Murray Investments Pty Ltd v Chief Executive, Department of Main Roads
[2000] QLC 45
•25 July 2000
|
BRISBANE
25 July 2000
Claim for Compensation consequent on the resumption
by the Chief Executive, Department of Main Roads
for transport or incidental purposes under the
provisions of the Acquisition of Land Act 1967 and the
Transport Planning and Coordination Act 1994.
(A99-56).
Murray Investments Pty Ltd
v.
Chief Executive, Department of Main Roads
J U D G M E N T
This is a claim for compensation by the lessee of a service station situated at 4071 Pacific Highway, Loganholme, consequent upon the resumption of land under the Acquisition of Land Act 1967.
Introduction:
By notice of intention to resume dated 22 December 1997, Murray Investments Pty Ltd (the claimant) was advised that the Chief Executive, Department of Main Roads (the respondent), intended to take land including 1503 square metres, being part of Lot 2 on RP 122922, in the Parish of Mackenzie (the resumed land). That land was subsequently taken by the respondent by proclamation on 6 March 1998.
On 20 March 1998, the claimant lodged a claim for compensation in the sum of $967,000. An amended claim for $984,698.50 dated 20 October 1999 was lodged stating that the claimant was the lessee of the whole of the land described as part of Lot 2 on RP 122922, Parish of Mackenzie, containing an area of 1503 square metres, on which was located the Mobil Loganholme Service Station. The lessor was Lee Properties Pty Ltd (Lee Properties).
Then on 5 May 2000, the claimant was granted leave to further amend the claim to $855,273, itemised as follows:
1. Business disturbance/loss of goodwill $ 819,364
2. Pre-resumption loss:
2.1 Loss of sublease rent $ 1,001
2.2 Loss of gross profits $17,790 (agreed) $ 18,791
3. Disturbance
3.1 Removal expenses etc $ 1,256 (agreed)
3.2 Valuation fees $ 5,400 (agreed)
3.3 Accountant's fees $ 1,662 (agreed)
3.4 Consultancy fees (planner) $ 1,8003.5 Legal fees $ 7,000 (agreed) $ 17,118
TOTAL $ 855,273
Less:
Advance:(i) Paid 31/3/98 - $ 250,000
(ii) Paid 4/8/98 - $ 50,000
(iii) Paid 28/9/98 - $ 200,000 $ 500,000
NET CLAIM $ 355,273
Plus interest as determined by the Court.
Attached to the amended claim was an explanation of the calculation of the revised claim as follows:
1. EM Gross profit $ 456,697.00
2. Add EM Other Income:
· Mobil rebate (75% x $114,442 as a negotiated level
of rebate) $ 85,831.50
· Rent subsidy $ 18,465.00
· Rents $ 23,414.00
· Supply advance $ 30,000.00 $157,710.50
$614,407.00
Less expenditure $372,747.00
$241,666.00
Capitalised at 25% $966,664.00
Less employed capital $147,300.00
TOTAL $819,364.00
(Minor calculation errors would reduce total claim by $24.)
Background:
The resumed land has been the site of a service station for many years, having been approved by the Albert Shire Council for use as a service station in 1965. At the date of resumption it was zoned "Particular Purpose - Service Station, Shop and Food Outlet". In November 1987, Mr Angus Murray and his wife Mrs Alwyn Murray, commenced to operate the service station, then known as "Esso Loganholme", under a franchise (sub-lease) agreement. At that time Esso Australia Ltd held the head lease from the lessor, Lee Properties, which held the freehold interest in the land. In or about January 1990, Mobil Oil Australia Limited (Mobil) took over all service station sites operated by Esso. The service station thereafter traded as "Mobil Loganholme" and in or about March 1990, the franchise in Esso Loganholme was transferred to the claimant.
On 2 January 1991, the claimant purchased Esso's leasehold interest in the land for US$40,000. The lease was due to expire on 14 August 1991. Esso entered into a deed of surrender and Lee Properties granted a new lease to the claimant from 15 August 1991 to 31 December 1993, which contained two 3-year options for further leases.
Clause 13.1 of the lease provided that the rental for the first year of the first option period was to be such sum as was agreed upon by the parties, but if the parties did not agree, the rent was to be the current market rent determined by a valuer appointed by the President of the Australian Institute of Valuers, provided the rent was not less than the previous years rent increased by the Consumer Price Index (CPI). For the subsequent years of the first option period, the rent was to be adjusted by a formula based on the average of the CPI for the December quarter and the CPI for the December quarter of the previous year, but not less than the rent for the previous year.
Clause 14.1 provided for the rent for the second option period to be fixed in a similar manner to that for the first option period.
Subsequent to the original lease, two deeds of extension (May 1994 and April 1997) and a deed of variation (May 1995) were entered into, to the effect that the relevant terms of the lease were as follows:
- 15 August 1991 - 31 December 1993;
- 1 January 1994 - 31 December 1996 (the first option period);
- 1 January 1997 - 31 December 1999 (the second option period);
- 1 January 2000 - 31 December 2002 (the third option period); and
- 1 January 2003 - 31 December 2005 (the fourth option period).
The rents were to be fixed in the same manner as described for the lease. This meant that at the date of resumption (6 March 1998), the claimant had a term remaining of approximately 7.81 years. However, Mr Murray had an expectation that the claimant would have remained in occupation after that period had expired.
According to Mr Murray, from the time the claimant had purchased Esso's leasehold interest until the date of resumption, the rentals for each new term were negotiated and mutually agreed between the claimant and Lee Properties, based on the CPI increase for the previous year, without the need for a third party to determine the rental. Each of those agreements was incorporated into a deed.
As it held the head lease, the claimant could have traded as an independent operator as it was not bound to any particular fuel company. It was therefore in a strong negotiating position to gain an advantageous arrangement. From early 1991, the claimant had entered into agreements with Mobil and the service station traded as "Mobil Loganholme" and supplied Mobil fuel products. Mobil spent approximately $391,400 in or about February 1991, upgrading the site and the improvements.
In July 1997, the claimant sub-leased the shop area in the front of the service station to persons operating a cellular phone company known as "Licence to Call" at a rental of $1,148 per month. Then in October 1997, the claimant sub-leased a workshop area at the rear of the service station to a trailer hire company known as "Handi Trailers" for a rental of $1,020 per month.
At the date of resumption, the claimant had an existing supply agreement with Mobil, which commenced on 1 January 1995 and which was to expire on 31 December 1999. Under that agreement, Mobil agreed to advance the claimant $150,000 for the period of the agreement. Although it appears to have been an up-front payment, this money was brought into the profit and loss statements of the company as revenue at $30,000 per annum.
Following the date of resumption on 6 March 1998, the claimant remained in occupation and the service station continued to trade until 27 March 1998. This postponed the date of extinguishment of the claimant's business, so that from that date the claimant had a guaranteed period of lease of 7 years and 9 months. The fuel supply agreement had a further 21 months to run and Mobil required repayment pro rata of the unexpired portion of the $150,000 paid for the five years of the supply agreement, which amounted to $52,500 (x $150,000).
In addition to that payment, Mobil also paid a rebate on each litre of fuel sold. The rebates paid on the various fuels were renegotiated every 12 months. The rebates for the year 1997 were:
· 1.9 cents per litre on super and unleaded fuel;
· 2.5 cents per litre on diesel fuel; and
· 2 cents per litre on auto LPG fuel.
The negotiations for the rebates for the year 1998 took place in about November 1997, with both Mobil and the Murrays being aware of the pending resumption. A new rebate agreement for fuels was entered into from 1 January 1998 to 31 December 1998 as follows:
· A rebate of 4.0 cents per litre off Mobil's reseller list price on all leaded, unleaded and premium unleaded purchases.
· A rebate of 4.5 cents per litre off Mobil's reseller list price for all diesel purchases.
· Mobil's local area price to be paid for all auto LPG purchases.
· A rebate of 0.3 cents per litre on total fuel (leaded, unleaded, premium unleaded, diesel and auto LPG) purchased, to be paid as a month end cheque.
Mr Murray gave evidence that in the latter months of 1997, relations between the claimant and Mobil deteriorated after Mobil became aware that the service station would be resumed. The claimant's former strong bargaining position had been eroded as Mobil knew it was going to lose the site. The claimant was therefore forced to accept the less attractive interim rebate agreement from 1 January 1998. Mr Murray said that on occasions, Mobil failed to deliver and the claimant had to obtain fuel from an alternative source, Redlands Fuel Supplies, but he described the percentage as "next to nothing". However, the delivery invoices showed that between 29 September 1997 and 22 December 1997, almost 28% of total fuel purchases were from Redlands Fuel Supplies.
The Interest of the Claimant in the Resumed Land.
Under the provisions of section 12 of the Acquisition of Land Act 1967, where land is resumed, the resumed land vests in the constructing authority from the date of publication in the Government Gazette of the proclamation taking the land. From that date, the estate or interest of every person entitled to the whole or any part of the land is converted into a right to claim compensation under the Act. The claimant as lessee of the resumed land therefore has a claim for compensation which is separate and independent from that of the holder of the fee simple. A separate assessment must be made for each interest in the land: Rosenbaum v. Minister for Public Works (1965) 114 CLR 424. It seems that the holder of the fee simple of the land (Lee Properties) negotiated its claim for compensation with the respondent without litigation.
There is no issue that at the date of resumption the claimant held a leasehold interest in the land and had options for the subsequent renewal of the lease until 31 December 2005. The claimant was conducting a business on the land and that business depended on the continuance of its occupation of it. Once the claimant was deprived of possession of the land the claimant lost its business.
