5,300,000, or $1,313 per square metre. Despite the differences in area and shape, Mr Gould concluded that the pro-rata values of the two properties were equal and he applied the analysed rate of $1,313 per square metre to the 3,054 square metres of the subject land, arriving at a rounded valuation of $4 million.
Mr Goodman-Jones took a different approach. He rejected the Woolworths' sale as providing a reliable basis of valuation for two reasons.
First, the property was the subject of a 40-year lease to Woolworths which commenced in December 1969. Therefore, at the time of sale, it still had some 18 years to run.
Second, the annual rent is a "variable rent" based on 3% of gross sales, above a base rent of $105,133.
Mr Goodman-Jones reasoned that, because it was subject to a long-term lease with rent tied to turnover which could fluctuate from year to year, the sale provided no basis for the assessment of the unimproved value of the subject land. He therefore had regard to six sales in the fringe commercial area which had occurred between September 1991 and April 1992. From the evidence derived from those sales he concluded that the unimproved values of properties in the fringe area had fallen by 15-25% since the last valuation of the area made as at 31 March 1991. The closest of the six to the "Golden Block", the so-called "TAB site", had fallen by 15%. He therefore applied that percentage reduction to valuations in to the "Golden Block". Accordingly, he reduced the unimproved value of the subject land from $7,500,000 to
$6,400,000.
The judgment of the Land Court
The learned Member below came to the conclusion that the appeal must stand or fall on the use of the Woolworths' sale as a basis of valuation. He accepted Mr Goodman-Jones' reasoning concerning that sale and found that there were unusual circumstances about the lease. As at the date of sale the lease had 18 years to run and the rent was based on turnover. The rent had already fluctuated markedly upwards in favour of the lessor between the date of purchase and the date of hearing, although that was due in part to the refurbishment by Woolworths since the sale.
The learned Member accepted that the value of the property could not vary from year to year as the turnover varied. He was concerned that the use of just one comparable sale could
result in a reduction of the valuation of the subject land by 46% in one year. While accepting that the Woolworths' land was comparable, he rejected the sale as a basis for the abovementioned reasons. He added:
"In circumstances like this, when there is only one strictly comparable sale, it
might well be worth checking the level of unimproved value (as at a specific relevant date) by capitalising rental returns (and deducting the value of the leased improvements) for properties in the 'Golden Block' other than Woolworths, this notwithstanding the recognised difficulties in using such a method of valuation. "
Mr Goodman-Jones' relativity exercise
Mr Goodman-Jones' six sales included two parcels of vacant land. The first, zoned "Main Business and Shopping" with an area of 1,017 square metres, was situated in Sheridan Street, some 1,100 metres west of the subject land. It was sold in September 1991, for $280,000. However, apart from showing a decrease in value from the previously applied unimproved value of $310,000, it is difficult to see how the sale of that much smaller and remote site is of any assistance in determining the valuation of the subject land.
The second unimproved sale is the "Tuna Lodge" site on The Esplanade, zoned "R2 Multi Unit" and situated some 700 metres north of the subject land. That property of 4,592 square metres, sold in April 1992, for $3,750,000. Although not directly comparable, Mr Goodman-Jones emphasised the inferiority of that site when compared with the subject land, because of its inferior zoning and less favourable location. He stated that the land is in "DCP 3", which provides for a plot ratio of 1.75:1 and a minimum area of 2,000 square metres for a building the total height of which is not to exceed six storeys and 18 metres.
Mr Goodman-Jones also attempted to justify his valuation by referring to the unimproved values applied to two properties in the "Golden Block" and to one on The Esplanade. However, in our view, his relativity comparisons with the Woolworths' property, which had an unimproved value of $8,800,000, and to the Boland Centre at $4,900,000, do no more than indicate the comparative values applied within the "Golden Block" itself. If those values were determined on an unsound basis then they provide no support for determining the relative value of the subject land. The force of his argument was somewhat reduced when he had to concede an error in the calculation of the valuation of the Boland Centre land, adjusting it to $5,100,000.
The other relativity comparison was with the Lyons property on The Esplanade. It has an area of 4,048 square metres, is zoned "Main Business and Shopping" and at the relevant date had an unimproved value of $5 million. Mr Goodman-Jones explained that his relativity exercise was designed to indicate that, if the relativity between the sale of the Lyons site in August 1987 for $5,750,000 and the sale of 1,012 square metres of the subject land to the present appellant in May 1987 for $2.6 million was maintained, the subject land would be valued at $2.8 million.
The relativity exercise may have been of some comfort to Mr Goodman-Jones in reasoning the relative valuations applied to various parcels of land in the City, but for the purposes of determining this appeal, we found it to be of no assistance.
