NSW Trustee and Guardian v Wardy

[2020] NSWSC 18

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

NSW Trustee and Guardian v Wardy [2020] NSWSC 18

Hearing dates:

30 November, 1 December 2017, 9 & 13 February 2018; 11 December 2018; final written submissions received January 2019.

Date of orders:

29 January 2020

Decision date:

29 January 2020

Jurisdiction:

Equity

Before:

Slattery J

Decision:

The Court orders that the property being proposed by the administrator, namely the George Street property, should be substituted for the property sold to pay the estate’s debts. Orders made in relation to the administrator’s costs of the proceedings. Directions made for the parties to advance further submissions in relation to costs and for the resolution of remaining incidental issues of estate administration.

Catchwords:

ADMINISTRATION OF ESTATES - specific devise – an administrator decides to satisfy some of an estate’s substantial debts by selling certain real estate, which had been specifically gifted to named beneficiaries – the administrator and the specific devisees of the real estate propose the substitution in the gift to the devisees of a particular estate property, namely the George Street property, for the property that had been sold – other beneficiaries propose the substitution of a different property, or alternatively that the estate acquire a new property, as a substitute for the sold property – how should the rights of all beneficiaries among one another be adjusted, so that the specific devisees of the real estate that has been sold should now “be put into the same position [they] would have been if the property the subject of the specific legacy had not in fact been sold”.

Legislation Cited:

Evidence Act 1995, s 69
Probate and Administration Act 1898, s 46C
Succession Act 2006, Chapter 3
Trustee Act 1925, s 63
Valuation of Land Act 1916, s 6A
Valuers Act 2003,ss 8, 45

Cases Cited:

Ewer v Corbet (1723) 2 P Wms 148; (1723) 24 ER 676
Joyce v Cam (2004) 12 BPR 22,231
NSW Trustee and Guardian v Wardy [2017] NSWSC 1466
RL v NSW Trustee and Guardian (2012) 84 NSWLR 263
Wardy v Wardy & Ors; The Estate of Edmund Wadih Wardy [2013] NSWSC 244
Wardy v Salieh; Wardy v The Estate of the late Edmond Wadih Wardy [2014] NSWSC 473

Category:

Consequential orders (other than Costs)

Parties:

Plaintiff: NSW Trustee and Guardian
First Defendant: John Wardy

Representation:

Counsel:

 

Plaintiff: A. Hill; M. Pringle; J.E. Thomson
First Defendant: M. Sneddon

 

Solicitors

  Plaintiff: David Jackson, David Jackson& Associates
First Defendant: Phillip Brand, Bartier Perry Lawyers

File Number(s):

(2016/120350)

Publication restriction:

No

Judgment

1. The point at issue in these proceedings arises upon an administrator’s decision to pay an estate’s substantial debts by selling certain real estate which had been specifically gifted to named beneficiaries. The question presently in dispute is how, by a process of adjustment of the rights of all the beneficiaries among one another, that the specific devisees of the real estate that had been sold should now “be put into the same position [they] would have been if the property the subject of the specific legacy had not in fact been sold”: Ewer v Corbet (1723) 2 P Wms 148; (1723) 24 ER 676, Joyce v Cam (2004) 12 BPR 22,231; [2004] NSWSC 621 at [48] – [49] and Wardy v Salier [2014] NSWSC 473 at [9], [34] – [37].

2. The real estate the subject of the specific devise that was sold to pay estate debts is referred to in these proceedings as “the Cleveland Street property”. The administrator, the NSW Trustee, who is the plaintiff in the proceedings, seeks judicial advice under Trustee Act1925, s 63 in respect of its proposal, to put the specific devisees of the Cleveland Street property “into the same position they would have been”, by substituting another named estate property, called “the George Street property”, for the Cleveland Street property but with some financial adjustments. The specific devisees of the Cleveland Street property support the administrator’s proposal. But another beneficiary, the first defendant, Mr John Wardy, proposes the substitution of a different estate property, known in the proceedings as “the Coogee property”, for the Cleveland Street property. Alternatively, he proposes that the estate acquire a new property, as the substitute for the Cleveland Street property.

3. The administration of the testator’s estate has been protracted by disputes among beneficiaries, leading to several rounds of prior litigation. These reasons commence with a short background to the estate’s administration and to the procedural origins of the present contest.

4. In this contest Mr A. Hill and Ms M. Pringle of counsel, and then Mr J. Thompson of counsel, were instructed by David Jackson, David Jackson & Associates, for the plaintiff, the NSW Trustee. And Mr M. Sneddon instructed by Mr Phillip Brand, of Bartier Perry Lawyers appeared for the first defendant/cross claimant, Mr John Wardy.

The Estate of the Late Edmond Wardy

5. The late Edmond Wadih Wardy (“the testator”) died on 19 July 2009. He was survived by his widow, his second wife Hassiba Wardy, and their three children, Anthony, Roger and Robert Wardy. The testator was also survived by the three children of his first marriage, John, William and Sam Wardy.