The parties agreed that what is to be found is the value to the claimant of the interest taken. This means that "… All the actual and potential advantages to the proprietor of the interest enter into that value to him. If the goodwill of his business is annexed inseparably to the interest, it may not be possible to disentangle the one from the other." Dixon J in The Commonwealth v. Reeve and Another (1949) 78 CLR 410 at 428.
It was not suggested that there should be separate findings for the value of the leasehold interest and the value of the business. Throughout these proceedings the words "business" and "goodwill" were used interchangeably, as indeed they were in Reeve, where the following passage appears:"The business had been entirely destroyed by the acquisition of the plaintiffs' interest. It was plain that to take over the premises forming the coffee lounge was to take over the business or goodwill. In these circumstances the valuation of the goodwill might well be considered in point of fact, though not in point of law, to be decisive in the valuation of the interest of the plaintiffs which had been taken." (Dixon J at 429-430).
Mr Gallagher QC, senior counsel for the respondent, did not suggest the compensation for the extinguishment of the business should be characterised as "disturbance". On the other hand, Mr Allan, counsel for the claimant, submitted that where a leasehold interest has been compulsorily acquired causing the destruction of a business annexed to that interest, the claim for compensation is in reality a claim for the "disturbance" (in this case the destruction) of the business, because "the interest in land" attracts nominal compensation. That nominal sum when added to the amount awarded for the disturbance due to the destruction of a business goodwill as a going concern equates together to make up the value of the land to the owner.
Mr Allan referred to the judgment of the Privy Council in Director of Buildings and Lands v. Shun Fung Ironworks Ltd [1995] 2 AC 111. In that case the Privy Council pointed out that land may have a special value to a claimant over and above its market value and if the claimant is using the land to carry on a business, the value of the land to the claimant will include the value of his being able to conduct that business without disturbance. Compensation should cover the disturbance loss as well as the market value of the land itself. While the resuming authority does not acquire the business, the resumption prevents the claimant from continuing that business, so the claimant loses the land and with it the special value it had for him as the site of his business. If the business can be moved elsewhere, the expenses and any losses the claimant incurs in moving the business to a new site will ordinarily be the measure of a special loss that he sustains.However, the Privy Council went on to say at 125:
"If, exceptionally, the business cannot be moved elsewhere, so it simply has to close down, prima facie his loss will be measured by the value of the business as a going concern. In practice it is customary and convenient to assess the value of the land and the disturbance loss separately, but strictly in law these are no more than two inseparable elements of a single whole in that together they make up the value of the land to the owner. "
In his judgment in the decision of the High Court in Boland v. Yates Property Corp Pty Ltd (1999) 74 ALJR 209, Callinan J discussed "disturbance" and "special value to the owner" at pages 269 and 270. He came to the conclusion that there will be cases in which the distinction between "special value" and "disturbance" and perhaps "reinstatement" may not be clearly drawn.
In any case, it probably does not matter whether the compensation is characterised as "special value" or as "disturbance", as long as this aspect of compensation is not duplicated: Arkaba Holdings Ltd v. Commissioner of Highways (1969) 19 LGRA 398 at p.405; Thirty-Fourth Philgram Pty Ltd v. The Crown (1993) 14 QLCR 13 at 44.
In the present case, regardless of how it should be characterised, the respondent accepted that the claimant had a valid claim for compensation for the loss of its business or goodwill. Issue was joined, however, on the amount of compensation payable.
Special Value or Market Value:
It is well established that in cases of compulsory acquisition of land (or an interest in land), compensation must be assessed on the basis of value to the owner, even if that value exceeds the market value of the land. The long-accepted basis for the assessment of market value was formulated by the High Court in Spencer v. The Commonwealth (1907) 5 CLR 418, particularly the following passages from Griffiths CJ and Isaacs J.
Griffiths CJ said at 432:
"In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, that is, whether there was in fact on that day a willing buyer, but by inquiring 'what would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?' …
The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together."
In the same case, Isaacs J said at 441:
"To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and cognisant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property."
The principle that the value to the owner was a "special value" is said to be based on the decision of the Privy Council in Pastoral Finance Association Ltd v. The Minister [1914] AC 1083, particularly the test proposed at 1088:
"Probably the most practical form in which the matter can be put is that they were entitled to that which a prudent man in their position would have been willing to give for the land sooner than fail to obtain it. "
However, in Boland v. Yates Property Corp Pty Ltd, Callinan J suggested that asking what the dispossessed owner would pay if he or she were a hypothetical purchaser is not the only way of defining or calculating "special value". His Honour went on to say at 279:
"…Another way of viewing the formulation of the Privy Council in Pastoral Finance is to regard it as a means of ascertaining the value of the property to the owner. Part of the difficulty arises from a need or desire to ensure that an owner is compensated for the loss of value of the property to the owner, a value which may not always be the same as the value which the unqualified application of Spencer's case, an exchange value or sale in the marketplace, would yield. Sometimes such a need will involve a calculation of what might properly be called special value. The requirement, and I would regard it as a requirement now long accepted by the courts, of the various statutes providing for compensation on resumption, that an owner be paid the value to him or her, may mean that in some cases the direct and exclusive operation of Spencer's case may not be possible. No doubt that case will cover most situations because although it assumes a willing vendor (the dispossessed owner) it does not contemplate one who would lightly relinquish a property which had a particular value to him or her for less than that value." (Footnote omitted)
The concept of value to the owner is contemplated in section 20(2) of the Acquisition of Land Act 1967, which states:
"(2) Compensation shall be assessed according to the value of the estate or interest of the claimant in the land taken on the date when it was taken."
However, the statute contains no reference to "special value".
It has been suggested that the terms "value to the owner" and "special value" are interchangeable. However, in Arkaba Holdings Ltd v. Commissioner of Highways, Bray CJ of the South Australian Supreme Court said at 404:
"It is, of course, well established that it is the value to the owner which must be paid, even if that value exceeds the market value (Pastoral Finance Association Ltd v. The Minister [1914] AC 1083; Minister for Public Works v. Thistlethwayte [1954] AC 475). The additional element is commonly called "special value to the owner", e.g. Thistlethwayte's case [1954] AC, at p.491. But this special value must, in my view, arise from some attribute of the land, some use made or to be made of it or advantage derived or to be derived from it, which is peculiar to the claimant and would not exist in the case of the abstract hypothetical purchaser. Would a prudent man in the position of the claimant have been willing to give more for this land than the market value rather than fail to obtain it or regain it if he had been momentarily deprived of it? (Pastoral Finance case [1914] AC, at p.1087; per Kitto J in Turner v. Minister of Public Instruction (1956) 95 CLR 245 at p.292) "
What then are the principles to be applied in order to determine "special value" and are they different from the well established test to determine market value? That question seems to have been answered by Wells J of the Supreme Court of South Australia in Commissioner of Highways v. Tynan (1982) 53 LGRA 1, where his Honour said at 9:
"It seems to me that the principles to be applied where special value is in issue are virtually the same as those laid down in Spencer's case, though extended and qualified slightly, to accord with the changed inquiry. What the court is being asked to determine is the price at which a person in exactly the same position as the claimant would 'come together' with a hypothetical person on the point of dispossessing him, in circumstances in which the claimant would, in order to retain the land under threat, pay a sum representing the market value of the land, together with the value of all its special advantages to him, but would not, in addition to the market value, pay more than the provable commercial value to him of those special advantages."
After considering what is expected of a valuer in such circumstances, his Honour continued at 10:
"…As in the case of simple market value, so in the case of special value to the claimant, the court, in the final analysis, must, by its own judicial act, founded on all relevant information placed before it, apply the principles enunciated in Spencer's case, but qualified by the need to render them applicable to questions of special value."
Mr Allan submitted that the present case was one where the claimant would have been prepared to pay more than market value for the land rather than be deprived of it because of its special advantages to the claimant. I will consider those special advantages later.
The Claim for Compensation:
The claimant's claim for compensation was based on the assessment of Mr LGF Wright, a business broker and business valuer, who assessed compensation at $938,550, comprising:
Loss of goodwill $909,800
Loss of fuel rebate $ 18,320
Loss of gross profits $ 8,171
Loss of sub-lease income $ 1,001
Disturbance costs $ 1,256
TOTAL (rounded) $938,550
Mr Wright's approach was to estimate future maintainable net profit before tax, which he capitalised at 25%. His estimate of the future trading performance was as set out in the following table:
Estimated maintainable gross income per annum $4,081,300
Estimated maintainable gross profit
(before rebate 11.19%) $ 456,697
Add: Established maintainable other income $ 156,322
Estimated maintainable supply agreement advance $ 30,000$ 643,019
Less: Estimated maintainable direct business expenditure $ 378,741
Estimated maintainable net profit: $ 264,278
(before tax, leasing/financing costs and
after manager's wage)
He capitalised that figure for maintainable net profit of $264,278 by 25% to arrive at a value for the business as a going concern of $1,057,100, which he called "total capital employed". From that figure he deducted the value of plant and equipment ($30,000), stock ($85,000) and working capital ($32,300) to arrive at the value of goodwill of $909,800.
The Respondent's Assessment of Compensation:
The respondent's assessment was based on the opinion of Mr NC Calabro, a chartered accountant, who assessed the value of the business at the date of resumption at $426,000.
Mr Calabro adopted a somewhat different approach from that adopted by Mr Wright. He claimed that he used the discounted cash flow (DCF) method of valuation and arrived at the fair market value of the business by discounting future cash flows. Because of circumstances which will be discussed later, that involved arriving at an estimate of future maintainable earnings, as did Mr Wright's capitalisation method. However, the process by which each of them arrived at the future maintainable earnings for the business was quite different and will require some explanation.