Mr Gould's sales analyses
Before us, the parties elected to rely on the record of the proceedings in the Land Court and to adduce further evidence. Mr Gould produced analyses of four sales of properties known as the City Place Arcade, Hides Hotel/Motel, the Reef Plaza and the TAB Building.
The City Place Arcade is situated in the city block to the north-west of the "Golden Block", with a frontage to Lake Street. It sold for $1.3 million in November 1992. Mr Gould analysed the sale to show the value of improvements exceeding the sale price by $39,211.
The Reef Plaza is situated in the city block to the east of the subject land, on the corner of Spence and Grafton Streets. The property sold in August 1993, for $9,800,000 and Mr Gould analysed that sale to show the value of improvements exceeding the sale price by $3,401,410.
The Hides Hotel/Motel property sold in September 1993, for $3,250,000 and Mr Gould's analysis of that sale resulted in an unimproved value of $950,000. However, he conceded in cross-examination that it was not a true reflection of the unimproved value of that land.
The fourth sale produced by Mr Gould was that of the TAB Building in October 1991, for $525,000. His analysis of that sale resulted in an unimproved value of $250,000. If he made an allowance for a rental guarantee of $8,800, his analysis resulted in an unimproved value of
$240,000. Mr Goodman-Jones had also analysed that sale to show an unimproved value of
$355,000. He had applied an unimproved value of $345,000 as at 31 March 1992. We shall return to this analysis later.
As a check on the unimproved value derived from that sale, Mr Gould had undertaken a hypothetical development of the TAB site. This exercise purported to capitalise an annual net income of $66,775 at 8% from a notional building on that site, arriving at an improved value of
$835,000. From this he deducted the cost of developing the site with such a building, which he costed at $395,000, arriving at an unimproved value of $240,000.
In undertaking the analyses of all four sales, Mr Gould valued the improvements on each of them on the basis of their replacement cost less depreciation. That method resulted in the negative unimproved values for the City Place Arcade and the Reef Plaza sales. Such results are clearly not in accordance with the correct principles of valuation.
In O'Brien Nominees v. The Valuer-General (1979) 6 QLCR 280, the Land Appeal Court considered the principles that must be applied if the analysis of a sale results in a negative or a nominal unimproved value. The Court held that in such circumstances, it is unrealistic to conclude that land, the commodity basic to the enterprise, has a minus or nominal value. When economic conditions are depressed a valuer must adopt an added value approach to the valuation
of improvements. Mr Gould admitted that he did not adopt this added value approach, although his analysis of each sale includes the heading "Added Value of Improvements".
By arriving at negative unimproved values for two of the sales, Mr Gould has adopted an incorrect and inappropriate method for the valuation of the improvements upon those lands. He stated that he was aware of that but had adopted the approach to better demonstrate the extent of the fall in the market of such properties. He admitted that he had adopted the same method for the analysis of all four sales. Because that approach is demonstrably flawed, we can have no confidence in his analyses of any of the sales or the conclusions that he draws from them.
Although conceding that the analyses of three of the sales could not be relied upon, Mr Gould purported to check the analysis of the TAB sale by undertaking a hypothetical development of that property. While we would encourage valuers to adopt every reasonable check to ensure that their valuations are correct, the use of the hypothetical development method is fraught with difficulty, as pointed out by this Court on a number of occasions. (See for example Merivale Motel Investments Pty Ltd v. The Brisbane Exposition and South Bank Redevelopment Authority (1984-85) 10 QLCR 268 at 281).
As for the use of the method to ascertain the unimproved value of land for the purposes of the Valuation of Land Act 1944, we endorse the remarks of the learned then President of the Land Court, Mr WFG Smith, in Thomas Nominees Pty Ltd v. Valuer-General (1986-87) 11 QLCR 283 at p. 287:
"In addition to the criticisms made by the Land Appeal Court it seems to me that
when ascertaining unimproved value for the purposes of the Valuation of Land Act, the hypothetical development method does not give sufficient flexibility to permit the reflection comparatively of appropriate differences between parcels as regards to their respective situations, access, topography, sizes, inherent physical features (poor drainage, etc), other advantages and disadvantages and the environment of their communities. It may be a good test by which to determine the maximum amount that should be paid for land as the basic commodity to sustain a particular development. It appears to be primarily concerned with the generality of ascertaining what amount may be viably expended on the land content of a proposal and is not primarily designed for ascertaining the specific value of a particular piece of land by giving due weight to its various inherent features and the quality of the environment of its community. It is a method where progression to the end result (land value) is more a matter of mathematical progression than the application of a professional valuer's expert judgment as to the weight to be given to inherent component factors relevant to the unimproved value of a specific parcel of land.
Where there are no sales available for comparative purposes, the method of hypothetical development may assume greater importance as a guide to unimproved value but I strongly doubt, as a general rule, that it should be preferred to evidence of comparable sales in matters arising under the Valuation of Land Act. "
In this case, however, we are of the opinion that the method is of no assistance even as a support for Mr Gould's primary method of valuation, as that primary method itself was incorrect. We can have no confidence in an unimproved value which is ascertained by an incorrect method and checked by such a notoriously unreliable method.
