Isabella Dit Pty Limited v Lee Wharf Developments Pty Limited

[2014] NSWCATCD 224

Civil and Administrative Tribunal

New South Wales

Medium Neutral Citation:	Isabella DIT Pty Limited v Lee Wharf Developments Pty Limited and Anor [2014] NSWCATCD 224
Hearing dates:	14 February 2014 and 9 May 2014
Decision date:	19 November 2014
Jurisdiction:	Consumer and Commercial Division
Before:	J A Ringrose, General Member
Decision:	The application to allocate unit entitlements is dismissed pursuant to s 185(3) of the Act. Each party is to bear their own costs of the application.
Catchwords:	Re-allocation of unit entitlement
Legislation Cited:	Strata Schemes Management Act 1996 ss 149 and 183
Cases Cited:	Spencer v Commonwealth (1907) 5 CLR 418 Challenger Property Asset Management Pty Limited v Stonnington City Council (2011) 34 VR 445 Owners Corporation Strata Plan 73959 v Sweid (2010) NSWCTTT 468 Fenton Nominees Pty Ltd v The Valuer General (1981) 27SASR 258 Penhall v Valuer General (1976) 1 NSWLR 628 at 632 Arnotts v Trade Practises Commission (1990) 24 FCR 313 at 351-352 Western Australian Planning Commission v Arcass Shop Fitters Pty Ltd (2003) WASCA 295 Maikita (Aust) Pty Ltd v Sprowles (2001) 52NSWLR 705 at 729 Riana Pty Ltd v The Owners Strata Plan 22336 (2007) NSWSC 1033 Anderson Stewart and Ors v Treleaven and Anor (2000) NSWSC 283 Sahada v The Owners Strata Plan 62022 (2014) NSWCA 208
Category:	Principal judgment
Parties:	Isabella DIT Pty Limited (applicant) The Owners SP 80988 (first respondent) Hunter Development Corporation (second respondent) Lee Wharf Developments Pty Limited (third respondent)
Representation:	Counsel: Mr J Knackstredt for the applicant Mr D Knoll for the third respondent Solicitors: Cantle Carmichael for the applicant Macdonald Johnson for the third respondent Spark Hellmore for the first respondent
File Number(s):	SCS 13/39543
Publication restriction:	Nil

reasons for decision

BACKGROUND

1. Strata Plan 80988 comprises five retail or commercial Lots situated at 19 Honeysuckle Drive, Newcastle. The property is located on the northern side of Honeysuckle Drive at its intersection with Worth Place with the northern section being approximately 10 metres from the shores of Newcastle Harbour. The property is 1.5kms west of Newcastle GPO and 2 kms from Newcastle beach. It is approximately 300 metres from rail and bus transport.

2. The property currently forms the ground floor of an integrated development on Newcastle foreshore which has been developed over approximately 15 years with a number of high rise apartment buildings, ground floor retail and commercial suites and a renovated historical building.

3. To the east of the property is the Lee Wharf Development which comprises separate apartment buildings with ground floor retail. This also forms part of the Honeysuckle re-development precinct.

4. The Units erected on the property comprise Units 1 to 3 which face generally east while Unit 4 is a corner Unit with east and west elevations and Unit 5 is a small Unit at the rear with a south westerly aspect looking over a roundabout.

5. The initial contracts for sale of the Lots were entered into before building works had commenced and before the Strata Plan was registered. Records produced indicate that contracts were initially executed as follows:-

Lot 1 together with three car spaces under an initial contract dated 8 March 2006 at a price of $1,095,000.00.

Lot 2 plus two car spaces under a contract dated 28 March 2006 with a price of $525,000.00.

Lot 3 with 3 car spaces plus one storeroom under a contract dated 12 April 2007 with a contract price of $660,000.00 clear of agent’s commission.

Lot 4 plus two car spaces under a contract dated 8 March 2006 with an initial contract price of $750,000.00

Lot 5 plus one car space with an initial contract dated 14 June 2006 at a price of $260,000.00.

6. Strata Plan 80988 was registered on 28 May 2009 and at that date the commercial units in the complex, although substantially completed, were all vacant. The subject property was slightly removed from the main retail and entertainment areas which then existed around “the Boardwalk”, the Crown Plaza and the Newcastle Regional Museum and Newcastle Maritime Museum. After completion it would appear that this and the adjoining buildings generally remained vacant up until late 2010.

7. The land was owned by the Hunter Development Corporation and it would appear that in about 2003 Lee Wharf Developments Pty Limited entered into an agreement with the Hunter Development Corporation with respect to the development of certain parcels of land owned by the Hunter Development Corporation for the purposes of residential and commercial development.

APPLICATION

8. By an application filed on 25 July 2013 the Applicant, as the owner of Lot 1 in Strata Plan 80988 sought orders:-

1. Pursuant to s 183(1) of the Strata Schemes Management Act an order that the Unit entitlements in Strata Plan 80988 be allocated in accordance with a table submitted with the application.

2. An order pursuant to s 183(6) the Hunter Development Corporation pay the applicant:-

(a) The costs incurred by the applicant on this application including fees and expenses reasonably incurred in obtaining a valuation and the giving of evidence by the valuer.

(b) an amount of $4,537.32 representing overpayments incurred by the applicant due to Hunter Development Corporation’s unreasonable allocation of unit entitlements.

3. Alternative to Order 2 an order pursuant to s 149 of the Act that contributions made by the Lot owners in the Strata Plan from its inception be varied to reflect the proportional contributions set out in a table with the application.

9. The application was accompanied by a valuation report of Skelton Valuers dated 8 August 2012 from a registered valuer Nick Cesta. He provided a valuation as at the date of registration of the Strata Plan namely 28 May 2009.