Mr Calabro assumed that maintainable earnings of $158,000 per annum would remain constant for the period 1 April 1998 to 31 December 1999, and similarly that maintainable earnings of $113,000 per annum would be constant from 1 January 2000 to 31 December 2005. He adopted a discount rate of 25.35% for both periods. A summary of his valuation process is explained as follows:
Maintainable earnings $158,000 p.a. for 1 year 9 months,
discounted at 25.35% $203,552
Maintainable earnings $113,000 p.a. for 6 years,
discounted at 25.35% $222,799
Value of the business on a "walk in - walk out" basis $426,000
Mr Calabro had not been provided with a valuation of the plant and equipment, but he estimated that $20,000 would be reasonable. The value of stock on hand at 31 January 1998 was $75,000, which he thought represented the average value of stock maintained on the premises. This left the value of goodwill at $331,000.
The Issues:
The difference between Mr Wright's assessment of the going concern value of the business and that of Mr Calabro is of the order of $631,000. Mr Calabro's analysis of those differences was set out as comprising:
Difference arising from assessment of market rental $ 86,595
Difference arising from assessment of maintainable earnings
(excluding rent) $ 355,864
Difference arising from capitalising in perpetuity $ 182,757
Difference arising from assessment of capitalisation/discount
rate $ 5,884
TOTAL $ 631,100
Clearly the major difference between them is in their assessment of maintainable earnings. That is somewhat surprising, as both Mr Wright and Mr Calabro had been provided with the same unaudited profit and loss statements and monthly trading figures by the claimant's accountants.
Although not mentioned in Mr Calabro's analysis of the differences, a further issue arose as to whether the income from the sub-leases to Handi Trailers and Licence to Call should be included in the maintainable earnings of the business. The respondent alleged that Council approval had not been obtained and they may have been prohibited uses. Furthermore, it was suggested that the sub-letting of part of the premises without the prior approval of the lessor and of Mobil, may have been in breach of the conditions of the lease and the agreement with Mobil. If the submissions of the respondent in respect of those issues are proved to be correct, then the maintainable earnings would be further affected.
Maintainable Earnings: Mr Wright's Approach
Mr Wright considered that he had to make adjustments to the information provided to him by the claimant and the claimant's accountants "… to meet normal market conditions…". He noted that the profit and loss statements showed that gross sales increased by 4% in 1994-95, but fell in 1995-96 by 4.9%. They increased by only 2.1% in 1996-97, but still below gross sales for 1994-95. Mr Wright attributed that downturn largely to roadworks involved in the upgrading of the Pacific Highway, between November 1995 and March 1997, which in his opinion had inhibited egress from the service station.
Gross sales for the financial year 1997-98 were not available because the land was resumed in March 1998. However, the accountants had produced a profit and loss statement for the seven months July 1997 to January 1998. Instead of relying on that profit and loss statement, Mr Wright preferred to rely on the monthly trading figures for the six months July to December 1997, which showed on an average monthly basis that gross sales increased by 7.37% over the monthly average for the previous year. Based on that monthly average of $340,109, Mr Wright adopted what he called "estimated and maintainable gross sales" of $4,081,300 per annum, that is, he "annualised" that monthly average by multiplying by 12.
The profit and loss statements for the years 1993-94 to 1996-97 showed gross profits of 13.1%, 13.7%, 13.1% and 12.3% respectively, for each of those years. From the monthly trading figures, Mr Wright calculated that for the period July to December 1997, the profit margin was 11.19% of gross sales. He reasoned that if projected for the full year gross profit would have been $456,699, or 11.19% of the estimated gross sales of $4,081,300.
The fuel rebates were included in the gross profit figures in the profit and loss statements for the years 1993-94 to 1996-97. However, the figures for the six months from July to December 1997, were simply the totals of the profit margins from the monthly trading figures. Therefore, Mr Wright's projected gross profit for the full year would not include the rebates.
To compare his projected gross profit with the gross profit percentages achieved for the earlier years, Mr Wright added $114,442 (average monthly rebate of $9537 x 12) to his estimated gross profit of $456,697. The result, $571,140, represented 13.99% of gross sales, higher than the gross profit achieved in any of the earlier years, the best result being 13.7% in 1994-95.
However, Mr Wright reasoned that gross profit levels for service stations can vary markedly, being affected by a number of factors. As an example, he referred to the gross profit achieved by Mobil Beenleigh, which ranged from 13.1% to 15.5% over the same period. This was supported by figures for service stations published by Financial Management Resource Centre (FMRC).
Mr Wright did not directly calculate his gross profit at 13.99% of gross sales, but at 11.19%. Later he brought in the fuel rebate as part of other income, which included the $30,000 per annum supply advance. A proper comparison between Mr Wright's estimated gross profit and the gross profits for earlier years, would require that the annual supply advance of $30,000, in addition to the annual rebate of $114,442 be included, which would have increased Mr Wright's gross profit to $601,140, or 14.73% of gross sales. Based on past performance this would seem to be an unrealistic and unachievable figure.
Other Income:
Because Mr Wright derived his gross profit of $456,697 from the monthly trading margins from sales associated with the service station business (fuel and shop), that figure did not include any other sources of income, which must be included in any assessment of maintainable earnings. Mr Wright assumed that the fuel supply agreement which existed at the date of resumption would have continued at $30,000 per annum. Despite the new rebate agreement of 1 January 1998, Mr Wright assumed that fuel rebates for Mobil fuel would have continued to average approximately $9,537 per month, or $114,442 per year.
The "other income" stream included two further components. Mr Wright assumed that rental income from the sub-leases, or sub-tenancies, would have continued if it had not been for the resumption. For some unexplained reason he adopted rental income at the rate of $918 per month ($11,016 per annum) and $1,033.20 per month ($12,398.40 per annum) instead of the monthly amounts of $1020 and $1148 that had been paid.
Under the heading "Adjoining Property Maintenance Income", Mr Wright included an amount of $18,465.12 per annum. The basis for that figure is the result of an oral agreement between Mr Lindsay Lee, the principal of the landlord, Lee Properties, and Mr Murray, whereby the Murrays carried out maintenance and general supervision of the property adjoining the service station site, which was also owned by Lee Properties. Mr Wright explained that the method of payment was by way of "contra" set-off against the monthly rental, which at 1 January 1998, discounted the rental by $1,538.76 per month, or $18,465.12 per year. The reduction in rent shows in the profit and loss statements.
It should be explained that the adjoining property referred to by Mr Wright is situated immediately to the south of the land on which the service station was located. There was a residence on that land which was used by Mr Lee on his visits to Brisbane. Also on that adjoining land was a large sign advertising that the Mobil Loganholme service station was the last highway fuel for 69 kilometres.
Mr Wright's estimate of the "other income" stream is summarised as follows:
Per Annum $
"Handi Trailers" rental income $ 11,016
Adjoining property maintenance income $ 18,465.12
"Licence to Call" rental income $ 12,398.40
Mobil rebate $114,442
Supply agreement advance $ 30,000
TOTAL $186,321.52
Mr Wright derived his estimate of the business expenses from the profit and loss statements (particularly for the 1997 financial year). After checking them against the FMRC Business Benchmarks for service stations, he made what adjustments he considered necessary, including increasing the allowance for owner/operator/manager's salary from $31,200 to $43,680 per annum. He assumed that rent would have increased to $106,240 per annum by 1 January 1998, allowing $107,000 per annum. He estimated business expenses at $378,741 per annum.
In summary, Mr Wright's method of assessing net profit appears in the following statement and table:
"I have examined the historical trading performance of the business in order to establish the 'maintainable net profit' for the business that should be achieved by an experienced owner/operator/manager.
We therefore adopt the following estimated maintainable trading performance per annum:
Estimated maintainable gross income per annum $4,081,300
Estimated maintainable gross profit (before rebate 11.19%) $ 456,697
Add: Estimated maintainable other income $ 156,322Estimated maintainable supply agreement advance $ 30,000
$ 643,019
Less: Estimated maintainable direct business expenditure $ 378,741
ESTIMATED MAINTAINABLE NET PROFIT: $ 264,278"
(before tax, leasing/financing costs and after
manager's wage)
Mr Calabro's Approach:
Mr Calabro estimated the maintainable earnings of the business by a different, but simpler approach. He did not refer to the monthly trading figures, but relied on the operating performance of the business as reflected in the profit and loss statements for the years 1994 to 1997 and for the seven month period to 31 January 1998, adjusted as he considered appropriate by:
· eliminating finance costs, as the business was valued unencumbered
· adjusting owner's remuneration to reflect his assessment of the commercial rate
· excluding abnormal or non-recurrent items of income and expenditure
· adjusting rent receivable to reflect the rental arrangements prior to resumption
The details are set out in Schedule 2 to his report. Essentially he relied on the adjusted statement for the year to June 1997, showing net profit of $240,429, and the adjusted statement for the period 1 July 1997 to 31 January 1998, showing net profit for those 7 months of $179,077. He assumed that rate of net profit would have continued for the rest of the year to establish the net profit for the 12 months to 30 June 1998 at $306,989. He then took the weighted average of the 1997 and 1998 figures, placing greatest weight on the latter (two to one), arriving at $284,803.
To compensate for adjustments he had made to the figures in the profit and loss statements, he added back the rent receivable from the sub-leased premises, which he assessed at $24,000, and deducted his estimate of director's remuneration of $45,000, to arrive at his estimate of net maintainable earnings before rent of $263,803.
The next step was to arrive at maintainable earnings after rent. Mr Calabro noted that for the lease option period current at the date of resumption, the rent had been negotiated between the claimant and Lee Properties at $105,715. However, that lease option period was to expire on 31 December 1999, when the rent for the next option period would have been negotiated. Mr Calabro assumed the rent would then have been increased to market rent, which had been assessed by a registered valuer, Mr Parsons, at $151,200.