6. A dispute about the last will of the testator was resolved first. In the meantime, the estate’s interests were preserved by the appointment on 24 June 2010 of Mr Gordon Salier as administrator pendente lite of the testator’s estate. In 2013 after a contest, White J admitted the testator’s will dated 7 November 1992 to probate: Wardy v Wardy & Ors; The Estate of Edmund Wadih Wardy [2013] NSWSC 244. Hassiba Wardy and all of testator’s six sons are named as beneficiaries under that will. The Public Trustee was named as the executor of the testator’s November 1992 will and the plaintiff. The administrator of the estate, the NSW Trustee, is the statutory successor to the Public Trustee.

7. The testator’s estate is substantial. Hassiba Wardy, and two sons by the testator’s first marriage, William Wardy and Sam Wardy next brought proceedings under Succession Act 2006, Chapter 3, seeking further provision out of the estate. In that litigation, White J made orders for provision for each of Hassiba (in the sum of $300,000), William (in the sum of $1,560,000) and Sam (in the sum of $1,900,000): Wardy v Salieh; Wardy v The Estate of thelate Edmond Wadih Wardy [2014] NSWSC 473. In the course of that decision White J made findings that lay the foundation for the current litigation. Some of these are referred to below.

8. In 1998 the testator had established the Edmond Wardy Family Trust (“the Trust”). Linevale Pty Limited (“Linevale”) was the trustee of the Trust and is the second defendant in these proceedings. The testator was a director and the sole shareholder of Linevale. Prior to 28 March 2008, the testator was the appointer of the trust with the power to replace the trustee. John Wardy replaced his father as appointor in March 2008. At the time of White J’s decision the Trust had substantial assets, to the value of some $11.5 million. In the family provision proceedings, White J found that the assets of the Trust were liable to be designated as notional estate under Succession Act, Chapter 3 and that the net assets of the Trust were to be taken into account in determining adequate provision out of the estate for the plaintiffs in those proceedings.

9. The present proceedings were commenced in 2016, raising a range of issues many which are no longer in contest. The NSW Trustee for example sought an account from Mr John Wardy of the rents that he had collected from the tenants or occupiers of the George Street property since June 2012. In prayer for relief 11 of the Statement of Claim the NSW Trustee, by then the estate’s administrator, first sought judicial advice under Trustee Act 1925 as to whether it was justified in substituting the George Street property for the asset specifically devised to certain of the beneficiaries, the Cleveland Street property.

10. The plaintiff’s claim for judicial advice was listed for hearing in October 2017. The Statement of Facts put before the Court on the application for judicial advice revealed a wider dispute between the NSW Trustee and Mr John Wardy. In late 2017 when the matter was listed, the Court concluded that the dispute was not appropriate merely for an application for judicial advice as, even if the judicial advice were given, the dispute with Mr John Wardy would still be outstanding, and it would likely be litigated. The Court wanted greater finality, so that the dispute with Mr John Wardy would be resolved at the same time. The Court therefore declined to give judicial advice: NSW Trustee and Guardian v Wardy [2017] NSWSC 1466.

11. The Court gave leave to Mr John Wardy to file a cross-claim in the proceedings: NSW Trustee and Guardian v Wardy [2017] NSWSC 1466. In the Cross-Claim Mr John Wardy sought relief: requiring the NSW Trustee to purchase a substitute property in lieu of the Cleveland Street property, for the Cleveland Street property devisees; a declaration that the Coogee property (with or without adjustments) was a satisfactory appropriate substitute for the Cleveland Street property; a declaration that the George Street property was (with or without adjustments) an appropriate substitute for the Cleveland Street property; and further in the alternative, if neither of the Coogee property nor the George Street property was a satisfactory substitute for the Cleveland Street property, the devisees of the Cleveland Street property would be given then a money sum equivalent to the Cleveland Street property.

12. The Cross-Claim joined the NSW Trustee as first cross-defendant and the Cleveland Street devisees as the other cross-defendants. As will be seen, the NSW Trustee contends that aspects of this Cross-Claim are not maintainable by Mr John Wardy. The issues in the reconstituted proceedings including the Cross Claim, derive from Clause 3(iv) of the testator’s last will.

13. The Court directed that the matter be reconstituted as a contested hearing of Mr John Wardy’s Cross Claim so that the proceedings accurately reflected the true dispute between all interested parties, and who would be bound by the result. When reconstituting judicial advice proceedings the Court should join all necessary parties and reformulate the originating process as required: RL v NSW Trustee and Guardian (2012) 84 NSWLR 263; (2012) ASTLR 149; [2012] NSWCA 39 at [58]. The Court sought to do this at directions hearings throughout 2018 as the parties were preparing their evidence for the contested hearing.