10. The matter was listed for directions on 10 September 2014 and thereafter a hearing was listed for 14 February 2014 and 9 May 2014.

11. Lee Wharf Developments Pty Limited was joined as an interested party to the proceedings, along with the Owners of Strata Plan 80988 and Hunter Development Corporation. Evidence was provided by or on behalf of the applicant and by or on behalf of Lee Wharf Developments Pty Limited. Submissions were ultimately received from the applicant, Lee Wharf Developments Pty Limited and the Hunter Development Corporation. Final submissions were received from the parties by mid August 2014 but a full copy of the transcript referred to by the parties was not received until mid to late September 2014.

APPLICANT’S SUBMISSIONS

12. The applicant relied upon three statements of Angela Coceancig dated respectively 3 June 2013, 7 February 2014 and 10 February 2014. The last of these statements annexed leases in respect of shops 2, 3 and 4 on the ground floor of 19 Honeysuckle Drive which commenced on 1 December 2010. It was admitted subject to final submissions as to its relevance.

13. The applicant also relied on four statements and/or reports of Nick Cesta, Registered valuer, dated respectively 4 July 2013, 30 October 2013, 30 January 2014 and 6 February 2014. Mr Cesta was required to attend for cross-examination.

14. Angela Coceancig gave evidence that she was the sole Director/Secretary of the applicant, Isabella DIT Pty Limited as trustee for the Conceancig Debt Instalment Trust. She claimed that construction of the building at 19 Honeysuckle Drive was completed round about May or June 2009 and that all five Lots were sold to the purchasers at about the same time in June 2009. She referred to a contract for sale dated 25 June 2009 in favour of the applicant but in cross-examination she conceded that the property had initially been purchased by Ocean Dental Pty Limited (a company in respect of which she was also the sole Director and Secretary) and that a contract for purchase by Ocean Dental was dated 8 March 2006. The contract price of $1,095,000.00 was the same as the contract price referred to in the 2009 contract in favour of the present applicant. She agreed that the first contract was entered into, off the plan, in 2006 and the second was entered into at about the time the building was completed.

15. The fit out of Lot 1 was not completed until about September 2011 but the fit outs of Lots 2, 3, 4 and 5 took place during the period from about June 2009 to September 2011.

16. Ms Coceancig attached schedules of payments made by the applicant for all levies from the date of completion in June 2009 to date as well as tax invoices for various expenses incurred. She also annexed copies of correspondence between her lawyers Cantle Carmichael Lawyers and the solicitors for Hunter Development Corporation between 3 July 2009 and 10 May 2010 requesting a copy of the Valuation of Strata Entitlements that was used to allocate the existing unit entitlements for the Strata Plan.

17. She claimed that on 15 April 2010 she was provided by the Strata Manager of Strata Plan 80988 with a document entitled “Schedule of Unit Entitlements”. She claimed that the document did not disclose the underlying basis upon which the unit entitlements were calculated.

18. At the time of registration of the Strata Plan on 25 May 2009 the unit entitlements were designated as follows:

Lot 1 - 324

Lot 2 - 171

Lot 3 - 221

Lot 4 - 200

Lot 5 - 84

Total unit entitlement - 1,000

The basis upon which the unit entitlements had been calculated was not evident from the material which was made available to the applicant.

19. In his initial report, Mr Cesta considered the relative building areas of Lots 1-5 to be as follows:-

Lot	Internal area m2	Outdor area m2	Total are m2	Car space storage m2
1	178	91	269	44
2	96.5	64.5	160	29
3	112.2	150.8	263	70
4	119.2	38.4	158	33
5	54	nil	54	15

20. 20 In assessing the sales evidence in his first report Mr Cesta referred to the initial purchase price of each Lot but in respect of Lot 3 he referred to a re-sale of that Lot on about 25 June 2009 in which the purchase price was recorded as $885,000.00 plus GST. He also noted a re-sale of Lot 2 on 31 January 2011 for a price of $630,000.00   and a re-sale of Lot 5 on 16 September 2011 for a price of $325,000.00.

21. Mr Cesta also referred to sales at 15 Honeysuckle Drive where four Lots were sold in a period between March and August 2006 and two Lots were sold in August 2009 and June 2010 respectively. He referred to two sales in Honeysuckle Drive on 27 June 2007 and 17 December 2009. A Lot which was purchased on 17 December 2009 was re-sold at a significant profit on 9 September 2011.

22. Based on the information referred to above, Mr Cesta concluded that the following represented an appropriate valuation and unit entitlement for the Lots in Strata Plan 80988:-

Lot 1 - value $1,030,000.00, unit entitlement 306

Lot 2 - value   $575,000.00, unit entitlement 171

Lot 3 - value $840,000.00, unit entitlement 249

Lot 4 - value $655,000.00, unit entitlement 194

Lot 5 - value $270,000.00, unit entitlement 80

Total value $3,370,000.00

Total unit entitlement 1,000.00

23. The valuations were based on an inspection of the property which was undertaken on 31 July 2012 when he was advised that the construction of the property was completed on 25 June 2009. He was later requested to revise his report in light of the fact that the Strata Plan was registered on 28 May 2009 but he indicated that he would not have altered his earlier opinion.

24. In a letter dated 3 October 2013 Mr Cesta noted that he had reviewed the valuation report submitted by the Hunter Development Corporation and noted that it was dated 23 July 2007 and that it had been prepared by Duponts for mortgage finance purposes and for referral to the Commonwealth Bank of Australia. He noted that the valuation methodology was in keeping with the requirements of a hypothetical assessment valuation for mortgage finance purposes and he did not regard it as the usual approach for assessing unit entitlements. He suggested that a direct comparison method using sales which could be analysed as at the date of the registration of the Strata Plan was appropriate. He observed that, in theory, comparative values should not differ greatly between July 2007 and May 2009. However he suggested that he had noted some discrepancies between the original “off the plan sale prices” and subsequent sale prices. He referred in particular to a sale of Lot 2 in January 2011, a sale of Lot 5 in September 2011 and the sale of Lot 3 on 25 June 2009 where the original price was increased from $660,000.00 in May 2007 to $885,000.00 in June 2009.