Accordingly, Mr Calabro reasoned that the maintainable earnings from 1 April 1998 to 31 December 1999 (1 year and 9 months), would have been $158,000 ($263,803 minus rent of $105,715); and for the period 1 January 2000 to 31 December 2005, maintainable earnings would have been $113,000 per annum ($263,803 minus rent of $151,200).
Both Mr Wright and Mr Calabro assumed that the income from the sub-leased premises would continue for the remainder of the lease. However, if the use of those sub-leased areas was unlawful, then that income would have been in jeopardy. Since the respondent has raised that issue, it is necessary to consider the effect that may have on the maintainable earnings of the business.
The Sub-Lease Income:
The resumed land had been zoned "Special Facilities - Service Station, Shop and Food Outlet" in April 1994. The zoning was changed to "Particular Purposes - Service Station, Shop and Food Outlet" in December 1997.
Following an application to amend the plan of development of the service station in September 1995, the Council gave approval to modify the site plan and the internal design of the service station, subject to certain conditions. Those modifications were carried out and, at the dates discussed previously, the area on the plan marked "storage" (workshop) was sub-let to Handi Trailers and the area marked "Shop" was sub-let to Licence to Call, on monthly tenancies. However, Council approval for such uses had not been sought.
The respondent submitted that both businesses were unlawful uses for the following reasons: They were not businesses which could be described as subordinate or ancillary to the dominant use of the land; nor were they uses which subserve the primary use as a service station. As a consequence, it was argued, they could have been brought to an end through court proceedings if necessary; action to terminate such business activities could have been initiated by the council or by disgruntled competitors. In such circumstances, there were real risks associated with the income stream from those businesses; that income was in jeopardy; the maintainable earnings have been inflated by that income.
The respondent conceded that those uses could have been replaced by other lawful uses. However, there would have been delays and uncertainties and, it was submitted, something less than 100% of the income should be adopted for the purpose of assessing maintainable earnings.
The claimant denied that the uses were unlawful, submitting that they were permitted by the relevant zoning, whether or not those uses were ancillary to the principal use as a service station. In any case, it was argued, given the favourable location of the site, any hypothetical prudent purchaser would have considered that there would have been good prospects of finding alternative sub-tenants in the event that those sub-tenancies had been discontinued.
The respondent called evidence through Mr NC Stevens, the Senior Planning Officer of the Logan City Council, to prove the unlawfulness of the use by Handi Trailers. Mr Stevens confirmed that there had been no Council approval for such use. He was of the opinion that the use contravened the relevant zoning, as the repair and maintenance of trailers was prohibited; if such use had been reported to the Council there was a real prospect that the use would have been declared unlawful and would have had to cease.
On the other hand, the claimant called Mr C Dodd, a qualified town planning consultant, who was of the opinion that the use by Handi Trailers was permitted by the zoning, whether or not that use was ancillary to the principal use. In his opinion, the repair of trailers was within the definition of "service station" as it existed at the relevant time under the town plan.
There was no real attack on the use by Licence to Call.
In the circumstances, I do not feel that I have to determine whether the sub-leases to Handi Trailers and Licence to Call were lawful. In my view, the appropriate test is whether a prudent purchaser of the business would have concluded that the sub-lease income would have continued. There is certainly some doubt as to the lawfulness of the uses prior to the resumption, particularly that of Handi Trailers. The relevant definition of "service station" includes the hiring of trailers, but not the repair of trailers unless they could be considered to be "motor vehicles". However, given the concession by the respondent, I am prepared to accept that the location of the site is such that the claimants would have had little difficulty in leasing the premises to lawful users.
Clearly the difference between them was the result of them relying on different aspects of the financial records.A further submission was made on behalf of the respondent, that the sub-letting of part of the premises was a breach of the conditions of the claimant's lease with Lee Properties. Under the lease, written consent of the lessor was required before the lessee could sub-let any part of the premises. No such consent was sought or granted. In addition, it was submitted that the sub-leases breached the agreement with Mobil, because under that agreement Mobil was to be given first option of any lease of the premises. However, I was not referred to that particular provision.
In neither case was it suggested that these omissions would have resulted in the sub-leases being terminated. There is no evidence that either Lee Properties or Mobil would have objected to the sub-leases if permission had been sought. In my view, a prudent purchaser would have thought that it would have been a simple matter to have regularised such sub-leases.
Accordingly, I propose to take the whole of the income stream from the sub-leases into account in determining the maintainable earnings for the business.
Handi Trailers' sub-lease commenced in October 1997 at a rental of $1,020 per month and continued up until the date of resumption. Licence to Call commenced to sub-lease the shop area in July 1997 at a rental of $1,148 per month and continued to do so until 9 February 1998, vacating only because of the pending resumption. Apart from the issue concerning the lawfulness of those uses, there was no suggestion that if it had not been for the resumption, those sub-leases would not have continued.
There is no evidence to indicate that these rentals are unreasonable. Therefore, I will adopt $26,000 per annum as additional income for the service station business from that source.
Maintainable Earnings Before Rent:
Putting aside the question of rent for the moment, the maintainable earnings (before rent) from Mr Wright's figures would have consisted of net profit $264,278, plus actual agreed rent as at 1 January 1997, $105,715 adjusted by CPI to $106,240, a total of $370,518. Mr Calabro's figure was $263,803. The difference between them was $106,715.
How could such a significant difference arise? As mentioned previously, the claimant's accountants had provided them with the same financial records, including profit and loss accounts and the monthly sales figures, including monthly product sales analyses, showing records of sales of every product for each month, but not the monthly expenses. While there was a profit and loss statement for the seven months from 1 July 1997 to 31 January 1998, there was no such statement for the six months from 1 July 1997 to 31 December 1997.
Clearly the difference between them was the result of them relying on different aspects of the financial records.
Mr Wright did not rely upon the seven month statement because he felt that it was distorted by the January 1998 figures, during which he thought (wrongly) that no rebate had been paid. He preferred to rely on the monthly sales figures for the six months to December 1997, which he regarded as more accurately reflecting the trading performance of the business. It seems that he simply totalled the profit margin for each month of the six month period, then doubled that figure to arrive at the projected gross profit of $456,699 for the full year. That represented 11.19% of his projected figure for gross sales for that year of $4,081,300, which figure he obtained by adding the total sales for the six months to December 1997 and doubling that figure to obtain the projected gross sales for the full year.Mr Calabro was critical of Mr Wright's use of the trading figures for that six month period as a basis for calculation of what was meant to represent the maintainable earnings for the next eight years. He contended that the monthly figures were not a true reflection of the gross profit margin. He pointed out that if the business had continued, there would have been variations from year to year. Furthermore, those monthly figures did not contain the income from fuel rebates and the supply advance. To make a valid comparison with previous years, Mr Calabro contended that the rebates and supply advance should be added, which would increase the gross profit percentage for that year from 11.19% to 14.73%, which was higher than had been achieved for any previous year.
Mr Wright did not dispute that. In his opinion, the profitability of the business was trending upwards after the decline suffered due to roadworks in the vicinity of the service station between November 1995 and March 1997. He felt that the growth in business and the changing product mix would produce results greater than in the previous years. In his view, the six months' figures reflected the trading performance just prior to resumption and he assumed that it would have continued for the next eight years.
Mr Calabro relied on the profit and loss statements rather than monthly sales. He also placed greatest weight on trading for the last six months of 1997, but extended to include January 1998, as indicated by his weighted average, because the profit and loss statement was for the seven month period to January 1998. Mr Wright alleged that the January figure was not reflective of normal trading, but he was not aware that Mobil had paid rebates in accordance with the new agreement.
However, neither Mr Wright nor Mr Calabro were aware that from 29 September 1997, a significant proportion of fuel had been purchased from a source other than Mobil, upon which both of them had assumed the rebate would be payable. The evidence did not disclose just why the claimant felt obliged to purchase "foreign" fuel. Mr Murray said it was because Mobil could not deliver. However, the evidence of Mr Maguire, the Retail Area Manager for Mobil at the date of resumption, effectively rendered that explanation improbable. At least it did not explain the extent of those purchases.
One can only speculate on the real reasons for the Murrays' purchase of such large quantities of fuel from Redlands. However, whatever the reason, the fact is that for those months and into January 1998, the trading performance and profit margins were at least maintained, if not slightly improved. Certainly, for the months of February and March 1998, trading performance declined, as would be expected just before resumption, but the margins actually increased.
It has been established that from 29 September 1997, fuel was being sold as Mobil fuel which, it was contended, was in breach of the agreement with Mobil and could have been categorised as "passing off". Whether that amounted to a serious breach of the agreement with Mobil, is a matter which I will not enter into. I am prepared to accept that if it had not been for the imminent resumption, the purchase of foreign fuel may not have occurred. It was a period of great concern and uncertainty for the Murrays. They knew that the roadworks were going to result in resumptions and that both their service stations would be affected. Mobil probably knew even before the Murrays that the two service stations would be resumed. When they came to negotiate the rebate agreement with Mobil in November 1997, Mobil was well aware that any agreement would be only short term. I am prepared to accept that had there been no resumption pending, it is likely that the Murrays could have negotiated a more attractive rebate agreement and that the supply agreement would have been renewed beyond 31 December 1999. The Murrays had proven that they were very competent operators. They had won Mobil awards on several occasions. In such circumstances, it would seem reasonable to assume that, but for the resumption, Mobil would have been very keen to continue to do business with them.
Mr Maguire said that Mobil changed the rebate system in January 1998, because the previous agreement was unprofitable to Mobil. However, his evidence indicated that in other circumstances Mobil would have been keen to continue their business relationship and would not have forced the Murrays to go elsewhere. He said: "It was my responsibility to maximise our position, but … you certainly don't cut off your nose to spite your face".
