Kanivah Holdings Pty Ltd v Holdsworth Properties Pty Ltd & Ors

[2003] HCATrans 700

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S247 of 2002

B e t w e e n -

KANIVAH HOLDINGS PTY LIMITED

Applicant

and

HOLDSWORTH PROPERTIES PTY LIMITED

First Respondent

EGAN NATIONAL VALUERS (NSW) PTY LIMITED

Second Respondent

KEITH NORRIS

Third Respondent

Application for special leave to appeal

GLEESON CJ
HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 9 MAY 2003, AT 9.35 AM

Copyright in the High Court of Australia

__________________

MR D.E. GRIEVE, QC:   May it please your Honours, I appear with MR M.R. GRACIE for the applicant.  (instructed by Emerys Law Firm)

MR B.W. WALKER, SC:   May it please the Court, I appear with my friends, MR A. IVANTSOFF and MR E.C. MUSTON, for the respondent.  (instructed by Minter Ellison)

GLEESON CJ:   There is a certificate from the Deputy Registrar that she has been informed by the solicitor for the second and third respondents that the second and third respondents submit to the order of the Court, save as to costs.  Yes, Mr Grieve.

MR GRIEVE:   May it please your Honour.  Your Honours, when a valuer has to value an asset he must, of course, determine its worth in monetary terms, according to the Spencer test.  In doing so his responsibility is to acquaint himself fully with the character of the asset in question.  He cannot, for example, assume that it is a four carat diamond rather than a well polished piece of glass simply because he has been told so.  Thus, if realty stands to be equated with money, the many and complex considerations which affect its value necessitate consideration.

In Maurici v Chief Commissioner of State Revenue [2003] 195 ALR 236, this Court affirmed the proposition – paragraph [8] at page 238 – that:

The making of a valuation will frequently involve an application of legal principle or principles.  Questions of law, fact and opinion do not always readily and neatly divide themselves into discrete matters in valuation cases and practice.

We submit that this matter involved several questions of public importance and general application.  First, is a mistake in determining the highest and best use to which a particular property may be put a mistake sufficient to invalidate a valuation as one not in accordance with a party’s contract?  In Legal & General v Hudson ‑ ‑ ‑

GLEESON CJ:   What is the level of particularity or generality at which you have to determine the highest and best use?

MR GRIEVE:   That is the point.  That is the second point.

GLEESON CJ:   Is it sufficient to say it is commercial use, or do you have to design the building that is going to go on it?

MR GRIEVE:   We submit the latter, but the first general question arises as a threshold question of principle, we submit.  In Legal & General v Hudson 1 NSWLR 315, Mr Justice McHugh observed that a mistake by a valuer as to “the identity of the premises to be valued” was one which in all or virtually all cases would vitiate the valuation. That is the passage that we have set out on page 85 to 86 of the application book. One question that arises is, is that the only error which would have that effect?

Mr Justice Giles in the instant case seemed to be of that opinion at page 71 in the application book, paragraph 25.  However, we submit that if a valuer proceeded on the footing that the highest and best use of land was, for example, as a site for the construction of an industrial factory, when in fact the applicable zoning expressly forbade such usage, that would be a mistake of a similar character to one concerning the identity of the property.  That leads, we submit, to the second question of importance which arises, namely, does the concept of the highest and best use necessitate an inquiry into and determination of the economics of the property’s potential usage?

The Court of Appeal expressly rejected that proposition; Mr Justice Stein, with whom Justices Beazley and Giles agreed, at paragraph 58 on page 69 of the application book.  We contend that in principle their Honours fell into error in that regard.  If, for example, a valuer correctly considered that the highest and best use of a particular parcel involved the construction of a commercial office block, and then incorrectly proceeded to asses its value on the basis that it had a permissible floor space ratio of, say, 10:1 when in fact all that was allowable was 4:1, we submit that the valuation would be equivalent to a valuation of a property other than that the subject of the party’s contract.

In paragraph 40 of his reasons at application book page 65, Mr Justice Stein observed:

In any event, the valuer did not simply adopt the deferred development consent, but utilised it as ‘indicative’ or as a ‘guide’ to floor space ratio.  Essentially, he determined the valuation upon the comparable sales –

With respect, we submit that that misses the point.  What the valuer did was to assume, by reference to the DCC, that the subject property could feasibly be improved by the construction of a building with a net letable area of some 13,500 square metres and thus a corresponding floor space ratio.  He then compared it with other properties with a similar and indeed higher floor space ratio.