Other approaches of Mr Goodman-Jones
In addition to his evidence about the Woolworths' sale (discussed later in this judgment), Mr Goodman-Jones gave evidence of a valuation exercise which he had carried out based on the capitalisation of the rentals for the Katies property of 1,100 square metres, situated in the "Golden Block", on the corner of Abbott and Shields Streets. He explained that he had undertaken that exercise because of the suggestion in the judgment of the learned Member below that the unimproved value might be checked by that method. He capitalised the gross income, after allowing for outgoings, at 8.5%, arriving at an improved value of $6.5 million. He then deducted the value of the existing improvements, arriving at an unimproved value of $5,396,590. However, as at 31 March 1992, he had applied an unimproved value of $3,500,000 to the Katies property.
The capitalisation exercise was undertaken presumably to support the valuation which had been applied to that land. While the capitalisation of net rentals is undoubtedly a recognised method of valuation to arrive at the value of an improved property, we have some doubts about its use to ascertain an unimproved value. It can only be relied upon when certain steps are taken. First, it is necessary to arrive at the correct improved value. That involves three basic assumptions: that the present use of the land is its highest and best use, that the rent paid is market rent, and that the capitalisation rate is appropriate. These matters can only be ascertained
by investigation and analysis of appropriate sales.
Second, the improvements must be valued precisely. That involves the problem discussed previously of arriving at an appropriate added value of improvements, particularly in a falling market. Commercial properties are usually highly developed, which increases the difficulty of accurately assessing the value of those improvements.
Even if the first and second obstacles are overcome, a third difficulty arises. The proviso in s.3(2) of the Valuation of Land Act 1944, provides that the unimproved value of improved land shall not be less than the sum that would be obtained by deducting the value of improvements from the improved value. Mr Goodman-Jones clearly fell at that hurdle. His exercise showed what should be the minimum unimproved value for the Katies site and yet, at the relevant date, he had applied a valuation almost $2 million less. Indeed, Mr Goodman-Jones recognised his difficulty. In answer to a question from the Bench, he expressed doubt about the accuracy of the result achieved by the capitalisation method.
In an effort to further support his valuation, Mr Goodman-Jones produced a schedule of sales of land within the "Golden Block" and one sale fronting it on the other side of Lake Street. These were additional to the six sales relied upon in the Court below and ranged in date from May 1987 to September 1989 (Sales 7 to 10) and May 1994 (Sale 11). Following an objection on the grounds of relevance by counsel for the appellant, the schedule of sales was admitted only on the bases that it indicated, first, that the relativity of valuations made by the Valuer-General since 1987 was supported by sales and, second, that the relativity had not changed since then.
However, apart from demonstrating that the earlier valuations may have been soundly based and that there have been no significant changes to the relativity of unimproved values (as distinct from the level of values) in the "Golden Block" since 1987, the additional evidence adduced by Mr Goodman-Jones does not advance the present matter beyond the findings of the learned Member below in relation to the sales evidence.
The Woolworths' sale
The major point in the appeal is, as it was in the Land Court, whether the Woolworths' sale can be relied upon as a basis for ascertaining the unimproved value of the subject land as at 31 March 1992.
Prima facie, the sale would appear to be a suitable basis of valuation. It is situated in the "Golden Block", it adjoins the subject land, it has frontages to both streets and, apart from its area and shape, it is directly comparable. Furthermore, it was sold by the AMP Society, one of Australia's largest property owners, to Chorley Properties Pty Ltd, which also owns property leased by Woolworths in the Brisbane suburb of Paddington.
The property sold on 19 September 1991, for $6,400,000, and was subject to a lease to Woolworths (Queensland) Limited, which commenced on 23 December 1969 and had just over 18 years to run. Under the terms of the lease, the rent is effectively 3% of gross sales in excess of a base rental of $105,133. At the time of sale, the rent was based on an annual turnover of $19 million which, at the date of the hearing in the Court below, had increased to $30 million.
An investment report sent to potential purchasers prior to the sale, indicated a net income of around $570,000, which on the ultimate sale price of $6,400,000, would show a return of 8.9%. According to Mr Gould's evidence, enquiries by the purchaser had indicated a growth of turnover of about 12% per annum, which at the date of purchase represented a return closer to 9.8%, which Mr Gould considered to be within the appropriate market range.
Before us, as in the Court below, Mr Gould said that he regarded the balance of the lease of 18 years to be a benefit rather than a detriment. He reasoned that the annual rent was tied to turnover and, historically, Woolworths had been showing growth. He thought that there were prospects for good rental growth. He expressed the view that the highest and best use of the land was as it was used. He could see no likely prospects for redevelopment of the site in the
foreseeable future. He thought that the sale was the best indication of what the market was doing at the time.