Mr Maguire conceded that the 1998 rebate agreement was negotiated with Mobil having full knowledge of the resumption and seeking to maximise its profit during the short term of the agreement. Although Mr Maguire said that the previous agreements were being phased out and the rebate agreement from 1 January 1998 was pretty much standard for the industry, the fact remains that the claimant was in a very difficult negotiating position and, except for the resumption, may have been able to obtain a better rebate agreement.
Do these matters so distort the trading figures for the last six months of 1997 as to render them unreliable? For the period October to December 1997, a significant proportion of fuel had been obtained from a source other than Mobil. But the more attractive rebate was being paid on Mobil fuel. The new rebates commenced from January 1998, but the gross profits were at least maintained, if not trending up in January 1998, when the new rebate agreement was in force. It seems that despite the new rebate agreement, at a time of some adversity, with the resumption pending, the claimant was maintaining or even increasing its margins. Mr Wright, who believed that all rebates had ceased from December 1997, thought that the trading results for those early months of 1998, were an indication of how well the Murrays could have performed as independent operators.
There is another more practical reason for not abandoning those trading figures. The profit of the service station may have been affected by roadworks prior to March 1997. The respondent contended that periodic disruption because of roadworks is to be expected for a highway site. However, it would seem that with the completion of roadworks in the area, further disruption over the next eight years would have been unlikely. The only evidence of trading performance after completion of those works is from April 1997. There was a general trend showing improvement in performance and profit margins from then on. On the basis of that evidence, it would be reasonable for a prudent purchaser to assume that there would have been a steady increase in profitability.However, I am not prepared to accept that profit margins from the monthly sales reports more accurately reflect the trading performance of the business than do the profit and loss accounts. There was no evidence of how those margins were calculated. Mr Calabro did not think they were a true reflection of profit. He described them as no more than an indication. In the circumstances, I am not prepared to accept the monthly sales profit margins in preference to the details contained in the professionally prepared profit and loss statement.
In rejecting Mr Wright's method of calculating the gross profit, I do not accept uncritically the method adopted by Mr Calabro, although I do accept that he was correct to place more weight on the profit and loss accounts. However, before proceeding further, I will turn to another significant difference between the experts.
The Assessment of Rent::
There were several differences between Mr Wright and Mr Calabro in their assessment of the expenses of the business. By far the greatest is in relation to their treatment of rent. Their respective arguments can be simply put:
Mr Wright contended that the rent as agreed between the parties would not have increased to market rent after the expiry of the option period on 31 December 1999. That had not happened throughout the history of their relationship. At each renewal of the lease, the parties had agreed that the rent should be increased by the CPI, without the need for the intervention of a third party. In addition, he reasoned that the "contra" payment, or reduction in rent, would have continued, because the parties would have expected that the oral agreement for the claimant to maintain the adjoining property would have continued. It was a mutually convenient arrangement and there was every reason to assume that it would have continued.
On the other hand, Mr Calabro accepted that the rent which had been agreed by the parties could not be adjusted until the commencement of the next option period. He assumed that it would then have increased to market rent. The basis for that assumption stemmed from evidence produced during negotiations between the respondent and the freehold owner (the lessor) regarding compensation to be paid for the lessor's interest in the resumed land. The representatives of Lee Properties demonstrated by means of Mr Parsons' assessment, that the rent at the date of resumption was not market rent and would (or perhaps could) have been adjusted at the next opportunity.
In respect of the "contra" reduction in rent, Mr Calabro regarded that as a personal arrangement between the lessor and lessee and not something which a prudent purchaser of the service station business would have expected to be extended to such a purchaser.
Mr Allan argued that both the prospect of an agreed rent at less than market rent and the "contra" arrangement were elements of special value to the claimants and therefore must be taken into account in the assessment of compensation.
Mr Gallagher, for the respondent, argued that there was no special value. Applying the test of market value to the present circumstances, a prudent purchaser of the business would not have had regard to either of them, but would have assumed that the rent would have been adjusted to market rent from 31 December 1999. Furthermore, a prudent purchaser would not have expected the "contra" arrangement to continue.
It is therefore necessary to consider whether those arrangements between the lessee and lessor which had resulted in the claimant paying less than market rent at the date of resumption, were attributes which should be taken into account in the assessment of compensation. It seems that the lessor had been prepared to accept a rent less than market, because at the end of each option period the rents for the new option period were negotiated without the need for a third party assessment of market rent.
The rent agreed for the option period commencing 1 January 1997 was $105,714.84. On 1 January 1998, that rent would have increased in accordance with the formula contained in the lease. Mr Wright assumed it would have been $106,240 per annum.
However, I accept that the rent was less than market rent and that Mr Parsons had correctly assessed the market rent as at the date of resumption at $151,200. It is unlikely that it would have been much different by the end of the option period.
From about May 1996, the rent was further reduced as a result of the oral agreement between the lessor and the claimant. Mr Wright pointed out that the relevant profit and loss statements show that the rent had been discounted by $1,538.76 per month, or $18,465.12 per annum. The reasons for that reduction in rent were explained by Mr Murray as being three-fold:
- The expenditure by the claimant of approximately $30,000 on the rezoning and construction of a shop/food outlet, together with site works for nine additional carparks;
- The maintenance by the claimant of the lessor's adjoining land and residence;
- Assistance by the lessor to the claimant because of the downturn in trading experienced by the claimant as a result of roadworks on the Pacific Highway affecting the egress from the service station.
The expenditure of $30,000 by the claimant on the rezoning and construction of a retail food outlet area and carparks, seems to have been motivated by the wish to increase the income from the premises. There was some evidence that the claimant had itself endeavoured to utilise the workshop area at the rear of the premises and then to lease it to an independent mechanic, but neither venture proved viable. It seems that it was not until the areas were sub-let to Handi Trailers and Licence to Call that the claimant was able to recoup a return on its expenditure of $30,000.
As a result of various roadworks upgrading the Pacific Highway, a number of service stations were resumed, in addition to Mobil Loganholme, including Mobil Beenleigh and Mobil Ormeau. Mobil would therefore have been well aware of the effect of the resumptions on its business in the area and was probably aware of the respondent's intention to resume the Mobil Loganholme service station before the Murrays became aware of that intention.
Ironically, the claimant operated the Mobil Ormeau service station under a franchise agreement with Mobil. The resumption also deprived the claimant of that business, although that plays no part in the present claim, except to indicate the extent to which the claimant has been affected by the resumptions.
Where then does this leave the two arrangements between the claimant and Lee Properties, which together resulted in the claimant paying a rent which was less than market rent at the date of resumption?
First, in relation to the agreed rent that was paid at the date of resumption: the history of the negotiations between lessor and lessee suggests that the lessor is not concerned to extract the highest possible rent from the lessee. The lessor was prepared to extend the lease by two additional option periods by the deed of variation. That would seem to indicate that the lessor's priority was to keep a good reliable tenant and was prepared to accept a rent less than market rent in order to do so.
Mr Gallagher submitted that the concessional rent is the result of a "friendly" relationship between lessor and lessee. However, apart from the "contra" arrangement, there is no evidence that the relationship was other than a good commercial one, with each rental agreement being incorporated in a deed.
In my opinion, at the date of resumption a hypothetical prudent purchaser aware of the rental history of the service station would expect to be able to negotiate rent in accordance with the provisions of the lease at the end of each option period. It would seem unlikely, given the past rental history of the property, that the lessor would have increased the rent by almost $50,000 for the period commencing 1 January 2000. Therefore, I am of the view that the probability of a negotiated rent for each option period is an attribute which was not unique to the claimant, but would have extended to a hypothetical purchaser of the claimant's business.
Therefore, the probability of the rent continuing at less than market rent was not an attribute of "special value", but was an element of the market value of the subject business. It was a matter which a prudent purchaser would have taken into account in assessing the price which he or she would have paid for the business.
However, if I am wrong in so finding, then in my view the concessional rent should be taken into account as part of the special value to the owner, under the principles outlined earlier.
Turning now to the reduction in rent because of the "contra" agreement. The arrangement was an oral agreement between the lessor and the claimant which was entered into in about mid-1996, and resulted from a number of factors including:
- The expenditure by the claimant of approximately $30,000 in connection with the construction of the shop/food outlet and carparks;
- The downturn in trading of the business because of the roadworks which affected egress to the service station;
- The maintenance of the lessor's adjoining property by the claimant.
The first and second factors were not attributes or qualities in the land itself, but were simply the result of the relationship which had developed between lessor and lessee. Any reduction in rent resulting from previous expenditure on the premises by the lessee, or because of a business setback, would almost certainly be temporary. In my view they are not elements of either market value or special value.
The third factor was an arrangement to the mutual benefit of both parties. The principal of the lessor, Mr Lindsay Lee, lived interstate. It was to his benefit that the property was cared for. The claimant had an interest in ensuring the adjoining land was maintained to enhance the visibility of the large advertising sign. There is no suggestion that the claimant paid rent for the sign, or that the cost of the maintenance work was taken into account. In my view it would be unlikely that such an advantage would be considered by a hypothetical prudent purchaser. It seems to have been a mutually advantageous arrangement between the lessor and the claimant which was not committed to writing.
Mr Allan submitted that it was an economic advantage which was enjoyed by the claimant and to that extent should be recognised in the value of the business to the owner.
Mr Gallagher contended that there was no "special value", as there was no guarantee the advantage would continue in the future. It was purely a temporary advantage which could cease at any time. There were many circumstances which could cause the advantage to cease: the owner could sell the adjoining property, or rent it to someone else, or transfer the property and/or the freehold of the resumed land. There were just too many uncertainties, it was argued, to take that advantage into account in the value of the business. In any case, the advantage was an attribute which was "personal" to the owner, it was not a quality in the land itself which could be characterised as "special" to the owner.