25. Mr Cesta observed that the transfer of Lot 3 showed that a Director of one of the purchasing companies was also a director of the selling agents, Colliers International. He concluded that, having regard to the registration of the date of the Strata Plan in May, it would be prudent to consider the resale of the property on 25 June 2009 rather than the off the plan sale price 2-3 years earlier.

26. In two further short reports dated 30 January 2014 and 6 February 2014 Mr Cesta addressed matters raised in the report of Mr Dupont dated 28 November 2013 which had been prepared for Lee Wharf Developments Pty Limited. Mr Cesta conceded that the rationale and method adopted by Mr Dupont appeared to be fair and reasonable but he criticised him for disregarding the resale of Unit 3 on 25 June 2009 (referred to as 2008) as being a “one off sale to an out of town purchaser”. He also criticised Mr Dupont for applying an adjusted rate of $4,250.00 per m² for the internal area compared with rates adopted for other units ranging from $4,500.00 to $4,750.00 per m².

27. Mr Cesta also noted “in assessing the values in my assessment I have adopted rates per m² based on the internal Lot areas. This method is a recognised valuation approach, it is considered appropriate method as long as the rates are adjusted to reflect for variation in respect of Lot area, car parking, outdoor areas and any other relevant factors.”

28. In his report dated 6 February 2014 Mr Cesta conceded that a variation between valuers of less than 5% would be expected but for specialised properties which are rarely traded on the open market a variation of 10%-15% would be acceptable, although where comparable sales in the immediate locality were available, the variation should be less than 10%.

29. Mr Knackstredt of Counsel for the applicant submitted that Lot 1 was originally purchased off the plan and was vacant without any fit out at its time of purchase. Other Lots were similarly vacant and lacking any fit out when the Strata Plan was registered. He noted that Hunter Development Corporation was the vendor under the sale contract and was accordingly the “developer” as defined in the Strata Schemes Management Act 1996.

30. He pointed out that during the construction phase Hunter Development Corporation, by its associate, Lee Wharf Developments Pty Limited, applied for construction finance and as part of the process obtained a “mortgage use only” valuation for the then proposed Strata Plan. That valuation was dated 23 July 2007, some two years prior to the registration of the Strata Plan. Mr Knackstredt submitted that Hunter Development Corporation relied upon that valuation for the purposes of allocating unit entitlements within the Strata Plan.

31. Mr Knackstredt submitted that both the experts provided by the parties had given evidence and had conceded that the mortgage evaluation was wrong, although Mr Dupont, on behalf of the third respondent appears to argue that this had only occurred because there were changes to the Strata Plan before it was registered.

32. It was further submitted that one of the pre-sales involved a transaction in which the selling agent (Mr Dodds) sold Unit 3 to a company owned by him in circumstances which allowed him to obtain a “windfall” profit by obtaining the Unit at a substantial discount to market value. The circumstances of this transaction were apparently unknown to Mr Dupont or to Lee Wharf Developments Pty Limited at the time. It was argued that the mortgage valuation and the settling of unit entitlements by reference to pre-sales was infected by Mr Dodd’s below market purchase.

33. Mr Dupont was criticised as not being a truly independent expert as he was, it was submitted, endeavouring to support his valuation conducted in 2007. It was pointed out that Mr Dupont did ultimately concede that his valuation of Lot 3 was too low and that it exceeded the maximum 10% variance which was generally acceptable in valuation evidence.

34. Mr Knackstredt of Counsel referred to the provisions of s 183 of the Act and submitted that there was ample evidence to demonstrate unreasonableness. He summarised these as:-

1. the unit entitlements were allocated on the basis of a mortgage valuation rather than pre-sale prices.

2. the valuation was prepared prior to actual construction and for mortgage purchases only.

To that extent it was based on a hypothetical rather than actual development.

3. it was prepared almost two years before registration of the Strata Plan and was based upon projected rather than actual market data.

4. it did not contain a considered individual assessment of the value of each Lot that ultimately made up the Strata Plan.

5. it was unduly influenced by the pre-sales in the Strata Plan. He submitted accordingly the Tribunal to re-allocate unit entitlements in accordance with the valuation prepared by Mr Cesta.

35. Mr Knackstredt also sought compensation orders pursuant to s 183(6) of the Act claiming that the original allocations were not allocated in accordance with a “valuation” by a registered valuer. He referred to evidence given by Mr Owens and suggested that there were at least three or four other witnesses who could have enlightened the Tribunal as to the process of setting unit entitlements but they were not made available for evidence or cross-examination.

36. It was submitted that the discretion ought to be exercised to make the order for compensation and for expenses.

RESPONDENT’S SUBMISSIONS

37. Evidence was adduced by Lee Wharf Developments Pty Limited which was joined by a respondent, being an interested party. Mr Knoll of Counsel tendered a statement of David Owens dated 12 December 2013 together with a tender bundle, a statement of Peter Dodds dated 12 December 2013 and a report of Mr Dupont dated 28 November 2013. A valuation prepared by Mr Dupont dated 23 July 2007 was annexed to the statement of David Owens and it was referred to as the valuation upon which the unit entitlements were based. It was noted further that the actual sale price of the Lots were those referred to in the valuation report.

38. Mr David Owens was a Director of Lee Wharf Developments Pty Limited and in about 2003 the company entered into an agreement with the Hunter Development Corporation with respect to the development of certain parcels of land owned by Hunter Development Corporation in deposited plan 88374. Lee Wharf Developments Pty Limited carried out construction works required to erect a number of buildings on the land for both residential and commercial purposes.