Mr Gould had made enquiries as to the reason that the AMP Society had sold the land. He said that its Property Manager had told him that, in order to release funds for refurbishment and extension of some of AMP's regional shopping centres, those properties which were valued at less than $10 million nationwide were to be sold. There was no suggestion that it was a forced sale or that AMP was an over-anxious vendor. Mr Gould contended that he could find no evidence that it was not a true test of the market at the time.
That evidence by Mr Gould would have been far more convincing if he had not jointly signed a valuation of the subject land made as at 1 May 1992, for mortgage security purposes. At p.21 of that report appears the following statement in relation to the Woolworths' sale:
"The property is currently occupied by Woolworths on a 40 year lease from 1969
with the lessee responsible for all operating expenses and maintenance. Rental for the twelve months to January 1991 was believed to be $570,296.
We concluded that the terms of the lease inhibit an effective market rental review and we consider that the long-term nature of the lease to, therefore, encumber the value of the property. "
Mr Gould tried to defend that statement by saying that the report was in respect of the improved valuation of the property which had no bearing on its unimproved value. The Woolworths' sale was not comparable because the price was so much less than the improved value of the subject land that they were, as he put it, "different slices of the market".
When questioned about the statement that he considered that the long-term lease encumbered the value of the Woolworths' property, Mr Gould denied that he had formed an opinion about the sale at the time. He said that someone else had undertaken the research which he did not personally check. He did not think it was critical that he did so, because the report had stated that the sale was not comparable for the purposes of that valuation. However, it was only later when he was considering the unimproved value of the property, that he felt that the circumstances surrounding the sale became quite important. It was then that he conducted detailed investigations and obtained copies of the lease document and spoke to the parties.
Mr Gould went further, making two remarkable admissions. First, he said that the comments made about the sale were those of another valuer in a report which he countersigned without carrying out a thorough investigation of the sales. Second, he admitted that, if he had applied the Woolworths' sale in his valuation for mortgage purposes in May 1992, the valuation would have been lower.
We turn now to consider the evidence for the respondent.
In giving evidence for the respondent, Mr Goodman-Jones adhered to the opinion which he expressed in the Court below, that the Woolworths sale is not reliable evidence of the market
value of land in the "Golden Block". He repeated that the principal reasons for rejecting the sale were that the rent was based on turnover and the lease had an unexpired term of 18 years, which would prevent the owner from undertaking any redevelopment of the site for that period without incurring expensive payouts.
Before us he advanced the additional reason that the rent is not market rent. This was completely contrary to what he had said in the Land Court. He said that he came to his present view during the proceedings in the Land Court and had investigated it later. He felt the reason the rent was not market rent was that the present use of the Woolworths' site was not its highest and best use.
In rejecting the Woolworths' sale, Mr Goodman-Jones emphasised that in his opinion it was inconsistent with other evidence, particularly the sale of the Tuna Lodge site. Of all his sales, he seemed to feel that the Tuna Lodge sale best demonstrated the error of the valuation of
$4 million contended for the subject land by Mr Gould. The Tuna Lodge land sold as a vacant site in April 1992, for $3.75 million and as at 31 March 1992, an unimproved value of $3.7 million had been applied. As noted earlier, the site has an area of 4,592 square metres, is zoned "R2 Multi Unit" and is, in Mr Goodman-Jones' opinion, inferior to the subject land in situation, in zoning, in plot ratio and in potential.
Mr Goodman-Jones gave further evidence of his discussion on 29 June 1992, with Mr Jeremy Apthed, the valuer for the AMP Society, concerning the setting of the reserve price for the sale of the Woolworths' property. The details are set out in the judgment of the learned Member below, but essentially the reserve was set by capitalising the known returns for the remaining period of the lease, to which was added the value of the reversion, which had been assessed at the present value of the land deferred for the remaining period of the lease at 10%.
Mr Goodman-Jones expressed the opinion that the valuer would only have adopted that approach if he was of the opinion that the rent paid by Woolworths was not market rent. He did not know if the purchaser was aware of the reserve before entering into the contract to purchase the property.
Mr Goodman-Jones contended that the highest and best use of the Woolworths' property, if unencumbered by a long-term lease, was for retail specialty shopping, proposing development of the two street frontages, together with an arcade connecting Lake and Abbott Streets. An arcade would, in his opinion, result in the loss of 20% of the site area. He calculated that a conservative base rental for the remaining 80%, or 3,230 square metres, as at March 1992, would be:
Abbott Street frontage
1600m2 @ $650 per sq. metre
= $1,040,000
Lake Street frontage 800m2 @ $700 per sq. metre = $ 560,000 Inside arcade
TOTAL
818m2 @ $450 per sq. metre = $ 368,100
$1,968,000
Adopt $2,000,000
Mr Goodman-Jones went on to say that the site could be developed on the basis of its plot ratio of 4:1 and a four storey building constructed. The first floor would be office/retail and the upper floors might be offices or accommodation units. However, he provided no estimates of the returns that might be achieved from such development beyond that for the ground floor retail area. He had made no estimate of the cost of such development.