14. The current disputes comprise issues concerning the proper interpretation of clause 3(iv) of the will when making the choices now presented in the administration of the estate. The starting point for analysis is the testator’s November 1992 will.

The Testator’s November 1992 Will

15. After appointing the Public Trustee as his executor and trustee, the testator’s November 1992 will separately dealt with his real estate and his personal estate. He dealt with his real estate in clause 3 of the will and his personal estate in clause 4.

16. In clause 3 (sub-clauses 3(i) to (v)) of his will, the testator “gave, devised and bequeathed [his] real estate” to his wife, Hassiba Wardy, and to the sons of both his marriages”. The present contest arises out of decisions taken in relation to the gift in clause 3(iv) of the will.

17. The gifts in clause 3 of the will were as follows. By clause 3(i) of the will the testator gave to his wife Hassiba the real property in Kensington in which they both lived. By clause 3(ii) of the will the testator gave to his sons by his first marriage, William, John and Sam, as tenants-in-common in equal shares real property in South Dowling Street, Surry Hills. Under clause 3(iii) of the will the testator gave to his son John real property in New Canterbury Road, Dulwich Hill.

18. Clause 3(iv) of the will gives to the testator’s widow, Hassiba Wardy, for her life with remainder to the testator’s and Hassiba Wardy’s sons, Anthony Wardy, Roger Wardy and Robert Wardy (together described as “the Hassiba Wardy interests”) in equal shares as tenants-in-common a property in Cleveland Street, Redfern (“the Cleveland Street property”). This gift was in the following terms:

“(iv)   To my wife HASSIBA WARDY for her life with remainder to my sons ANTHONY WARDY, ROGER WARDY, and ROBERT WARDY in equal shares as tenants in common:-

[address not published] Cleveland Street, Redfern:

My wife shall be entitled to receive the rents and profits derived from the said property during her lifetime. My wife shall pay from the rents and profits all liabilities (such as rates, taxes, charges and other expenses) in connection with the said property. My wife must arrange and maintain an adequate fire insurance Policy with respect to the building and any contents belonging to her in the property and also arrange an adequate Public Liability Insurance cover.

Upon her death the said property is to be given to my sons, ANTHONY WARDY, ROGER WARDY and ROBERT WARDY for their own use and benefit absolutely as tenants in common in equal shares provided that the youngest shall have attained the age of 21 years.

NOTWITHSTANDING WHAT I HAVE STATED ABOVE IN THIS CLAUSE IN THE EVENT that any of my sons (that is ANTHONY, ROGER and ROBERT have not attained the age of 21 years at the time of my death I DIRECT that the property be held in TRUST by my TRUSTEE until the youngest [sic] of my said sons have attained the age of 21 years and immediately upon my youngest attaining the age of 21 years, if my wife is still living to deliver the said property to her for the rest of her life with reminder [sic] to my said sons for their own use and benefit absolutely.

IN THIS EVENT I further direct my Trustee to pay the income derived from the property to my wife after paying all liabilities (rates charges, taxes Insurance and the like) incurred in connection with the management and maintenance of the said property. IN THE EVENT that my said wife is not living at the time my youngest attains the age of 21 years then I DIRECT MY TRUSTEE to deliver the said property to my sons for their own use and benefit absolutely in equal shares as tenants in common.” [Emphasis added]”

19. The final clause 3 gift in the will, clause 3(v), dealt with the residue of the testator’s real estate. The deceased directed that the residue of his real estate be given to all his children, of both marriages, William, John, Sam, Anthony, Roger and Robert in equal shares as tenants-in-common. He also directed in clause 3(v) that in the event that any of his children had not attained the age of 21 years at the date of his death, that the estate properties be held in trust until the youngest attained the age of 21 years.

20. Finally, clause 4 of the will dealt with the testator’s personal property. By clause 4 he “gave, devised and bequeathed all my personal property wheresoever situated and whatsoever nature unto my wife for her own use and benefit absolutely.”

Issues Arising from Clause 3(iv) of the Will

21. Although complex in places, the present contest may be defined in a relatively narrow compass. The early administration of the estate revealed that it had substantial debts to the Australian Taxation Office (“ATO”). To meet these ATO debts the administrator pendente lite, with the approval of the Court, sold the Cleveland Street property in November 2012 for $5,150,000. By the time of the hearing the residue of the estate comprised approximately $4,000,000 in cash, a property in Coogee Bay Road, Coogee (“the Coogee property”) and another property in George Street, Redfern (“the George Street property”).

22. Some substitution of real estate, or other property, for the Cleveland Street property is necessary to satisfy the provisions of clause 3(iv) of the will. The parties accept that the substitution must satisfy the established principle stated in Ewer v Corbet (1723) 2 P Wms 148; (1723) 24 ER 676, Joyce v Cam (2004) 12 BPR 22,231; [2004] NSWSC 621 at [48] – [49] and Wardy v Salier [2014] NSWSC 473 at [9], [34] – [37], that if an executor sells property which is the subject of a specific legacy or devise, then the legatee is entitled by a process of adjustment of the rights of beneficiaries between one another “to be put into the same position he would have been if the property the subject of the specific legacy had not in fact been sold…”.