39. Mr Dodds stated that sale prices for each Lot had been “negotiated off the plan” prior to the preparation of the 2007 valuation and prior to the registration of the Strata Plan. He observed that the value attributed to the Lots within the Strata Plan in 2007 were based upon the valuation of the Lots prepared by Dupont Valuers who he described as experienced, qualified and registered property valuers. He noted further that the unit entitlements were based on the actual sale prices contained in the 2007 valuation.

40. In cross-examination Mr Owens initially suggested that the surveyor may have been responsible for allocating unit entitlements but said that he could not be sure. He agreed that he and others had discussed the process that they would adopt to determine unit entitlement but he did not have any input into the mathematics of it. Upon being asked to outline the process of assessing the valuation further, Mr Owens said that the valuer did the valuation report which the partnership discussed and agreed. The information was then passed on to a surveyor who was preparing the Strata Plans and he did the mathematics on unit entitlements. When questioned Mr Owens was unable to produce any minutes of a meeting at which unit entitlements may have been discussed and set although he claimed that he did try to look for minutes when he was preparing his statement. He conceded that the valuation was prepared by Mr Dupont for Lee Wharf Developments Pty Limited in relation to a proposed mortgage to the Commonwealth Bank of Australia.

37. In further cross-examination Mr Owens conceded that the market valuation figures for the purposes of the schedule of unit entitlement he quoted to the pre-sale prices. The original draft Strata Plan was based on the valuation whereas the ultimate Strata Plan was based on actual sale prices.

38. Mr Owens stated he was not aware that Lot 3 had been sold to a company of which one Director was also the Director of the selling agent Colliers but he knew that Colliers had an interest in the purchase.

39. Mr Peter Dodds gave evidence that he was the Managing Director of Colliers International (Newcastle) Pty Limited and that he was also a Director of a company called Kinnik Pty Limited. He claimed that Colliers was engaged by Lee Wharf Developments Pty Limited to act as its agent with respect to the sale of various properties comprised within the development in Honeysuckle Drive Newcastle. Strata Plan 80988 formed part of that development.

40. Mr Dodds claimed that Lee Wharf Developments Pty Limited formulated a price list for the purposes of a marketing campaign and instructed Colliers to sell the various properties within the development in accordance with the list. In about 2006 Kinnik Pty Limited, together with another company expressed an interest in purchasing Lot 3 within the Strata Plan and the asking price was adjusted by 2.5% to take into account the fact that there would be no agent’s commission in respect to the sale.

41. Mr Dodds stated that in about 2009 he was contacted by a Sydney based developer who stressed a strong desire to acquire a property within the development with a view to opening a chicken shop or food outlet in the development. The companies owning Lot 3 nominated a sum of $885,000.00 as the price they were prepared to accept to sell the property and that price was accepted by the buyer. A sale was completed about a month after the original purchase had settled. Mr Dodds regarded the price as a “premium” in the light of what he perceived to be an unusually keen purchaser with a desire to acquire property on the waterfront within the development.

42. Mr Dodds was cross-examined about the profit made on the sale of the property within one month of the finalisation of purchase and it was suggested to him that he had purchased the Lot for a price which was significantly under value.

43. Mr Dodds was cross-examined further about the letting of the property in December 2010. He acknowledged that the rent received for the property after that time would have amounted to a 12.7% return on the original purchase price of $660,000.00. He agreed that the yields on the adjoining properties, namely Lots 2 and 4 were in the order of 8.6%. In further cross-examination Mr Dobbs agreed that after the initial price list was prepared plans were changed and Lot 3 acquired an extra 30m² of external space, another car park and a storage space. He agreed that it would be unusual for the additional space and the additional facilities to be provided free of charge by a developer but conceded that his company only paid the originally listed price. Mr Dodds then conceded that the situation had resulted in his company obtaining Unit 3 a price which was under value.

44. In his valuation report dated 28 November 2013 Mr Dupont considered the zoning of the area, environmental factors, the area profile and descriptions of the subject properties. He noted that all properties were sold in a “cold shell” state with no internal fixtures or fittings and at the date of valuation they were valued accordingly. He expressed the view that the courtyard areas should be treated in a different manner to internal space as desirability in the open market area would be totally dependent on the surrounding trades or uses. Where the expected use was offices the courtyard areas would add limited value to the building as they would generally have limited commercial potential unless a Restaurant or eating area was proposed. He determined a valuation for the purposes of unit entitlement making few allowances for size, relative position and amenity available to each Lot. He applied a direct comparison with other units, including those in the same block by nominating a rate as a per m² rate.

45. Mr Dupont conceded that this particular development, being at the western end of the site, with a minimal amount of retail/restaurant/entertainment potential, particularly at the date of valuation, would in his view be at the lower end of sales analysed. He noted that the balcony or courtyard areas and car parks were worth considerably less that the actual unit area and he applied a regressive rate of 20-25% for courtyard areas. Mr Dupont allocated $30,000.00 for each car park space and suggested that other areas ought to be adjusted further. He expressed the view that, as Lot 3 had a ratio of outdoor area to internal area of 2 to 4 times higher than the other units, it would require a specific adjustment.

46. Mr Dupont referred to sales and re-sales within the subject Strata Plan together with sales in 2006 of premises at 15 Honeysuckle Drive in two separate Strata Plans. Generally the m² rate varied between $3,634.00 per m² through to $5,987.00. He noted there were very few resales in the period 2006 to 2009 which he described primarily due to the onset of GFC in late 2007. He expressed the view that there would have been little market movement over the period between 2006 and the time of completion in 2009.