That submission mirrors the finding of Else Mitchell J in Chong v. Fairfield Municipal Council (1968) 16 LGRA 407 where his Honour said at 411:"… The concept of special value to an owner is not something personal to the owner, but a quality of the land itself, which is special only in the sense that it is a potentiality demonstrated by the use to which it has been put by the owner …."
The arrangement cannot be said to be a quality in the land itself. Certainly the land on which the service station business was conducted was physically adjoining the land on which the advertising sign was located and the lessor's residence was constructed. The arrangement might have continued while it was to the mutual advantage of each party. However, in my view, it was not one which it would be reasonable to assume would have continued into the future. In any event, maintenance work carried out by representatives of the claimant on the lessor's adjoining land was only one of three reasons which Mr Murray said were behind the agreement. Therefore, I propose not to allow the additional reduction in rent resulting from the "contra" agreement.
The Appropriate Method of Valuation:
As explained earlier, Mr Wright adopted the traditional valuation method known as capitalisation of future maintainable profits, whereas Mr Calabro purported to adopt the discounted cash flow method (DCF). However, as I will discuss later, Mr Calabro's approach was not the traditional DCF approach. Indeed, he recognised that himself, but considered that the claimant's accounts were not sufficiently sophisticated to enable him to make the forecasts of income and expenditure necessary for a conventional DCF evaluation.
Both methods involve estimating the future profitability of the enterprise. The capitalisation of future maintainable profits involves deriving the valuation of a business as a whole by capitalising a figure which represents the estimate of profits which could be maintained in the future, to find the "going concern" value of the enterprise. The value of goodwill can be ascertained by deducting the value of tangible assets from the going concern value of the business. The method involves selecting a capitalisation rate to convert estimated maintainable profits to a capital sum, taking into account the nature of the business, its stability or otherwise, and the risks associated with that business. The capitalisation rate which is appropriate is usually derived from the analysis of sales of comparable properties.
It is obvious that the past performance of a business is not necessarily indicative of future performance. However, in most circumstances past performance provides some guidance as to the likely trend of the profits of the business in the future.
On the other hand, the DCF method of valuation discounts future cash flows to present value. The method requires that an estimate be made of the amount and timing of all income and expenditure for each future period, be it monthly, quarterly or yearly. The resulting cash flow amounts are discounted to present value at an appropriate discount rate. The method is said to be most appropriate where the future income and expenses vary from period to period, with the result that a variable income stream is expected. That is said to be the main advantage of the DCF method over the capitalisation of net profits, which by its very nature, assumes that the net profit will remain constant each year.
There are obvious similarities between the two methods. This was recognised by the information paper attached to the AIVLE Practice Standard for Discounted Cash Flow, published in 1993, paragraph 1.3 of which states:
"DCF is not inherently different from the traditional approach of capitalisation of net income. The capitalisation method discounts the passing income in perpetuity with implicit assumptions regarding future growth, capital outlays and risk profiles. DCF on the other hand explicitly quantifies the likely cash flows over a specific future period, and discounts these cash flows and the terminal value estimated at the end of the period."
In this case Mr Calabro has not attempted to forecast the future incomes and future expenditures for the business each year, because the records of the company did not enable such an analysis to be made. Instead, he assumed that the maintainable income would have remained constant for the next 7 years and 9 months. Nor did he allow for a terminal value, because he reasoned that at the end of the last option period, there would have been no further cash flows.
Mr Allan pointed out where Mr Calabro's purported DCF method of valuation departed from the requirements of the AIVLE Practice Standard. Mr Calabro did not deny these departures, his excuse being that he was forced to adopt the compromise method because of the state of the company's accounts. However, he thought that the method of capitalisation of future maintainable earnings adopted by Mr Wright was inappropriate, mainly because the method capitalised those earnings in perpetuity, whereas the life of the business was limited to 7 years and 9 months. While Mr Wright claimed that he took account of the limited life in his capitalisation rate of 25%, Mr Calabro contended that it was not possible to adjust the capitalisation rate to take account of the limited life of the business.
Mr Allan submitted that a method similar to that adopted by Mr Wright had received the approval of the High Court in Dangerfield and Others v. Town of St Peters (1972-73) 129 CLR 586 and of the Land Court in Rountree v. Brisbane City Council (1988-89) 12 QLCR 46. However, in my view, both these cases can be distinguished from the present situation.
In Dangerfield, the life of the business extended over a period of some 23 years. It is well recognised that such a lengthy period is basically equivalent to perpetuity. It can hardly be compared with the limited life of the business in the present case. The difference between capitalisation in perpetuity and for 7 years and 9 months was demonstrated by Mr Calabro in Exhibit 73.
More relevantly, in Rountree the lease had a life of approximately 4.5 years and the Court accepted that capitalisation of net profit was the appropriate method. However, in that case Mr Wright (who coincidentally, was the valuer), had obtained his capitalisation rate from sales of similar properties. The capitalisation rate was 35%, therefore the year's purchase multiplier was only 2.85.That situation differs from the present, where Mr Wright was at some pains to point out that he did not derive his capitalisation rate from sales, but from his experience and knowledge of the market. It was abundantly clear that he placed no reliance on the sales of service stations included in his report. Furthermore, the capitalisation rate of 25% adopted in this case by Mr Wright has a year's purchase multiplier of 4, which gives me cause to doubt whether the capitalisation rate fully takes into account the limited life of the business.
It is well established that capitalisation rates should be derived from sales of similar properties. In this case, although Mr Wright paid some regard to sales, he found none that was directly comparable. It seems that he has not attempted to analyse any of the sales, but has included the raw data provided to him by Ampol and others. Those data show capitalisation rates varying from -5.5% to 31.3% (between earnings and sale price), the goodwill component varies widely and most of them are franchise/leases. It is no wonder Mr Wright relied on his experience and knowledge of the market, because those sales data could have been of no assistance.
Mr Wright listed the factors to which he had regard in arriving at his valuation of the business:
- Security of tenure
- Current and historical trading performance
- Estimated maintainable gross sales, estimated maintainable gross profit, and estimated maintainable direct business expenditure which should be achieved by an experienced owner/operator/manager of the business
- Location and competition
- Market demand and scarce availability of high volume independent leasehold sites
- Maintainable profit periods
- Working capital requirements and capital employed in tangible assets (ie stock, working capital, plant and equipment investment)
- Market growth and prevailing economic conditions
However, apart from that general explanation and his reliance on his experience and knowledge of the market, Mr Wright provided no further explanation of how he arrived at the 25% capitalisation rate.
As a check on the result, Mr Wright applied what he called the "sinking fund" test. However, although he seemed to derive some reassurance from that test, it seems to me it did no more than demonstrate that a prudent purchaser would be able to recoup his or her investment in 7 years and 9 months, in addition to making a profit. Such a method does not seem to have any judicial or academic approval. Apart from demonstrating to Mr Wright that his valuation is not too low, in my view it provides no basis for indicating that the valuation arrived at is correct. Nor does it provide any confirmation of the correctness of the capitalisation rate of 25%.
In carrying out his DCF exercise, Mr Calabro adopted a discount rate of 25.35% for both periods. In arriving at that discount rate, he said that he had regard to
· Current yields for medium term fixed interest security
· Current economic conditions
· The risk factors associated with the type of operations conducted by the claimant
· The customer base of the business
· The nature of the operations
· The competition within the industry
· The tenure of the business
Mr Calabro explained that the discount rate must reflect the extent to which a prudent purchaser of the property would expect to make a net profit in excess of the long-term bond rate. He made allowance for the small business risk and the risk associated with the service station industry. On top of that, he made allowance of 2½% for growth. Mr Calabro explained the weight that he gave to each of these factors:
Risk free rate - Government Bonds 10 years 5.86
Adjustments: Small business risk 8.79
Industry risk 13.19
Growth Rate -2.5
TOTAL 25.34
Mr Calabro was questioned closely by Mr Allan for further explanation of these various factors. However, he gave no further explanation. In my view, his various factors (apart from the bond rate which is available from published figures) required such an explanation to be fully credible. In the circumstances, I think that they can be said to be the product of Mr Calabro's extensive skill and experience. However, he did not satisfactorily explain the basis for the factors which led him to arrive at the discount rate. In my view, it would be necessary to explain the basis for each factor for the discount rate to have credibility.
Mr Calabro acknowledged that his DCF methodology in this case equated to the capitalisation of maintainable earnings method. However, the significant difference resulting from the methodologies of the two experts was not so much in their respective capitalisation rate or discount rate (which Mr Calabro explained would result in only a small difference), but in the fact that Mr Wright capitalised the maintainable earnings in perpetuity, while Mr Calabro discounted the net profits for the duration of the period for which the claimant held options for renewal of the lease, a period of 7 years and 9 months.
I am not convinced that Mr Wright's capitalisation rate of 25% sufficiently takes into account the limited life of the business. In accordance with my earlier findings, I feel that further recognition should be given to that limited life. Mr Calabro said that he considered the DCF method was the only logical approach where a business had a finite life. However, as I will explain, in my view that limited life can be given recognition in another way.
On the other hand, I cannot accept Mr Calabro's discount rate of 25.35% as appropriate in this case. He adopted the same discount rate of 25.35% in the valuation of the leasehold interest of the franchisee in the service station known as "Mobil Beenleigh". That service station was quite a different enterprise to that conducted by the claimant. It was owned by Mobil and was operated under franchise agreements. It had a much larger turnover of fuel and a 24 hour fast-food operation associated with it (but under separate franchise). The maintainable earnings of the interest valued were only $84,600 and the period of operation was 10 years. It says little for the sensitivity of the discount rate adopted by Mr Calabro that he could apply the same rate in two such different circumstances. In the result, I find that I can have little confidence in that discount rate and therefore have no option but to adopt what I consider to be the most appropriate method of valuation in these circumstances.