23. Upon advice, the NSW Trustee is of the opinion that the George Street property should be substituted for the Cleveland Street property, so as to satisfy the provisions of clause 3(iv) of the will. The Hassiba Wardy interests do not contest this proposed substitution, indeed in recent correspondence dated 18 and 21 November 2018 (Exhibit C) they maintain their belief and agree that the George Street property is an appropriate replacement property for the Cleveland Street property. But John Wardy contends instead that the Coogee property, or some other property yet to be acquired, should be substituted for the Cleveland Street property.

24. John Wardy sought to argue, among other contentions, that the George Street property was far more valuable than the Cleveland Street property and for that, and other reasons, the former was an inappropriate substitute for the latter. In contrast, the NSW Trustee argued that the George Street property and the Cleveland Street property were sufficiently close in value that with some adjustments, the former qualified as a proper substitute for the latter. The NSW Trustee and John Wardy each obtained competing valuations of all three properties, which will be analysed below.

25. Other matters are in issue. One of these is the date at which the estate’s property should be valued for the purpose of assessing the substitution decision. One party contended the valuation should be at the date of sale of the Cleveland Street property in November 2012. And the other contention is that valuation should take place at the date of the hearing, or at least some mutually acceptable date on which valuations could be done close to the hearing. Ultimately the parties cooperatively conducted their cases on the basis that they were presenting valuations and valuation critiques around a common valuation date in October 2016. Based on the way the trial was conducted the Court has accepted that common valuation as the basis for its reasoning below. Other disputes exist about how to take account of changes in value of the estate’s properties over time; and about the level of sustainable income that may be derived from the proposed substitute properties in comparison to the Cleveland Street property.

26. Finally, there is a question of whether if neither the George Street property nor the Coogee property is a proper substitute for the Cleveland Street property, whether some other property should be purchased by the estate and what property, or kind of property that should be. And if the Coogee property were going to be the substitute, there is no agreement as to the cost of works that are required to be done to make that property compliant with the Building Code of Australia (BCA), and with fire safety and Council regulations.

27. The resolution of a number of these contests required cross-examination and was likely to continue to divide the parties whatever judicial advice were given. An application for judicial advice was therefore an inappropriate vehicle to resolve these disputes.

28. The Court directed that the Hassiba parties be served with notice of the proceedings and a copy of the Court’s 2017 judgment. But they did not wish to take an active role in contesting the relief that John Wardy sought on the Cross-Claim. To set up a contest on John Wardy’s Cross-Claim the Court directed that the NSW Trustee act as the contradictor to John Wardy’s case. This was undertaken on the following basis. First no one would contest the propriety of NSW Trustee acting in that role. And the NSW Trustee was authorized to have a full indemnity from the estate for its costs of acting as contradictor. Neither John Wardy, nor any other beneficiary would seek to have the NSW Trustee removed or disqualified on the grounds it has acted as a contradictor to John Wardy’s Cross-Claim. In the event that John Wardy were successful he would be at liberty to seek his costs out of the estate. If John Wardy were unsuccessful, the NSW Trustee would be at liberty to seek the reimbursement of its costs from John Wardy.

21. It was initially thought that the reconstituted proceedings could be heard in late 2017. But the further gathering of evidence and the exchange of experts’ reports and the appointment of engineering and building experts by the Court to deal with the cost of making the Coogee property compliant with the Building Code of Australia, and applicable fire safety regulations delayed the commencement of the hearing, which finally took place in December 2018. The experts were cross-examined on 11 December 2018. Written submissions were received in January 2019, when judgment was reserved.

22. The NSW Trustee brought other proceedings against Mr John Wardy in 2015 (proceedings numbered 2015/159184). But these 2015 proceeding were settled on 5 September 2019.

23. Whilst judgment was reserved the parties raised issues about the condition of the George Street property. In response to a motion brought by the NSW Trustee, the Court made various orders and directions on 4 September 2019 to make the George Street property safe and reduce fire hazards at that location, pending the Court’s present decision and pending the making of further decisions by the NSW Trustee in the course of the estate’s later administration. On 4 September 2019, the Court ordered and directed that the George Street property be made clear of rubbish, that fire control systems be urgently connected at the property, and that such steps be taken urgently as are practical to ensure the property is secured against unauthorised access and is not used for criminal activities. Finally, the Court ordered on that occasion that the NSW Trustee should retain someone familiar with the property, being Mr John Wardy, at an hourly rate to oversee, supervise and implement the making safe of the George Street property in accordance with the Court’s orders.