47. In determining the valuations Mr Dupont reviewed the internal area, the courtyard area and car or storage spaces and applied a rate per m² to the internal value. The courtyard was then assessed at 25% of that rate and fixed allowances were applied for cars or store rooms. The resultant figures were then rounded to achieve the following results:-

Lot	Car space	Internal area	Total area	Rate per m2	Value $	UE
1	2.75	1.78	269	$4750	1.04m	324
2	1.75	95.5	160	$4500	550,000	171
3	3.50	112.2	263	$4250	710,000	221
4	2.00	119.2	157.6	$4500	640,000	200
5	1.00	54	54	$4500	270,000	84

52. When the actual Lot unit entitlement was compared against the proposed unit entitlement the following resulted:

Lot No.      Actual         Proposed      Variation

1          345          324         -6.09%

2         165         171         +3.64%

3         204         221         +8.33%

4         204         200         -1.96%

5         82         84         +2.44%

53. Mr Dupont compared the unit sale price with the valuation proposed as at 2009 in respect of each Lot. In respect of Lot 1 the actual price was $1,095,000.00 compared with the valuation of $1,040,000.00 representing a decrease of 5%. In respect of Lot 2 the unit sale price was $525,000.00 compared to a valuation in 2009 of $550,000.00 representing an increase in value of 5%. In relation to Lot 3 the sale price was shown as $650,000.00 but should have indicated $660,000.00. The proposed value in 2009 was $710,000.00 representing an increase of 7.6%. The proposed value of Lot 4 in 2009 of $640,000 represented a decrease of 2%. In relation to Lot 5 it was a unit sale price of $260,000.00 compared with a proposed value in 2009 of $270,000.00 representing a difference of 4%. It is to be observed that valuations differed from 2009 but the variations were between 2% and 8% which fell within an acceptable range of up to 10%. He concluded that his current valuations established that the original unit entitlement had been properly determined.

54. He noted that some of the areas had changed slightly and car parking allocations were slightly different, which would have affected the unit entitlement, although he described such changes as minor.

55. Mr Dupont was cross-examined and he conceded that the Lot 3 internal space appeared to be at least comparable, if not better, than Lot 1. He conceded that the figure of $4,250.00 per m² for the internal area should have been higher and that he had changed his mind during the course of cross-examination. Upon reflection he agreed that he would put an allowance of $4,500.00 per m² for the internal area.

56. Mr Dupont then agreed that if he had used an internal m² rate of $4,500.00 he would have added another $28,000.00 to the internal area. So far as the external area was concerned, applying the discount formula to 20%, he would have added another $7,540.00 for the external area which would then represent a total increase of $35,540.00 bringing the correct value to $745,540.00. He conceded that the valuation of that amount would have exceeded the maximum variation of 10% nominated in his report. He conceded further that the resultant figure in excess of $740,000.00 would have been equal in value to the calculation if he had allowed for the additional car park and storage space which was not included on the initial list price in 2006.

57. Mr Knoll of Counsel for the third respondent Lee Wharf Development Pty Limited, submitted that the decision of the High Court in Spencer v Commonwealth (1907) 5 CLR 418 required the Tribunal to ignore circumstances which arose after the date when the Strata Plan was registered. He submitted that the valuation analysis undertaken by Mr Cesta relied heavily on the subsequent sale of Lot 3 at a price of $885,000.00. He pointed out further that Lot 3 was the last Lot to be sold and if the asking price was below market value, and if it was the most attractive of the Lots offered for sale in early 2006, one would have expected that it would have sold very early.

58. It was submitted that the variations in valuation figures were not sufficient to warrant a finding that the allocation of unit entitlements was unreasonable. Mr Knoll referred to a decision of the Victorian Supreme Court in Challenger Property Asset Management Pty Limited v Stonnington City Council (2011) 34 VR 445 where the Court determined that circumstances occurring after the date of valuation could not be taken into account and evidence of subsequent circumstances may only be used if it related to a foresight but could not be used if it merely constituted a hindsight as the amount to be assessed was that which a hypothetical prudent purchaser would entertain if perfectly acquainted with the land at the relevant date.

59. Mr Knoll argued that most, but not all of the evidence relied on by the applicant fell into the category of evidence to be ignored because it sought to demonstrate unreasonableness by reference to matters that were not known and could not have been known when the Strata Plan was lodged for registration.

60. Mr Knoll also submitted that the leases entered into in 2010 could not possibly have been known or foreseen when the Strata Plan was lodged for registration and accordingly they ought to be ignored. He argued that they could not be used as a “sanity check” nor could they be used to demonstrate errors on the part of Mr Dupont such as to warrant a rejection of his evidence.

61. Mr Knoll pointed out that Mr Cesta’s working papers (exhibit ‘H’) showed that the starting point for all his analysis was the subsequent sale of Lot 3 on 25 June 2009, that being a resale which could not have been known to the developer at the time when the Strata Plan was lodged for registration. He also took into account sales of Lot 2 and Lot 5 in the subject property in 2011, along with a sale of Lot 1 at 15 Honeysuckle Drive on 14 August 2009.

62. Mr Knoll argued that, having accepted that the top end of the range for units in the Honeysuckle Developments was $6,000.00 per m² of internal space, Mr Cesta applied a much higher rate of $7,500.00 per m² for Lot 3. He acknowledged that its proximity to the harbour was about the same as Lots 1 and 2 and that Lot 1, like Lot 3, had three car spaces. Mr Cesta had also apparently applied different rates for external areas but did not set those different rates out in his report.

63. Mr Knoll referred to the cross-examination of Mr Dupont where he conceded that if an internal m² rate of $4,500.00 had been used the value of Lot 3 would have been $745,540.00. He submitted that these concessions were made on the basis of incorrect assumptions and that the concessions in cross-examination should be disregarded.