Mr Goodman-Jones' evidence was designed to demonstrate that the rent being received from the present use of the site was not the optimum rent which the site could generate. Therefore, he reasoned, the single occupier retail use by Woolworths was not the highest and best use since it did not provide the best return.
Mr Goodman-Jones admitted that there were three options for developing the site:
development of the whole site as at present;
demolishing the existing structure and selling off each of the seven separately surveyed parcels; or
retaining the shell of the existing building and developing the street frontages and an arcade as described above. (It seems that there would be savings in carparking contributions if the shell of the building was retained.)
However, apart from his preferred option, Mr Goodman-Jones did not calculate the returns obtainable or the cost of developing any of them. He said that he did not attempt a hypothetical development exercise, as he was simply attempting to demonstrate the gross rent that could be achieved with an alternative development. However, in our opinion until a cost- benefit analysis for developing the site was undertaken and compared with similar exercises in respect of the other alternatives, no firm conclusion can be arrived at as to the highest and best use of the Woolworths' site.
Mr Gould maintained his view that the present use of the Woolworths' site was its highest and best use. While he thought that an arcade development would result in the loss of 55% of gross lettable area, he did not disagree with the rents per square metre contended for by Mr Goodman-Jones.
We are unable to accept the evidence of either valuer in relation to the Woolworths sale. The valuation of 1 May 1992, which Mr Gould countersigned, cannot stand with his evidence before us. He did not abandon that valuation before us. In our opinion, Mr Gould was endeavouring "to have his cake and eat it too" by adopting a different approach in the present case. On the other hand, we are far from satisfied with the evidence given by Mr Goodman- Jones. He stated that the reason that the rent for the Woolworths' site is not market rent is that the land is not used for its highest and best use. However, he has not been able to demonstrate to our satisfaction that there is a higher and better use for that land. In the Land Court he accepted that the rent was market rent. We have been left with the impression that his later opinions were
formulated to fit his ultimate conclusion, rather than being based on objective evidence.
Conclusions regarding the Woolworths’ sale
We have come to the conclusion that the Woolworths' sale should not be relied upon as a basis for the unimproved value of the subject land. Mr Gould has failed to convince us that the rent received is market rent. Two other valuers held contrary opinions. The method used by Mr Apthed, the valuer for the AMP, to calculate the reserve price indicated that he was not satisfied that the rent based on turnover was market rent; and there is the statement by Mr Gould's co- signatory to the valuation of 1 May 1992, Mr Baden Mulcahy, that the long-term lease inhibited the market rent. Finally, there is Mr Gould's own opinion in the same valuation.
In our view, there may well be other explanations why a prudent purchaser would be wary of the long term lease. While rent based on turnover may have been satisfactory at the time of purchase and may well have been proved satisfactory in the months and years to come, there is some evidence that there was doubt as to the longer term future of the Woolworths' turnover. There was evidence of the movement of local shopping away from the Central Business District to regional shopping centres, particularly in respect of supermarkets. The CBD in Cairns was rapidly becoming a tourist oriented area and the effects of the pilots' strike were fresh in everyone's mind.
There was also the proposed development of the railway area which may well have drawn supermarket traffic away from the CBD.
In our opinion, a prudent purchaser of the Woolworths' site would have had regard to all these possibilities and the fact that Woolworths' lease ran for a further 18 years. While a purchaser would be entitled to the base rental for that period, there was no provision for review. There was no guarantee of anything more than the base rental unless turnover produced a rental in excess of that amount. In such circumstances it would have been surprising if a prudent purchaser had paid full market price for the Woolworths' property at the date.
For these reasons, we reject reliance on the Woolworths’ sale.
Statutory presumption of correctness and onus of proof
Mr TW Quinn, counsel for the respondent, submitted that if the Court found that the Woolworths’ sale was unreliable as a basis of valuation, then the appeal should be dismissed. He argued that it was not necessary to consider the matter further because the valuation was deemed to be correct by virtue of s.33 and s.56(2) of the Act.
Mr Quinn further submitted that an appeal court will not interfere with a question of valuation “unless it can be shown that some item has improperly been made the subject of valuation or excluded therefrom, or that there is some fundamental principle affecting the valuation which renders it unsound”: Re Golden Bread, Queensland Co-op Milling Association
v. Hutchinson (1977) QdR 44 at 65B, referring to The Commonwealth v. Reeve (1949) 78 CLR 410 at 423.