24. As a result of the Court’s orders made on 4 September 2019, Mr David Jackson, the solicitor for the NSW trustee filed an affidavit updating the Court about the current situation with the estate properties, including efforts that have been made since 4 September 2019 to improve the situation, in particular at the George Street property. Rubbish and building materials have been removed from the George Street property. And efforts have been made to rectify the fire control system and obtain access to flats to ensure that smoke detector systems were installed in each flat, an issue highlighted by the Court. But there are still squatters in the George Street property as at that date, although efforts were being made with Redfern police to undertake temporary works to ensure that squatters who are evicted from the property cannot re-enter. These works include the installation of a roller shutter door at the front entry to the property. As the Court indicated at the directions hearing, the parties have been given liberty to apply and are encouraged to seek the Court’s further assistance from time to time, as required, to use the Court’s available powers to make the George Street and Coogee properties as safe as possible, pending final administration of the estate.

Some Relevant Findings in White J’s Decisions

33. In their submissions both parties draw upon the findings and conclusions concerning the estate in the previous judgments of White J. His decision in Wardy v Salieh; Wardy v The Estate of the late Edmond Wadih Wardy [2014] NSWSC 473 is of particular relevance at [34] to [37]:

“34.   By clause 3(iv) the deceased gave Hassiba Wardy a life interest in a property in Cleveland Street, Redfern with the remainder to the sons of his second marriage, Anthony, Roger and Robert. That property was sold by the administrator to provide funds for the payment of debts. The property was sold at auction for $5,150,000. The net proceeds of sale that were received amounted to $5,038,711. Capital gains tax payable as a result of the sale of that property was estimated to be $854,734.

35.   For the reasons in paras [28]-[34] above the capital gains tax payable in consequence of the sale of the Cleveland Street property is an administration expense to be borne by those entitled to the residuary estate. The expenses of sale are also an administration expense. The executor will be required to apply the residuary estate to acquire substitute property to provide income to Hassiba Wardy for her life with remainder to her sons. (The amount to be so expended would be reduced if the residuary estate were insufficient to meet all debts, funeral, testamentary and administration expenses. In that event the specific gifts in clauses 3(i)-(iv) would bear the burden proportionately. That will not be the case.)

36.   Between 19 July 2009 and 2 April 2013 the Cleveland Street property generated a total net rental income of approximately $1,055,000. The tax paid or payable in respect of this income was approximately $415,000. The net amount to which Hassiba Wardy is entitled from the rents collected on the property after payment of tax is approximately $640,000.

37.   In their submissions the parties assumed that the substitute gift should be an income-producing asset or assets to the value of either $5.1 million or that sum less capital gains tax and/or selling expenses incurred on the sale of the Cleveland Street property. On the assumption that the substitute gift should be to the value of the property sold then the residuary estate would bear the burden of a substitute gift of $5.1 million. It will be a matter for the executor to determine what is an appropriate substitute investment having regard to the interests of the life tenant and remaindermen. The pre-tax annual return on the Cleveland Street property over 3.7 years between July 2009 and April 2003 (assuming a stable capital value) was approximately 5.6 per cent, and there is no basis for assuming that a like return could not be had from a substitute investment to the same value.”

34. But many of the judgments that the NSW Trustee and the Court must make related to these proceedings turn upon foundations of fact about the value of the George Street property, the Cleveland Street property and the Coogee property at the commonly used valuation date of October 2016. The NSW Trustee contends that it is able to act on the basis of the valuation available to it. My view, a trustee acting properly generally can act upon such expert evidence. But in this case Mr John Wardy has put the validity of these valuations in issue, fielding a factual contest about whether the NSW Trustee is acting on proper material. In order to avoid subsequent litigation about whether the NSW Trustee had a proper factual basis for its decisions, the Court has decided to make a determination binding on the parties about the valuation of those properties.

The George Street, Cleveland Street and Coogee Properties

35. These reasons discuss the valuation reasoning of the valuers with respect to the properties in question in these proceedings, rather than just recording the outcome of their valuations. This detail is necessary because a detailed contest as to the appropriate valuation methodology and valuation assumptions was a central question in the proceedings. In order to understand that contest, it is necessary to appreciate the central elements of the valuers’ logic.

36. Rather than put on an independent valuation Mr Teale’s approach was to offer criticisms of Mr Besele’s and Mr Price’s valuations. Mr Teale’s criticisms of their valuations are adequately dealt with in a separate, later section of these reasons devoted to the nine topics which the parties advanced in the main contest between the expert valuers. As these reasons show, the Court accepts Mr Besele’s and Mr Price’s valuations over Mr Teale’s criticisms.

The George Street Property - The Valuation Evidence

37. Mr Besele values the George Street property as at 5 October 2016 at $7,210,000, exclusive of GST. Mr Price values it at as at 17 October 2016 at $7,200,000. And upon various differing assumptions Mr Teale contends that Mr Besele and Mr Price have undervalued the George Street property by as much as $2.7 million. It is now necessary to look at the physical features of the George Street property and then to examine the valuation approach taken to it by each of the expert valuers.