HAYNE J:   Now, did either the trial judge or the Court of Appeal characterise that approach as relevantly mistaken?

MR GRIEVE:   No, they did not.

HAYNE J:   Thus, the question in this Court would be, or would include, would it not, whether there was a mistake?

MR GRIEVE:   That is right.

HAYNE J:   Would that be the only question in this Court?

MR GRIEVE:   Effectively, yes.

HAYNE J:   Thus, the question in this Court would be, would it not, the application of principles not in dispute between the parties to the particular circumstances of the particular valuation?

MR GRIEVE:   With respect, no.  In our submission, the question for this Court to determine in resolution of the dispute between the parties is whether or not it is a matter of principle that a valuer must address the economics of the usage.  Our friends would have it that the valuer need not do that and if he does not, even if he would have been mistaken had he done so in reaching the conclusion that he did, that is of no moment.  We submit that he was bound to look at the economics, he did not, and therefore fell into a relevant mistake.

GLEESON CJ:   Suppose you had a suburb in which there was vacant land and there was a rezoning that permitted the land to be used not merely for residential private dwelling houses, but also for blocks of home units.  You had sales of lots A, B and C as vacant land, but with that zoning, and then somebody came to value D.  Would the valuer have to design a block of home units and work out the economics of the development, or would he not be entitled simply to look at the price that was achieved for lots A, B and C?

MR GRIEVE:   He would have to work out how many units could be put on lot D and then, having worked that out, he could have a look at the comparable sales of units from lots A, B and C.  But he could not blandly assume that one could build 200 units on lot D when, if indeed, the applicable zoning and other restrictions limited the number to, say, 50.  That is the ultimate point.  The valuer here seems to have, as it were, assumed that the subject property could be economically developed to the maximum apparent extent allowed by this conditional consent.  What he did not question was what it would cost to achieve that outcome, and we submit that that was the error that he made which fundamentally vitiated his valuation.

HAYNE J:   Namely, a failure to allow for the costs of development, is it?

MR GRIEVE:   Yes.  There was undisputed evidence ‑ ‑ ‑

GLEESON CJ:   What was the basis on which the claim of negligence against the valuer was rejected?

MR GRIEVE:   Essentially, on the same basis that the claim that his valuation was vitiated by error was rejected.  Their Honours had, both at first instance and on appeal ‑ ‑ ‑

HAYNE J:   Did that involve a finding of fact that he had not failed to exercise reasonable care by omitting regard to this question of cost to which you now point?

MR GRIEVE:   No, it did not.  What it involved was a conclusion that he had done what he was charged to do sufficiently, and that was that.  So the decision in the primary case, if I can put it that way, overlapped into the secondary case and led to the result that it did.  Your Honours, we contend that in determining the highest and best use of a particular parcel the need to have regard to economic considerations finds support in one leading text, Valuation Principles & Practice, the first edition of which was published in 1977 by the Australian Institute of Valuers and Land Economists.  At pages 7 and 8, citing another text, the authors observe:

Brown (1991) provides some useful criteria for the determination of highest and best use.

.        the use must be legal – it must come within the planning and
           building regulations;

.        the use must be within the realm of probability – it must be
           likely, not speculative or conjectural; and

.        the use must be of a kind to come within the imagination of a
           particular purchaser.

They go on to observe:

These criteria imply rigorous inquiry into town planning regulations and policies on the part of the valuer, and sensible interpretation of the way in which the market will react to zonings and other restrictions over land use.  Before being able to determine the best economic use . . . the valuer may well have to perform a number of different valuation exercises.

The author returns to the theme at page 70 by observing that:

It is possible to add a further criterion to Brown’s considerations and this is:

.        The use should be economically feasible.

He then develops that proposition in detail in the remainder of that chapter.  Of present relevance are his observations under the heading “Commercial Land” and the heading “Development Applications and Their Outcomes” pages 76 to 78.  Time does not permit me to read the totality of what appears there.

We submit that the Court of Appeal’s rejection of the principle for which we contend is inconsistent with well‑recognised authority, exemplified by the decision of this Court in Turner v The Minister of Public Construction 95 CLR 245. In Turner, unimproved land was resumed. The most advantageous way in which it could be realised was by way of sale and subdivision. The issue was whether or not allowances should be made, first, for the risk factor involved in such a realisation, and, secondly, for the profit which the hypothetical purchaser would expect to make. The Court held in the affirmative on both matters. Chief Justice Dixon addressed the point of principle at pages 268, 269, Mr Justice Kitto to a similar effect at page 288.