We reject this further submission. In our view, Golden Bread has no application to a situation where this Court is dealing with an appeal after hearing further evidence from valuers. Whether such an approach would be appropriate in this Court (constituted as it is) in an appeal on the record in the Land Court we need not here decide. In the present case, the proper starting point is the statute.
Section 33 reads as follows:
“Any and every valuation, or alteration to the valuation, of any land made, or purporting to be made, under this Act by the Chief Executive shall be deemed to be correct until proved otherwise upon objection or appeal or until altered or further altered.”
In Brisbane City Council v. The Valuer-General for the State of Queensland (1978) 140 CLR 41 at pp.56-57, the High Court considered the provisions of the predecessor to s.33 (s.13(7)) of the Act. Gibbs J (as he then was). with whom the other members of the Court agreed, said:
“In my opinion once it is shown that in making the valuation the Valuer-General acted upon a wrong principle, or made a serious error of fact, the presumption created by section 13(7) is rebutted ... In my opinion once it is shown that a valuation was made by a method fundamentally erroneous the presumption is rebutted.”
Mr D Fraser QC for the appellant relied on that passage. He argued that the appellant can rebut the presumption created by s.33 by establishing any of the following:
that the Chief Executive acted upon a wrong principle;
that the Chief Executive made a serious error of fact by adopting incorrect costs of improvements in his analysis of the TAB sale;
that the valuation was made by a method fundamentally erroneous.
With respect to Mr Fraser’s first argument, we have already found that the respondent was correct in ignoring the Woolworths’ sale. Therefore we cannot find that the Chief Executive acted upon a wrong principle.
In advancing his third argument, Mr Fraser relied upon a contention that the Chief Executive valued the subject land by direct comparison with the TAB sale which resulted in a change in relativity (1990-1991-1992) which was not supported by any sales evidence or logic.
In our opinion, that contention is not shown on the evidence to be correct. We are not satisfied that the Chief Executive’s 1992 annual valuation was made by direct comparison. Mr Goodman-Jones said on a number of occasions that the fringe sales showed reductions of between 15% and 25% from the previous valuation made as at 31 March 1991 and that he
adopted a reduction of 15% because that was the percentage shown by the TAB sale which was geographically closest to the “Golden Block”.
It seems to us that Mr Goodman-Jones made no attempt at direct comparison between the sales and the subject land, but reasoned that since the sales showed a trend of reductions between 15% and 25%, he had adopted the upper limit of the trend parameters as shown by the closest sale.
That leaves Mr Fraser’s second argument. It is necessary to examine the evidence in some detail to ascertain if the Chief Executive made a serious error of fact. We note that Mr Fraser did not attack the analysis of the TAB sale by Mr Goodman-Jones on the basis of his adopted depreciation factor, only on his adopted building costs.
The analysis of the TAB sale
In the Court below Mr Gould adopted what amounted to an all or nothing approach, relying virtually entirely on the Woolworths’ sale as the basis for his valuation of $4,000,000. The learned Member, correctly in our opinion, rejected that sale on the evidence before him, as a proper basis for ascertaining the unimproved value of the subject land.
As mentioned previously, each of the parties adduced further evidence before us. Included in Mr Gould’s evidence was his analysis of the TAB sale on a cost less depreciation basis (as distinct from an added value basis), to show an unimproved value of $240,000.
In assessing the value of improvements, Mr Gould adopted a replacement cost for the main structure of the TAB building of $1,090 per m², based on building cost guides published by Rawlinsons and Cordells, backed up by the actual costs of a building situated at 32 Sheraton Street in Cairns (see exhibit 14). He was cross-examined about that exhibit, but it was not suggested to him that either his method or his figures were incorrect.
On the other hand, Mr Goodman-Jones claimed that he based his replacement cost of
$800 per m² for the same building, on what purported to be the costs of construction of three buildings:
a single-storey office building at Edge Hill (a suburb of Cairns) with an area of 888 m²,
constructed in July/August 1992, which showed $773 per m² with air-conditioning and
$688 per m² without;
a two-level building at 51 Mabel Street, Atherton, with an upper office level of 574.8 m² and a lower car-parking level of 400 m², constructed in November 1991, which showed
$646 per m² for the upper office level with air-conditioning and $532 per m² without;
a three-level building with basement car park in Abbott Street in Cairns, completed in July 1990, with a total area of 3,602.76 m² (excluding basement), which showed $860 per m² including air-conditioning and lift and $750 per m² excluding air-conditioning and lift.
In the Court below Mr Goodman-Jones stated in cross-examination that he arrived at the
$800 per m² from the cost he obtained for a smaller, single-level building in Cairns, clearly referring to the Edge Hill building. Before us, however, he said that the $800 per m² was derived from the cost he obtained from the Abbott Street building. When pressed, he said that the Abbott Street building was “the main one”, but that he had (or probably had) the other costs in mind at the time.