38. The George Street property is located on the eastern side of George Street Redfern, which at that point is a two-lane suburban road with concrete guttering, channelling and kerbside parking. The nearest cross street is Cleveland Street, which lies a few properties to the north. The property is bounded by William Street to its rear. On the northern side of the property is Reconciliation Park, a recreational grassed area bounded on its southern side by the wall of the George Street property and bounded on its northern side by a small laneway known as James Street. Reconciliation Park is also bounded to the east and west by George Street and William Street respectively.

39. The property is approximately 2.6 kilometres south of the GPO. Surrounding it is a combination of established commercial development and low to medium density residential development. Redfern train station is approximately 550 metres to the south-west. Bus stops are within walking distance.

40. Applicable planning controls over the property require a floor space ratio of 1.5:1 and a maximum building height of 12 metres. As at the date of the valuations in October 2016, there were no existing development applications or approvals in existence over the property.

41. Mr Besele was not able to inspect the George Street property internally. He was only able to undertake a kerbside inspection. Mr Teale was able to undertake a more detailed inspection. This led to some differences between them but they ultimately did not disagree upon the fundamental structure of the improvements to the George Street property.

42. The improvements to the George Street property may be shortly described. It is a two storey (and partly a three-storey) structure, rising up from a lower ground floor area. It rises to three levels at the frontage to George Street, which comprises two levels of residential flats above a retail level. It has two levels of industrial warehouse at the rear, being the William Street frontage. The front of the George Street property comprises four shops on the ground floor, all of which have a direct frontage to George Street. This street facing retail level is, as indicated, surmounted by two levels of residential flats.

43. Mr Besele and Mr Price assumed the warehouse area of the George Street property at all three levels (including a lower ground floor area) was 420 square metres. The ground-level shops and flats are 614 square metres. The first floor and second floor flats have a floor space of 508 square metres and the roof level has a floor space of 100 square metres.

44. The experts have concluded that the George Street property was constructed in about the 1920s. At the time of valuation, and on the evidence thereafter, the improvements on the George Street property are in poor condition and require immediate repairs. They exhibit surface rust and peeling paint, cracks to internal walls, moisture damage under roof eaves, broken and damaged tiles to shopfront facades, moisture damage and possible concrete cancer, leaking box gutters and downpipes, some gutted unoccupied flats, possible non-compliant gas metering fittings and a possible white-ant infestation.

45. Considerable capital expenditure is required to bring the George Street property up to a lettable standard. An allowance for this has been made in all valuations. Mr Besele initially estimated an allowance of $346,000, which equates to $200 per square metre for these repairs and capital expenditure. The capital expenditure that all the valuers assumed was required to let the George Street property to its best advantage did not involve any structural improvement.

46. Mr Besele was of the opinion that the residential and retail component of the George Street property could achieve 100% occupancy, if repaired and refurbished. But he regarded the rear warehouse as having little prospect of achieving full occupancy, even after capital works were undertaken. Because of its overall state of dilapidation Mr Besele assessed the highest and best use of the George Street property as the complete demolition of all existing improvements and its redevelopment into residential apartments with ground floor retail fronting onto George Street. But he cautioned that any new development might encounter design difficulties as a local council was unlikely to allow residential living areas in any redeveloped property to face onto the Reconciliation Park parkland. A possible design solution to this was the creation upon development of an internal courtyard to provide a light well. But this would restrict the potential development yield of the property. Overall, he saw the property as a “short to medium term development opportunity” and he adopted the direct comparison approach on a development value basis, as his primary approach to valuation. He used the investment income capitalisation approach as a secondary check.

47. Using sales evidence in the Surrey Hills, Waterloo, Chippendale and Annandale areas, Mr Besele derived an appropriate rate per square metre of floor space area for the property in the range of $3500 to $4500 and an appropriate rate per square metre of the land of the property at $5000 to $6000. Utilising comparable property sales for other similar investment properties in other inner-city suburbs, he concluded that an appropriate gross yield range for the George Street property is 6.5% to 8.5%. Using the existing floor space area of 1878 square metres, with a floor space ratio of 1.5 and taking the midpoint of $4000 as the rate per square metre of floor space area, as developed, Mr Besele reached an assessed market value of $7,512,000 for the property. He then deducts the required demolition costs, which he assessed at $299,000, being the rate of $100 per square metre of assumed area of demolition, to produce a final valuation of $7,213,000, which he rounds down to $7,210,000.

48. Mr Besele crosschecks his valuation using income capitalisation methodology, by estimating the net maintainable income receivable from the property and capitalising this at what he judged to be an appropriate multiple to derive a final value. Using this alternative methodology he reaches a market value of $6,901,317, which he rounds down to $6,900,000, exclusive of GST.