64. Mr Knoll concluded with an observation that it would be necessary for the Tribunal to find that the developer acted irrationally or exceeded the bounds of reason, despite having acted in accordance with the valuation of a qualified valuer in adopting the pre-sale prices as a basis for allocating unit entitlements. He submitted that if Mr Dupont’s values were fair and reasonable in 2007 then the relative worth of the five subject units, when compared to each other was also fair and reasonable.

65. In relation to the question of compensation in accordance with the provisions of s 183(6) of the Act it was submitted that an essential pre-requisite to the making of an Order under that subsection was that the original unit entitlements were not allocated in accordance with the valuation of a qualified valuer. It was argued that, even if the original allocation was unreasonable, the Tribunal could not make an order under s 183(6) if the original allocation was made in accordance with Mr Dupont’s 2007 valuation. The values allocated were generally in line with sale prices and all sales had been exchanged and adopted as the actual prices for the purposes of calculations. Reference was made to a decision of Tribunal Member Borsody in Owners Corporation Strata Plan 73959 v Sweid (2010) NSWCTTT 468 where she held that the original allocation was unreasonable but rejected an application under s 183(6) notwithstanding evidence that a developer had manipulated the valuation for his own purposes.

66. It was submitted that costs of the proceedings could not be included in subsection (6) because costs in relation to proceedings are governed by the provisions of s 192 of the Act. The circumstances under which costs can be recovered are limited by that section although expenses could be awarded. Mr Knoll submitted that following the cross-examination of Ms Cocoeancig, it was clear that her expenses would be limited to a total of $4,945.00. He submitted further that s 149 was simply inapplicable because it related to a decision to be made by an Adjudicator only. The present proceedings came before the Tribunal and not before an Adjudicator. The proceedings did not concern levies, which is the essential factual foundation upon which orders can be made under s 149. Mr Knoll referred again to the decision in Owners Corporation Strata Plan 73595 v Sweid (supra).

67. Submissions were also provided on behalf of the second respondent, Hunter Development Corporation. It was submitted that the material filed by the applicant, together with material in support, did not establish that the initial allocation of unit entitlements did not reflect the respective value of the Lots in the Strata Plan. It was submitted that s183 of the Act did not provide a remedy for a Lot owner who simply disagrees with the initial allocation of unit entitlements and with the valuation of a qualified valuer.

68. The second respondent also opposed any ancillary orders sought in the accordance with s 183(6) noting that the unit entitlements were in fact allocated in accordance with a valuation of a qualified valuer.

DECISION

69. Strata Plan 80988 comprises five retail or commercial Lots representing part of an integrated development of the Newcastle foreshores.

70. The present application has been brought by the owner of Lot 1 but there is no evidence that any of the other Lot owners support the application. Although The Owners Strata Plan 80988 was joined as a respondent to the proceedings there has been no appearance on behalf of the Owners Corporation, nor has it provided any evidence or submissions to address the application. The third respondent, Lee Wharf Developments Pty Limited was joined as an interested party and it has, in essence, conducted the case in opposition to the application.

71. All Lots were “sold off the plan” in 2006 with Lot 3 being the subject of a contract exchanged on 12 April 2007. Strata Plan 80988 was registered on 28 May 2009 and the sale of each of the Lots was completed shortly after the registration of the Strata Plan.

72. The application was accompanied by a valuation report of Skelton Valuers dated 8 August 2012 from a registered valuer, Nick Cesta. He provided a valuation as at the date of registration of the Strata Plan, namely 28 May 2009. Further reports of Mr Cesta were also relied upon and they were dated respectively 4 July 2013, 30 October 2013, 30 January 2014 and 6 February 2014.

73. The third respondent relied upon a report of Mr Robert Dupont dated 28 November 2013. It is noted that Mr Dupont was the valuer who earlier provided a valuation for the developer dated 23 July 2007. Mr Cesta was cross-examined by Mr David Knoll of Counsel for the third respondent whilst Mr Dupont was cross-examined in the proceedings by Mr Joshua Knackstredt on behalf of the applicant.

74. Section 183 of the Strata Schemes Management Act 1996 enables the Tribunal to make an order allocating unit entitlements. The section, so far as it is relevant, provides:-

183 Order for re-allocation of unit entitlements

(1)   The Tribunal may make an order allocating unit entitlements. The Tribunal may make an order allocating unit entitlements among the Lots that are subject to a strata scheme in the manner specified in the order.

(2)   Circumstances in which order may be made. An order may be made only if the Tribunal considers that the allocation of unit entitlements among the Lots;

(a) was unreasonable when the Strata Plan was registered or when a Strata Plan of sub-division was registered or

(b)   … or

(c)   …

(3)   Matters to be taken into consideration

In making a determination under this section the Tribunal is to have regard to the respective values of the Lots and (if a Strata Development contract is in force in relation to the Strata Scheme) to such other matters as the Tribunal considers relevant.

75. Sub-section (4) requires that the application be accompanied by a valuation certificate specifying the valuation at the time of registration or immediately after the change of permitted use of each of the Lots to which the application relates. Sub-section (5) requires the person providing a certificate for purposes of sub-section (4) to be a registered valuer under the Valuers Act 2003 authorised under that Act to make such a valuation.

76. The applicant submitted that the experts provided by both parties had conceded that the initial allocation of unit entitlements amongst the lots was wrong. It was argued that the unit entitlement for the entire development was allocated on the basis of a mortgage valuation prepared by Mr Dupont on 23 July 2007.

77. Mr Knackstredt pointed out that one of the pre-sales related to a transaction involving Lot 3 where the selling agent, Mr Dodds, sold to a company owned by him in circumstances which allowed him to obtain a “windfall profit”. It was submitted that the allocation of unit entitlements by reference to the pre-sales was infected by Mr Dodds below market purchase and that Mr Dupont’s report prepared in 2013 was intended to support his earlier valuation.