In this case I find that it is not appropriate to adopt the discounted cash flow method. The accounts of the company in Mr Calabro's opinion did not lend themselves to forecasting income and expenditure for each of the remaining 7 years and 9 months. It was necessary for Mr Calabro, as it was for Mr Wright, to assume that earnings would remain constant each year over that period. In other words, they treated those earnings as an annuity. In those circumstances, the essential benefits of the discounted cash flow method are absent. It seems to me that it would be more appropriate to adopt the capitalisation of net profits, but limited to 7 years and 9 months.
Before attempting that exercise, however, I will examine the evidence of the sales of service stations in this case in the hope that it may provide some assistance.
The Use of Comparable Sales as a Basis of Valuation:
It is well established that the most appropriate method of determining market value is by comparison with sales of comparable lands: for example, see River Bank Pty Ltd v. The Commonwealth (1974) ALJR 483. The characteristics of the land being valued and those of the sale may differ, but that does not mean that a sale should be totally rejected where there are significant characteristics of similarity: Crompton v. Commissioner of Highways (1973) 32 LGRA 8 at pp23, 24. Provided that there are such characteristics of similarity, appropriate adjustments can be made for the differences between the sale and the property being valued. Where there are major differences between sale and subject property, however, the adjustments may prove to be so great as to render any comparison pointless. The evidence derived from sales, therefore, tends to lose its evidentiary value unless those sales are subjected to critical analysis and appraisal before being used in the comparison process: Minister for Environment v. Petroccia (1982) 30 SASR 333 at 343. .
In the present case, neither Mr Wright nor Mr Calabro used that method of comparison with comparable sales as his primary method of valuation. Both of them referred to some sales of service stations, but both have denied that they relied upon those sales, except perhaps to give some ex post facto support to the valuations derived by other means. In other words, both of them preferred to rely on their general knowledge of the market and their experience in determining their respective valuations of the business in the present case.
Mr Wright referred to 24 sales of service stations in other States, which sold between July 1992 and December 1995. Each of them appears to be an Ampol Road Pantry service station, and would seem to have the complication of being involved with a food outlet. Significantly, none of the sales was at a price approaching the valuation which Mr Wright assessed for the business in this case. The highest was the sale of the service station at Wagga for $260,000.
It seems that Mr Wright did not attempt to analyse any of those sales but relied on the details which were provided by Ampol, which show capitalisation rates varying from -5.5% (Randwick) to 31.3% (Diamond Creek). However, all but two of those sales seem to be of franchise/leases and this, together with the other characteristics of those sales, makes them inappropriate for any comparison with the business in the present case.
Mr Wright also included the details of two other sales, BP Paradise Point and BP Kingscliff. However, according to Mr Coudrey, a business broker specialising in service stations, the details were inaccurate and the second sale referred to was Caltex Kingscliff and not BP Kingscliff.
As explained previously, Mr Calabro did not rely upon sales of comparable lands as his basis of valuation, but after he had completed his valuation, he referred to a number of transactions in order to test the reasonableness of his result. He explained that he had not analysed those "sales" personally, but had obtained the details from Mr Coudrey. In each case Mr Coudrey had provided him with the profit and loss statement for the business, which had been adjusted by the business's accountant to exclude financing costs, items considered abnormal and owner's remuneration. Of those four "sales", two of them (Ampol Booval and Ampol Hastings Point) were, at the time of hearing, still under contract and had not been completed. However, Mr Coudrey expected them to be completed in the near future. One of the other sales (Mobil Beenleigh) was the negotiated figure between the lessee (franchisee) of that service station and the respondent, following the resumption of that land.
The only concluded sale was of Caltex Kingscliff, which sold in January 2000, for what Mr Calabro was told was the sale price of $289,000. At the time of sale the lease had 16 years to run, the annual literage of fuel sold was 1.48 million litres and the
estimated net profit was $45,000, when adjusted for owner's remuneration. The details provided to Mr Calabro included plant and equipment valued or apportioned at $92,000 and stock at $79,000, leaving a goodwill value of $118,000, or 2.62 times net profit.
However, the contract of sale for Caltex Kingscliff showed the sale price as $210,000, apportioned as goodwill $170,000, and plant, fittings and chattels $40,000. That significantly changed the situation. On those figures, the relationship between earnings of $45,000 and goodwill of $170,000, is 3.778 times, or a capitalisation rate of approximately 26.5%.
This analysis of the sale of Caltex Kingscliff demonstrated two things. First, the sensitivity of any analysis to the correct valuation of plant and equipment. Second, the danger of relying on the contract apportionment of the sale price.
It seems that the details given to Mr Calabro by Mr Coudrey were incorrect as they do not accord with the details contained in the contract of sale. Mr Calabro was told the sale price was $289,000, whereas the contract shows the sale price as $210,000. However, the contract shows the stock-in-trade as $80,000 (fuel $20,000, shop $60,000). The contract does not reveal whether that figure of $80,000 was included in the total sale price, or whether the stock was sold separately to the business, which would approximate Mr Calabro's stated sale price of $289,000.
Unfortunately, the sales evidence in this case is far from satisfactory. It is difficult to see how either of the experts was able to find any support for their respective valuations made by other means. In my opinion, they do not support those figures. The best that can be said for the sales is that they indicate that neither Mr Wright nor Mr Calabro was able to find sales of leasehold interests in service stations throughout Australia which supported the valuation contended for by the claimant. On the other hand, the exercise undertaken by Mr Wright in respect of the analysis of the sale of Caltex Kingscliff indicates that if the plant and equipment are not valued correctly, the effect on the capitalisation rate derived from the sale will be significant.
It is unfortunate that neither Mr Wright nor Mr Calabro had attempted a valuation based on sales of service stations. In their defence, it seems that they were unable to find sufficiently comparable sales. Be that as it may, in the present circumstances, I can derive little assistance from the details of the sales that they have provided.
Disturbance:
As explained earlier, it is at least arguable in this case that the whole of the compensation to be awarded to the claimant would come under the heading of "disturbance". Whether disturbance should be characterised as part of "special value" to the owner or should be awarded as a separate head of claim, it has long been the practice of this Court and the Land Appeal Court to award as a separate head of compensation, legal and valuation fees reasonably and necessarily incurred in the preparation of a claim for compensation. The rationale for such an award finds its origins in the test laid down by the English Court of Appeal in Harvey v. Crawley Development Corporation (1957) 1 All ER 504 at 507, namely that any loss sustained by a dispossessed owner which flows from a compulsory acquisition may properly be regarded as the subject of compensation for disturbance provided, firstly, that it is not too remote and, secondly, that it is the natural and reasonable consequence of the dispossession of the owner.
In Merivale Motel Investments Pty Ltd v. Brisbane Exposition and South Bank Redevelopment Authority (1984-85) 10 QLCR 268 at 287, the Land Appeal Court confirmed the judgment of the Land Court in awarding legal and valuation fees involved in the preparation and lodgment of the claim for compensation. The Land Appeal Court then went on to say at 288:
"Dispossessed owners are entitled to seek professional advice and assistance in order to comply with the requirements of the Acquisition of Land Act insofar as lodging claims for compensation are concerned. Providing the valuation advice is not frivolous or lacking in bona fides, a fee based on a claimant's valuation should be reimbursed. To refuse this would be lacking in fairness and generosity to the claimant and too restrictive of its personal right of choice irrespective of whether or not the claim is successful."
That principle has been extended to cover other professional advice reasonably sought for the purpose of lodging claims for compensation.
In the present case, the parties have reached agreement regarding the amount of valuation fees, accountant's fees and legal fees that should be allowed as necessarily involved in the preparation of the claim. However, there remains in dispute the fee paid to Mr Dodd, the town planner, of $1800. Mr Gallagher submitted that the amount should not be awarded as disturbance, as this was not a case where town planning advice was required for the preparation of the claim. However, in my view, Mr Murray adequately explained the involvement of Mr Dodd. Mr Dodd is an engineer as well as a town planner. Mr Murray said that there were four schemes of development on the highway and Mr Dodd's advice was required to prepare the claim. He attended four different meetings with the claimant's directors and other advisors concerning town planning and Main Roads Department maps of the area when the claimant was preparing the claim for compensation. There had been roadworks in the vicinity of the resumed land over an extended period and the claimant was entitled to advice as to what was involved in the "scheme" of resumption before lodging its claim for compensation. Mr Murray also gave evidence that the account from Mr Dodd's firm, Consulting Coordination Pty Ltd, had been paid.It is well established that a claimant must prove each item of disturbance: Hill v. Director-General, Department of Transport (1992) 14 QLCR 205. In my view, there is sufficient evidence to establish that the advice of Mr Dodd was reasonably necessary for the preparation of the claim for compensation in this case.
A letter from the claimant's solicitors to the claimant dated 29 May 1998 regarding the solicitor's bill of costs, proved that Mr Dodd was involved in the matter from January 1998. He attended meetings in January, February and March, prior to 20 March when the claim for compensation was lodged. However, the letter also showed that Mr Dodd was involved in further conferences in April 1998. It is clear from the judgment of the Land Appeal Court in Merivale that the relevant period for the assessment of professional fees in such circumstances commences with the receipt by the claimant of the notice of intention to resume and ends on the date of lodgment of the claim. Therefore, Mr Dodd's fees for April cannot be allowed.