The Supreme Court at first instance and on appeal in the instant matter applied an undemanding standard for expert witnesses to meet for the purposes of rent review clauses in leases such as that in suit.  The decision below, if correct, established the principle that a valuation which is demonstrably erroneous will nevertheless be binding on the parties, save only where the valuer has mistaken the identity of the property in question.  Seemingly, any other mistake, even in the application of valuation principles, is of no moment.  Your Honours, we are bound to respond to certain of the respondents’ written submissions ‑ ‑ ‑

GLEESON CJ:   May I just interrupt you.  You say that in this case the findings below were that there was no mistake?

MR GRIEVE:   Yes, which finding was based on the proposition that it was sufficient as a matter of principle for the valuer to identify, in a generic sense, the highest and best use.

GLEESON CJ:   That appears on page 60, I think, in the passage quoted at line 35.

MR GRIEVE:   Yes, that is right.  That conclusion rejects as a matter of principle the proposition for which we contend, that it is insufficient simply to identify the highest and best use by way of a generic analysis without going further and descending to specifics in working out the economics of the usage.  That is the point at issue.  Now, your Honours, at line 17 on page 89 in paragraph 3(a) of their written argument, our friends ‑ ‑ ‑

HAYNE J:   Was there evidence at trial that that is how a properly instructed valuer would go about the task?

MR GRIEVE:   Yes, and, indeed, that is what we were just about to come to.

HAYNE J:   And that is, at least implicitly, rejected by the trial judge?

MR GRIEVE:   And the Court of Appeal, yes.

HAYNE J:   In the end, then, does it not come to a question of fact about what a valuer would do, and you have lost twice?

MR GRIEVE:   No, we submit it is a question of principle.  It is a mixed question of law and fact ‑ ‑ ‑

HAYNE J:   It is the Mandy Rice‑Davies response, is it not?  You have to say that, have you not, Mr Grieve?

MR GRIEVE:   Most assuredly.  There is no question about that.  I accept that.  No doubt that response has given all but a few of these applications ‑ ‑ ‑

GLEESON CJ:   But you have concurrent findings of fact that the valuer made no mistake.

MR GRIEVE:   Yes, but, in our submission, they are not merely findings of fact.  They are findings of fact predicated on an assumption of principle,

namely that it was unnecessary for him to test the economics of the usage.  That is the simple point.

Now, there was, indeed, evidence – contrary to our friends’ submission – that bore on the economics of the usage contemplated.  It is not appropriate presently to go to that evidence in great length.  It should suffice to indicate that the deferred development consent stipulated certain conditions as to vehicular parking.  There were two possible ways in which those conditions could be satisfied.  One was for the developer to take a lease of certain additional land from the council.  The applicant adduced evidence of the likely cost of that lease.  That is referred to by Justice Stein at paragraph 33, application book 63.

The other way of satisfying the parking condition was to have the subject property extensively excavated.  The applicant adduced unchallenged expert evidence on the cost of such excavation.  Those pieces of evidence were by no means the whole of that which was tendered on the issue of economic feasibility.  Reference to them should, however, suffice to dispel the respondents’ point.

The second matters which the respondents have raised to which we must respond are the contentions in paragraph 7 of its argument at line 11 on page 90 of the book, that is, that:

The applicant accepted that the valuer had regard to the highest and best use of the land, based on the DCC.  Indeed, the applicant accepted that the highest and best use found by the valuer was correct –

In fact the concession made by our client was simply that the valuer had correctly determined, in a generic sense, that the highest and best use of the subject property involved its improvement by the construction of a building for mixed retail and commercial usage, but we contend that that is no more than a starting point. 

To determine the underlying value of the land, we submit that the valuer was bound to descend to specifics by making some attempt to determine the size and probable cost of the building which could permissibly be constructed on the property for those generically identified purposes.  Our fundamental contention is that if this is not the case as a matter of principle, the process of valuation amounts to no more than guesswork.  May it please your Honours.

GLEESON CJ:   We do not need to hear you, Mr Walker.

The Court is of the view that there are insufficient prospects of success to warrant a grant of special leave in this matter.  The application is refused with costs.

MR WALKER:   Could I draw your Honours’ attention to the fact that by reason of pre‑trial dealings between the parties there have been indemnity costs orders made whenever we succeeded at stages below and we would seek indemnity costs today.

GLEESON CJ:   What do you say about that, Mr Grieve?

MR GRIEVE:   We accept the premise that our friend puts.

GLEESON CJ:   All right.  Those costs will be on an indemnity basis.

AT 9.52 AM THE MATTER WAS CONCLUDED