49. The main integers of this calculation are the following. Mr Besele assumes that the residential flats and the ground-level warehouse area of the George Street property are tenanted to produce a current sustainable gross rental of $230,880. But after execution of property repairs and renovations he estimates rental income from vacant areas of $339,820, to produce total gross rental from the property per annum of $570,700. He assumes total outgoings of $205,100 per annum with a 5% ongoing vacancy allowance of $28,535 per annum to produce a net sustainable income per annum of $337,065. Capitalised in perpetuity at 5%, this produces a capitalised value of $6,741,300.

50. After deriving this figure, Mr Besele undertakes various “below the line” calculations, some involving deductions and some involving additions. From this figure he deducts initial capital expenditure of $346,000, agent’s commission and other allowances. He also adds below the line a capitalised rental at the risk affected rate of 8.5%. This represents the anticipated rental from the ground-level warehouse, an area which he regards as functionally obsolescent and unlikely to generate sustainable rental. With these additions and subtractions the final valuation figure is $6,900,000, which represents an initial gross yield of 8.27%, a rate of $1,252 per square metre of land area and current gross rent per annum of $5,511.

51. Mr Besele’s two methodologies produce slightly different valuation figures but he adopts the valuation derived from his application of the direct comparison method because it represents the “most appropriate method of valuation” given the demolition and rebuilding is the highest and best use of the property in his opinion.

52. Mr Price also valued the George Street property. He reached a valuation of $7,200,000 as at 17 October 2016, the date of his inspection. He was unable to gain access to the upper ground and upper levels of the warehouse building fronting William Street. But he was advised and assumed that those areas had not changed since an earlier inspection he had undertaken in April 2014.

53. Mr Price agreed with Mr Besele that the highest and best use of the George Street property was as a medium residential development site. He assessed that the residential part of the property had a mixture of 37 rooms and older style flats. He sighted a small number of vacant unfurnished rooms, which he thought were representative of the other rooms that he did not see. He estimated an average rental of $120 per week for these rooms.

54. Like Mr Besele, Mr Price regards the most appropriate valuation methodology as the direct comparison with comparable sales evidence, supported by the capitalisation of income method. The current site area of 1252 square metres and a floor space ratio of 1.5 to 1 assumes a gross floor area on development of 1878 square metres. Looking to the comparable sales evidence of property suitable for demolition and reconstruction in the inner city area he derives a midpoint rate of $3,850 per square metre developed floor space, which over 1878 square metres produces a derived valuation of $7,230,300, which he rounds down to $7,200,000.

55. Mr Price also applied as a cross-check a capitalisation of income approach. Using this approach he adopts a net rental return of $280,758 and applies a yield of 3.9% to produce a figure of $7,198,923.

The Cleveland Street Property – The Valuation Evidence

56. Mr Besele produced two reports for the Cleveland Street property. There was a controversy in the production of Mr Besele’s second report, which was the one that he relied upon at the hearing. The first valuation report showed a value of $11,770,000. But as issued, it contained an arithmetic error of $6,020,000, a mistake made when in subtracting outgoings from gross income in order to calculate the net income of the property. Adjusting solely for the $6,020,000 error and making no other changes the adjusted valuation of the Cleveland Street property would be $5,750,000 (being $11,770,000 less $6,020,000). But in a valuation judgment that became controversial in the proceedings and which is discussed in more detail below, four weeks later on 29 November, Mr Besele issued a second report, which adjusted the capitalisation rate that he used in his first report from 6% to 5% (thereby increasing the valuation by $1,350,000), leading to an overall valuation of the Cleveland Street property of $7,100,000. Mr John Wardy’s case attacked this adjustment and Mr Besele defended it. These reasons deal with Mr Besele’s second report.

57. After the NSW Trustee sold the Cleveland Street property on 16 November 2012, its purchaser, Mr John Wardy, made improvements to the property. Therefore a valuation of the property for present purposes must be undertaken as at the common valuation date but assuming the physical state of the property as at 16 November 2012 and thereby excluding the value of and the financial benefits that might be derived from Mr John Wardy’s post sale improvements.

58. In his valuation dated 5 October 2016, Mr Besele values the Cleveland Street property on this basis as at 16 November 2012 at $7,100,000, exclusive of GST. Mr Price values it at $8,000,000. And upon various differing assumptions which will be explained, Mr Teale values it at $5,810,000.

59. The Cleveland Street property comprises an older style two story structure on the south eastern corner of Baptist Street and Cleveland Street in Redfern. Baptist Street extends south from Cleveland Street at an offset intersection from which Crown Street extends to the north. The property is situated three kilometres to the south of the Sydney GPO and is surrounded by established commercial development and medium to high density residential development. The Burke Street public school is 300 metres away. A Coles supermarket lies across the street.