Later in cross-examination, Mr Goodman-Jones revealed that he had personally investigated the cost of the Edge Hill building, but had relied on information obtained by other officers regarding the costs of the other two buildings. The source of that information, he said, was a document on the respondent's file. This document became exhibit 28. He referred to this document for the first time in cross-examination, producing it in the witness box. He gave no explanation of why it had not earlier been produced in response to a subpoena issued by the appellant. He maintained that the document was used, at least in part, in his analysis of the improvements on the TAB site. He specifically asserted that the various pages of exhibit 28 had been on the respondent's file since the various dates from 1991 to 1993 when they were first produced.
That evidence was simply not correct. When cross-examined about internal evidence in exhibit 28 which unequivocally demonstrated that his assertions were wrong, Mr Goodman- Jones remembered that he had asked a secretary to retype the various components of the document because "there was some mistakes in the other one". He had done this about a week before the hearing in this Court. He had then destroyed the originals. Curiously, he had then found it necessary to make some handwritten corrections to mistakes in exhibit 28.
We were not invited to draw the conclusion that Mr Goodman-Jones tampered with the evidence nor do we do so. However we are quite unable to place any reliance on this part of his evidence. On the other hand, Mr Gould's evidence on replacement costs was unchallenged in cross-examination. There is no reason to doubt its accuracy. We accept it.
Earlier in this judgment we concluded that Mr Gould’s analysis of the TAB sale was flawed. Once his replacement costs for this building are accepted, it is apparent that his error probably lay in the depreciation rate he adopted. If Mr Goodman-Jones’ depreciation rate of 55% is substituted for Mr Gould’s 35%, the result is as follows:
Sale Price $525,000
Deduct rental guarantee $8,800
$516,200
Less structural improvements -
Main structure 332 m² @ $1,090 per m² = $361,880 Cantilevered awning 42 m² @ $190 per m² = $7,980 Vertical awnings 30 m² @ $145 per m² = $4,350
$374,210
Add holding costs during development period -
Rates 0.75 years $4,445
Land Tax 0.75 years $4,055
$8,500
Interest during construction period -
$382,710
Allow half of 0.5 years @ 10% $9,568
Cost of Structures $392,278
Less depreciation and obsolescence @ 55 % $215,753
$176,525
Add Clearing $500
Added Value of Improvements $177,025
$339,175
Less Interest on Land Costs held for 0.75 years @ 10% $23,663
Unimproved land value $315,512
In our judgment, this is the analysis which the evidence supports. It represents a reduction of 22.1% from the previous valuation of $405,000.
The consequences of the reanalysis of the TAB sale
Mr Goodman-Jones said in the Land Court and before us that he had used the fringe sales to reflect what was happening in the marketplace and those sales had showed decreases from the previous valuations ranging from 15% to 25%. He also said that the TAB sale was an indication of the decrease that should apply to the “Golden Block”. He reasoned that although the sale was not comparable, it was geographically closest to the “Golden Block”.
It seems to us that in making that statement Mr Goodman-Jones really only had regard to four fringe sales, his Sale No. 2 (the TAB building), Sale No. 3 which showed a 25% reduction, Sale No. 4 which showed a 20% reduction, and Sale No. 6 which showed an 18% reduction. His Sale No. 1, which showed a 17.5% reduction, is simply too far away to have any great influence on the subject land and his Sale No. 5 (the Tuna Lodge sale) which did not show any reduction from the previous valuation, was obviously not included in his reasoning of a trend showing reductions of between 15% and 25%.
With the reanalysis of the TAB sale, the situation changes. The reductions now range from 17.5% to 25%. The TAB sale shows a reduction of approximately 22%. If we adopt Mr Goodman-Jones’ reasoning that the TAB sale is the best indicator of the fall in the market of the “Golden Block”, then the valuation of the subject land would be correspondingly lower.
Mr Goodman-Jones’ reasoned that if the unimproved value of the TAB building had fallen by 15% from the date of the last valuation, the same percentage should apply to the subject land. It is reasonable to draw the conclusion that he would have followed the result of the TAB sale as long as it was within the range of reductions shown by the other sales. On the analysis set out above, it is. We think it is appropriate to apply this approach. When our calculated reduction is applied to the subject land it results in an unimproved value of $5,850,000, $550,000 less than applied by Mr Goodman-Jones.
Mr Goodman-Jones erred in fact in adopting $800 per m2. He should have adopted
$1,090 per m2. In other words, his figure should have been 36% higher than it was. By using the incorrect figure, Mr Goodman-Jones arrived at a valuation 9.4% higher than it should have been. In our opinion, the error amounts to a serious error of fact. We recognise that in cases such as this, what constitutes a serious error of fact is a question of degree and judgment, upon which minds may differ. That issue is not to be resolved simply by looking at percentage errors. In the circumstances of the present case, where no confirmatory evidence was available, where the error was integral to the determination of the respondent's valuation and where it was of the magnitude described, we are satisfied the statutory presumption has been rebutted.