78. Mr Knoll, on behalf of the third respondent, submitted that the reports prepared by Mr Cesta on behalf of the applicant should be ignored because they disregarded the principals established by the High Court in Spencer v Commonwealth (1907) 5 CLR 418 where circumstances after the date of valuation were used as a hindsight rather than to confirm a foresight. He submitted that the valuation evidence relied on by the applicant should be ignored because it sought to demonstrate unreasonableness by reference to matters that were not known and could not have been known at the date when the plan was lodged for registration.

79. He argued further that Mr Cesta had accepted $6,000.00 per m² to be the top end of the range for units in the Honeysuckle Developments and that “implausibly” he had adopted a much higher rate of $7,500.00 per m² for Lot 3.

75. Mr Knackstredt, on behalf of the applicant, criticised the evidence of Mr Dupont and submitted that the pre-sale data was completely inappropriate given the changes in the Lot 3 floor plan and the specifications which had occurred between the pre-sale and registration of the Strata Plan. He suggested that Mr Dupont had advocated disregarding an arm’s length transaction entered into by a subsequent purchaser in favour of relying on the pre-sale transaction to a related party. He suggested that Mr Dupont was not a truly independent expert witness as he was someone who had already prepared a valuation in relation to the development and that he was attempting to justify the valuations contained in his mortgage valuation. He pointed out that ultimately Mr Dupont had conceded that his assigned value for the internal area of Lot 3 should have been higher and that this concession detracted from his credibility.

76. The solicitor for the second respondent provided submissions in which he contended that Mr Dupont was an experienced and qualified registered valuer and that the original valuation was disclosed to the applicant. He submitted that the original unit entitlement allocation was prepared in accordance with the valuation of a qualified valuer and accordingly it could not be said the allocation was unreasonable. A table of relative differences between the valuations of the Lot was produced although it is noted that the variations referred to in that table relate to variations in percentage of total valuation rather than variations in the valuation applied by the initial valuer and the valuation of Mr Cesta. Adjusting the percentages to reflect the valuation applied to the percentage range from a decrease of 1.96% in the valuation for Lot 5 and an increase of 21.97% in the valuation for Lot 3. These variations would, on the face of them exceed the expected range when comparing the opinions of the valuers.

77. The detailed submissions of fact and law provided by the legal representatives have all been taken into consideration. It becomes necessary to consider the whole of the evidence of the experts, together with the relevant principals to be applied to an application under s 183.

78. The onus to be borne by a party objecting to a valuation or allocation or unit entitlements has been conveniently stated by Wells J, at first instance, in Fenton Nominees Pty Ltd v The Valuer General (1981) 27 SASR 258:-

“There is no such thing as an ideally correct value for a given piece of land; neither of two valuers may be incorrect in valuing land at a figure that differs from the figure arrived at by the other valuer.”

84. Mr Cesta has elected not to rely on the initial purchase price of Unit 3 in 2009, although he does not question the sale price of the other four Units. Before an actual sale can be disregard there needs to be a sound evidential foundation for asserting that the transaction was not entered into by a willing but not anxious purchaser with a willing but not anxious vendor. Where both the purchaser and vendor act knowledgeably, and prudently without compulsion and at arm’s length, a sale should not be disregarded. See Spencer v Commonwealth (supra). Mere speculation will not suffice. In Penhall v Valuer General (1976) 1NSW LR 628 at 632 Waddell J said:-

“…the price for which the appellant sold the subject land should be taken to be its value unless there is cogent evidence that a proven purchaser at the time would have been prepared to pay more for it.”

It is in this context that the evidence of Mr Dupont must also be considered.

85. Whilst experts often generalise from their experience it is essential that they identify in their report to a Court or Tribunal the factual assumptions and observations to which they are applying their experience. See Arnotts v Trade Practises Commission (1990) 24FCR 313 at 351-352.

86. In Western Australian Planning Commission v Arcass Shop Fitters Pty Ltd (2003) WASCA 295 McLure J (with whom Anderson and Steytler J J agreed) set out relevant principals to be applied by a valuer in relation to comparable sales:-

“…as a matter of principal a valuer using the conventional approach should explain the steps in his reasoning and analysis from his basket of sales evidence to his opinion as to value. The correct principal is, in my view, that the valuer must review as far as possible a process of reasoning actually employed so as to enable the Court to evaluate the evidence and the experts conclusion; Makita (Aust) Pty Ltd v Sprowles (2001) 52NSWLR 705 at 729.”

87. Mr Cesta was cross-examined on his assertion that he had allowed a sum of $7,500.00 per m² for the internal areas of Lot 3 notwithstanding that his range of values otherwise was between $5,000.00 and $6,000.00 per m² in relation to other Units. It is apparent from his working papers which were admitted as exhibit ‘H’ in the proceedings that his starting point for valuing Lot 3 was the subsequent sale of the property in late June 2006. I am not satisfied that he has satisfactorily explained what appears to be a 25% increase in m² value between Lot 3 in the Strata Plan and the other Lots to which he has been ascribed a substantially lesser value per m².

88. It was submitted that when a m² price of $6,000.00 is applied to Mr Cestas valuation of Unit 3, the value of the Lot is reduced to $690,000.00 which is very close to the value ascribed by Mr Dupont in his report of November 2013.