Mr Dodd's account dated 5 May 1998 was for professional services up to the end of April, but merely shows "Professional Fees 18 hours @ $100/hour $1800". There is simply no evidence as to how much of that time was after 20 March. In the circumstances I can do no more than make what I think is a reasonable assessment and I propose to allow $1500.
In addition to their agreement regarding the amount of valuation, legal and accountant's fees that should be allowed in the award of compensation, the parties informed me that agreement had been reached regarding the payment of compensation in respect of two other matters. These were the amount of $17,765 for the loss of profits during the closing down of the business in February and March 1998, and the amount of $52,500, being the amount the claimant was required to refund to Mobil upon the cancellation of the supply agreement. As these amounts were negotiated independently of the matters argued in this case, I will make no comment on the appropriateness of those awards.
Before turning to the assessment of compensation, there was one other issue raised by the claimant which requires consideration.
The Nature and Duration of the Interest:
Mr Allan submitted that the claimant's interest was not confined to the end of the fourth option period of the lease on 31 December 2005. There was, he argued, a strong prospect of renewal beyond the expiry date and allowance should be made for that prospect as part of the special value to the owner.
That submission was made, notwithstanding the fact that Mr Wright stated that he did not make any allowance in his capitalisation rate for the prospect of renewal of the lease beyond 31 December 2005. Mr Allan submitted that, despite that evidence, this Court is bound to allow for the possibility of further renewal of the lease.
He bases that submission on two grounds: First, there was Mr Murray's evidence that he had an expectation that the lease would continue to be renewed because of the previous history of renewals during the claimant's occupation of the site for some 11 years prior to the resumption. Secondly, correspondence between the claimant's solicitors and Mr Wright dated 12 February 1998, referring to comments by Mr Lee that he "… had always considered that renewal would run in perpetuity to be documented every three years as may be required by Mr Murray".
Mr Gallagher countered that argument by submitting that it is well established that it cannot be assumed that a lessee will be permitted to remain in occupation of the premises when the lease expires, unless there is a right of renewal in the lease. If there is no such right of renewal, the Court cannot take into account that probability because of the personal relationship of the lessor and the lessee: The Minister v. New South Wales Aerated Water and Confectionary Co Ltd (1916) 22 CLR 56.
However, Mr Allan analysed the individual judgments of the members of the High Court and concluded that the ratio of Aerated Water is much narrower than the proposition for which it is contended to be authority. He also examined subsequent cases in which the Aerated Water principle had been applied or distinguished, before submitting that it was open for this Court to take into account the claimant's expectations of the prospect of further renewal of the lease, based on the strong commercial relationship which had developed between lessor and lessee.
In my opinion, the facts of this case are against such a proposition. Regardless of whether at law I could take into account the value of the claimant's assessment of the prospect of renewal of the lease beyond the period of existing options, there is simply not sufficient evidence to indicate a likelihood of further renewal, or the value that it would add to the business if it did exist. Certainly, Mr Murray saw no reason why the lease would not have been further extended. However, without supporting evidence, that expectation would seem to be little more than hope. There is some indirect evidence of what Mr Lee said in the presence of both the claimant's solicitors and Mr Wright about his expectation that the lease would run in perpetuity. However, Mr Lee was not called to verify that statement. Without any supporting evidence, I can place little weight on that letter.
Perhaps most significantly, Mr Wright who was alleged to be a party to that conversation, and who agreed that the claimant had a reasonable expectation of renewal, apparently saw little value in the prospect of the lease being renewed, as he made no adjustment to his capitalisation rate for that prospect.
The state of the evidence is such that, in my view, a hypothetical prudent purchaser would not be persuaded to pay more for the business because of the prospect of further renewal of the lease. Applying the test of "special value to the owner", I do not think that it would be reasonable for a person in the position of the claimant to pay more than the hypothetical prudent purchaser for that prospect. In other words, the prospect of further renewal is not an attribute in the land which can only be available by the owner. If it does exist, it appears to have very little value. In any case, there is no evidence of what additional value should be added, even if it could be allowed.
Assessment of Compensation:
I turn now to the assessment of compensation in accordance with my findings in this case. First it is necessary to arrive at a figure for maintainable earnings.
Maintainable Earnings: I have found that I prefer to have regard to the profit and loss statements rather than rely on the monthly sales figures. I have referred to the problems that I think are inherent in Mr Wright's approach and concluded that it leads to an over-optimistic assessment of what would have been the future trading performance of the business, if it had not been extinguished by the resumption.
I prefer to rely on the profit and loss statements provided by the claimant's accountants, particularly that for the seven month period 1 July 1997 to 31 January 1998, which I have found to be reasonably representative of the trading performance that could be expected for the remainder of the lease.
Before undertaking this assessment, I must state that the very nature of the exercise requires a number of assumptions to be made. I am consoled by the fact that both Mr Wright and Mr Calabro also based their assessments on many assumptions. At least I have had the advantage of making my assumptions after considering all the evidence and the arguments.
Trading Income: The trading income set out in the profit and loss statements for the seven months to 31 January 1998 is $2,410,526. Projected for a full year, or "annualised" it would amount to $4,132,330. That does not seem to be an unreasonable figure, having regard to the trading history of the business. That figure includes both rebates and supply advances.
Gross Profit: The profit and loss statement for the seven months to 31 January 1998 shows gross profit at $296,885 or 12.3% of gross income. However, the trading history from 1994 to 1997 indicates that gross profit varied from 12.3% to 13.7%. In accordance with my finding that with the completion of roadworks, there would have been a steady increase in profitability, I propose to adopt a gross profit of 13.5% or $557,865.
Expenses: Mr Wright assessed the maintainable expenses of the business at $378,741. However, having regard to the previous expenses and the expenses for the seven months to 31 January 1998, I have concluded that an additional amount of $13,000 should be added. The major items requiring adjustment in my view are the amounts he allowed for motor vehicle expenses, wages and rates and land tax. That increases the expenses to $391,740, which includes rent at Mr Wright's figure of $107,000.
Net Profit: Deducting the expenses from gross profit brings net profit from trading to $166,125. To that must be added income from the sub-leases of $26,000, bringing total net profit to $192,125 per annum.
Capitalisation of Net Income: I have found that the most appropriate method of valuation in this case is to capitalise net income at 25% for 7 years and 9 months. On my calculations, I arrive at a valuation of the business as a going concern of $635,600.
In considering Mr Wright's method of valuation, I expressed concern that his capitalisation rate of 25% did not sufficiently take into account the limited term of the lease. At that time, I refrained from suggesting an appropriate capitalisation rate. However, my determination of the value of the business at $635,600, is approximately equivalent to capitalisation at 30% in perpetuity, sufficient to account for the element I found missing in Mr Wright's capitalisation rate.
Also, although I found no assistance from the sales evidence in this case, I am satisfied that what evidence there is lends more support to a year's purchase of 3.3 rather than 4.
The Value of Goodwill:
From the going concern value of the business must be deducted the value of stock, plant and equipment, and working capital. It was common ground that these were not lost to the claimant when the business ceased to operate. Mr Calabro assessed the value of stock at $75,000, while Mr Wright adopted $85,000. Either value is supportable from the figures in the accounts. However, in the circumstances, I will accept Mr Calabro's value.
Mr Calabro admitted that he had not been provided with a valuation of the plant and equipment and had simply estimated what he thought was reasonable. On the other hand, Mr Wright had examined the plant and equipment and had estimated that its second-hand replacement value was $30,000. As Mr Wright's valuation is more soundly based I will adopt the figure of $30,000.
Mr Wright estimated that the business would need an operating capital/debtor funding of $32,300. However, as I understand Mr Calabro's evidence, he thought that very little working capital would be required as it was a cash business and that it would be adequately allowed for in his assessment of the value of stock at $75,000. I accept his reasoning.
Assessment of Compensation:
Value of the business as a going concern $635,600
Less: Value of stock $75,000
Value of plant and equipment $30,000 $105,000
Value of goodwill $530,600
Add: Disturbance:
Professional Fees (agreed) $14,062
Mr Dodd's fee $ 1,500
Items agreed independently $70,265 $ 85,827
TOTAL COMPENSATION $616,427
41
Interest:
The Court has the discretion to order that interest be paid upon the amount of compensation determined, excluding any amount of compensation advanced by the constructing authority: Acquisition of Land Act 1967, s.28. Interest may be awarded from the date of resumption until the day immediately preceding the date on which payment is made.
However, in this case the claimant remained in possession of the service station and continued to trade until the end of March 1998. As mentioned previously, the parties agreed on an amount which represented the loss of profits during the closing down of the business in February and March 1998. Therefore, I propose to award interest from 1 April 1998 instead of from the date of resumption.
I was advised that the following advances have been paid:
First advance paid 31 March 1998 $250,000
Second advance paid 4 April 1998 $ 50,000
Third advance paid 28 September 1998 $200,000
Interest on professional fees incurred in the preparation of the claim for compensation is payable only from the date of payment of those fees: Varitimos v. Queensland Electricity Commission (1990-91) 13 QLCR 1. Evidence was given that all fees were paid and the majority of those fees are detailed in the solicitors' bill of costs dated 29 May 1998. In the absence of evidence of precise dates of payment, I will assume they were paid on 1 June 1998.
Determination and Orders:
Compensation is determined in the sum of Six hundred and sixteen thousand, four hundred and twenty-seven dollars ($616,427) and the respondent is ordered to pay the claimant that amount.
I further order that the respondent pay interest at the rate of 6 per centum per annum as follows:
· on the amount of $300,865 from 1 April 1998 to 1 June 1998;
· on the amount of $316,427 from 2 June 1998 to 28 September 1998;
· on the amount of $116,427 from 29 September 1998 up to the day immediately preceding the date on which payment of compensation is made.
(JJ Trickett)
President of the Land Court
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