We have corrected the error and applied the respondent's method of valuation. No question of onus of proof under s.56(2) of the Act arises.
Expert evidence
We should not part from this appeal without some comment on the valuation evidence given before us. We greatly regret the need to do so. However, we have formed the firm opinion that it is timely to remind those who appear as expert witnesses in the Land Court and in this Court of what the courts expect of such witnesses. This has recently been restated in England by Laddie J in CALA Homes (South) Ltd v Alfred McAlpine Homes East Pty Ltd [1995] FSR 818 at pp 841-4. His Lordship was confronted with an expert witness (a Mr Goodall - an architect as it happened) who gave evidence in accordance with an article which he had published some years earlier in which he had written:
"...the man who works the Three Card Trick is not cheating, nor does he incur
any moral opprobrium, when he uses his sleight of hand to deceive the eye of the innocent rustic and to deny him the information he needs for a correct appraisal of what has gone on. The rustic does not have to join in: but if he chooses to, he is 'fair game'.
If by an analogous 'sleight of mind' an expert witness is so able to present the
data that they seem to suggest an interpretation favourable to the side instructing him, that is, it seems to me, within the rules of our particular game, even if it means playing down or omitting some material consideration. 'Celatio veri' is, as the maxim has it, 'suggestio falsi', and concealing what is true does indeed suggest what is false; but it is no more than a suggestion, just as the Three Card Trick was only a suggestion about the data, not an outright misrepresentation of them."
Laddie J said this:
“The whole basis of Mr Goodall's approach to the drafting of an expert's report is wrong. The function of a court of law is to discover the truth relating to the issues before it. In doing that it has to assess the evidence adduced by the parties. The judge is not a rustic who has chosen to play a game of Three Card Trick. He is not fair game. Nor is the truth. That some witnesses of fact, driven by a desire to achieve a particular outcome to the litigation, feel it necessary to sacrifice truth in pursuit of victory is a fact of life. The court tries to discover it when it happens. But in the case of expert witnesses the court is likely to lower its guard. Of course the court will be aware that a party is likely to choose as its expert someone whose view is most sympathetic to its position. Subject to that caveat, the court is likely to assume that the expert witness is more interested in being honest and right than in ensuring that one side or another wins. An expert should not consider that it is his job to stand shoulder to shoulder through thick and thin with the side which is paying his bill. "Pragmatic flexibility" as used by Mr Goodall is a euphemism for "misleading selectivity". According to this approach the flexibility will give place to something closer to the true and balanced view of the expert only when he is being cross-examined and is faced with the possibility of being "found out". The reality, of course, will be somewhat different. An expert who has committed himself in writing to a report which is selectively misleading may feel obliged to stick to the views he expressed there when he is cross-examined. Most witnesses would not be prepared to admit at the beginning of cross-examination, as Mr Goodall effectively did that he was approaching the drafting of his report as a partisan hired gun. The result is that the expert's report and then his oral evidence will be contaminated by this attempted sleight of mind. This deprives the evidence of much of its value. I would like to think that in most cases cross-examination exposes the bias. Where there is no cross-examination, the court is clearly at much greater risk of being misled.
In view of the above, it is relevant to remind those concerned with the preparation of experts' reports of some of what Cresswell J. said in The Ikarian Reefer [1993] FSR 563 at p 565:
'The duties and responsibilities of expert witnesses in civil cases include the following:
1. Expert evidence presented to the court should be, and should be seen to be, the independent product of the expert uninfluenced as to form or content by the exigencies of litigation: Whitehouse v. Jordan [1981] 1
WLR 246 at 256, per Lord Wilberforce.
2. An expert witness should provide independent assistance to the court by way of objective, unbiased opinion in relation to matters within his expertise: Polivitte Ltd v. Commercial Union Assurance Co. Plc [1987] 1 Lloyd's Rep 379 at 386, Garland J. and Re J. [1990] FCR. 193, Cazalet J. An expert witness in the High Court should never assume the role of an advocate.
3. An expert witness should state the facts or assumptions upon which his opinion is based. He should not omit to consider material facts which could detract from his concluded opinion (Re J., supra).'
It is clear that in saying that, Cresswell J. had just as much in mind the expert's report as the evidence given orally at trial."
Order
The appeal is allowed and the unimproved value of the subject land as at 31 March 1992
is determined at Five Million Eight Hundred and Fifty Thousand Dollars ($5,850,000).
(Signed Fryberg J) Judge of the Supreme Court
(Signed JJ Trickett) President of the Land Court
(Signed GJ Neate) Member of the Land Court
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