89. When Mr Dupont was cross-examined I accept that he conceded that the internal area of Lot 3 ought to be valued on the same basis as the other Lots in terms of m² value. Although it was put to me that the cross-examination was based upon a false premise I am satisfied that Mr Dupont ultimately conceded that, upon reflection, the value that he would have applied to Lot 3 was greater than the value contained in his report. Applying the formula which he had apparently used in the other Lots and reducing the rate per m² to 20% for the external areas, it is clear that the valuation of Lot 3 at the relevant time would have been $30,000.00 to $40,000.00 higher than the value given to it in his report but it would have been substantially less than the value ascribed to it by Mr Cesta.

90. Even if one were to disregard the specific values supplied by Mr Cesta and Mr Dupont, it is clear that the unit entitlement was probably derived from a mortgage valuation which did not properly take into account some of the final attributes of Lot 3 and which, on the evidence of Mr Dupont, applied a much lower rate per m² for internal space than that which had been applied to other Lots. Although this may give rise to an inference that Lot 3 was undervalued when the sale price was established, it does not, in itself justify the valuation provided by Mr Cesta in his report. It is arguable that the price paid by the subsequent purchaser of Lot 3 represented an offer made by an over anxious and extremely willing purchaser which was then accepted by a vendor who was glad to take advantage of a “windfall”. It is however, unnecessary for the Tribunal to speculate as to the basis upon which the respective sales figures have been arrived at as the applicant bears the onus of establishing that the allocation of unit entitlements among the Lots was unreasonable when the Strata Plan was registered.

91. In Riana Pty Ltd v The OwnersStrata Plan 22336 (2007) NSWSC 1033 Rothman J noted that Makita was clearly a rule of evidence and experts opinions which did not comply with the rule in Makita were admissible before a Tribunal and a Tribunal was required to give them such weight as was appropriate. His Honour observed that the determination that unit entitlements were unreasonable was a matter for the Tribunal and not the expertise of the valuer (see paragraph 49). His Honour noted further at paragraph 48 that the Tribunal did require the respective values of each lot and it would be incapable of making an order without having before it the values of each Lot at the respective date. To do so would constitute an error of law (see also Anderson Stewart and Ors v Treleaven and Anor (2000) NSWSC 283).

92. Although there is, in my view, compelling evidence that the value applies to Lot 3 for the purpose of unit entitlement initially was inappropriate and unreasonable, I am not satisfied that the values and therefore unit entitlements ascribed to the Strata Plan by Mr Cesta should be accepted. Whilst there is only a small variation between the valuation applied to Lots 1, 2, 4 and 5 the values applied to Lot 3 by Mr Cesta and Mr Dupont are significantly different and I am not satisfied that the applicant has discharged the onus of establishing the value he has ascribed to Lot 3. It follows that the Tribunal does not have before it reliable evidence of the respective values of each of the lots at the relevant date and the Tribunal is therefore unable to make the orders sought by the applicant. To do so would constitute an error or law [see Riana Pty Ltd and Anderson Stewart and Ors (supra)]. Section 183(2) permits the Tribunal to make an order only if it considers that the allocation of units among the lots was unreasonable at the relevant time. I am not satisfied that the evidence provides a sufficient and reliable basis upon which to determine the respective allocations of unit entitlement. In Sahada v The Owners Strata Plan 62022 (2014) NSWCA 208 Basten J A (with McColl J A agreeing) found that it would be inconsistent with the nature of the power and the test of “unreasonable” allocation under s 183 of the Strata Schemes Management Act if an order was solely determined by the respective values of Lots at the time of registration. His Honour held:-

17 s. 183(1) confers a power on a Tribunal; there is no explicit indication that there are any particular circumstances in which the power is coupled with a duty to make a particular kind of determination.

s. 182(2) imposes a statutory pre-condition to the exercise of the power namely “only if” the Tribunal is satisfied as to at least one of the three evaluative criteria specified. In substance, each criterion is identified by reference to a test of “unreasonableness” at one of a number of specified times...

18 subsection (3) may be described as identifying mandatory considerations, namely matters that the Tribunal “is to have regard to”. Only one specific matter is identified, namely “the respective values” of the lots … where there is a Strata Development contract in force with a    range of possible matters left open ended by the use of the words “such other matters as the Tribunal considers relevant”.

His Honour observed at paragraph 24 that the conferral of a power with no express obligation and the setting of the test of “unreasonable” allocation should be sufficient to reject the proposition that “respective values” was to be the only criterion. The Court left open the further question which arose, that is whether in determining unreasonableness of the original allocation or deciding to make an order varying the allocation, or in both circumstances, the Tribunal should take account of (respectively) the significance of the consequences of the original allocation and the effect of re-allocation.

93. Sackville A J A, with whom McColl J A agreed, found that s. 183(1) of the Strata Schemes Management Act conferred a discretion on the Tribunal to allocate unit entitlements where their original allocation was found to be unreasonable.

94. I am not persuaded that the reports of Mr Cesta establish his allocation of unit entitlement to be reasonable because there is, in my view, insufficient reasoning to demonstrate (a) that the value applied to Unit 3 is appropriate; and (b) that the relative values of all lots should be accepted where a valuation for one lot has not been satisfactorily explained.

95. Although the present proprietor of Lot 1 purchased the property in 2009 I note that a related company entered into a contract to purchase the property in 2006. I am not satisfied that I should make the orders sought pursuant to s 183(1) and it follows that the application for orders pursuant to s 183(6) must also fail.

96. The application for orders to vary contributions levied pursuant to s. 149 of the Act is a matter for an Adjudicator. The present proceedings were never commenced before an Adjudicator and were never referred to the Tribunal pursuant to s 164 of the Act or for any other reason.

97. The Tribunal may only make orders for costs in circumstances contemplated under s. 192 of the Act. I am not satisfied that the circumstances contemplated in that section have been made out and each party is to pay their own costs of the application.

J A Ringrose

General Member

Civil and Administrative Tribunal of New South Wales

19 November 2014

I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales.

Registrar

Decision last updated: 10 February 2015