56. The Cleveland Street property is well situated. Cleveland Street is a major four-lane arterial road, giving access to the eastern distributor some 350 metres to the east, and which provides motor vehicle access to the Sydney CBD. Redfern train station is approximately 1.6 kilometres to the west and a bus stop is available within walking distance. The Cleveland Street property is 809.4 square metres in area. It comprises an older style (probably 1930s) two story structure accommodating a total of six commercial tenancies. Mr Besele did not have the benefit of inspecting the Cleveland Street property.

57. Mr Besele assumed a net lettable area for the Cleveland Street property of 1396 square metres as at 16 November 2012, with two vacant tenancies at that date totalling 813 square metres: these being one ground floor tenancy and the whole of the first floor level. He assumed the first floor level required some capital works as at 16 November 2012 to bring it to a more marketable state, so he adopted an estimated capital expenditure allowance of $349,000 (representing approximately $250 per square metre of lettable area) across the whole building. Upon the property receiving this amount of initial capital expenditure, he allows for full occupancy to be achieved within six months, supporting a total potential gross income from the property of $523,650 per annum. This is derived from six lettable areas of various sizes, comprised of five ground floor retail areas known as 401A, 401, 401B, 403–407, 409 and the first floor area.

58. Mr Besele considered the highest and best use of the Cleveland Street property, in its current form as retail premises. From listed sales evidence of similar investment properties in the inner South Sydney region he judged an appropriate market yield range for the property to be from 5% to 6%, which on an appropriate rate per square metre of lettable area is $5000 to $8000. Mr Besele also surveyed rental evidence in the area to identify rental rates achievable for this type of property in the inner South and concluded that an appropriate rental range was $400 to $600 per square metre for the ground floor area and $200 to $300 per square metre for the first floor.

59. Mr Besele’s calculations of value involved reaching a net sustainable income per annum of $401,274 (being $523,650 less $96,194 less a 5% vacancy allowance of $26,183). This was capitalised at 5% in perpetuity to produce a capitalised value of $8,025,470. Once agent’s commission in and initial capital expenditure and leasing incentives are deducted, Mr Besele’s net estimated market value of the Cleveland Street property was calculated at $7,089,982, which he rounded up to $7,100,000. This represents a capital value rate of approximately $5086 per square metre of lettable area and an initial yield of 5.65%.

60. Mr Price valued the Cleveland Street property at $8 million as is, less various works undertaken and tenancies entered into since the November 2012 purchase. He reached this valuation conclusion using the capitalisation of income approach supported by direct comparison through comparable sales evidence.

61. His capitalisation of income approach used passing rental income of $211,968 per annum and market income on the vacant space of $391,568 per annum, making a total income (less an assumed 1% vacancy rate) of $597,530. Deducting outgoings of $156,975, and then adding back recoverable outgoings of $25,000, he calculated a net annual return from the property of $465,555. Before adjustments and using a yield of 4.75% he capitalised this net rental return to produce a preliminary valuation of $9,801,161. But after deducting a six-month leasing period, agents commission of 10%, incentives of 15% and rectification works and capital expenditure of $1,350,000 with a 10% 1.35 profit allowance, his result on valuation was $8,020,462. He rounded this to $8 million for an equivalent yield of 4.76%.

62. Mr Price also conducted a sensitivity analysis based upon the direct comparison rates derived from his available sales evidence. This indicated a rate per square metre of improved site area of $7,689,300 to $8,498,700 and at a similar range on a rate per square metre of building area justifying a midpoint close to $8 million, and thereby supporting his capitalisation of income analysis.

63. Mr Besele’s and Mr Price’s valuations produce a range of market values for the Cleveland Street property from $7,100,000 to $8,000,000. The Court has had the benefit of being both these experts defend their valuations and the way they did so is examined below. As between these two valuations, In my view Mr Besele’s valuation is, if anything, conservative and Mr Price well defended his detailed calculations and valuation reasoning. It would not be a wrong judgment therefore to treat the value of the Cleveland Street property as representing the midpoint between these two valuations, namely at $7,550,000. But as will be seen NSW Trustee is prepared to accept a more conservative approach and to treat the Cleveland Street property as worth $7,300,000 at the relevant date. Such an approach is well justified within the available evidence.

The Coogee Property – The Valuation Evidence

68. The Coogee property is an older style mixed retail and residential building situated within a small neighbourhood strip shopping centre in the suburb of Coogee. The retail component of the building contains two shops with a frontage to Coogee Bay Road. One of the shops was vacant in September – October 2016 when valuations were under taken on behalf of the NSW Trustee. The residential component of the building contains four self-contained flats over two levels.

69. Coogee Bay Public School is situated on the opposite side of Coogee Bay Road. Development along Coogee Bay Road in this area generally comprises residential apartment buildings with pockets of retail shopping. Surrounding development is generally older style attached or semi-detached residential dwellings and low rise apartment buildings together with some more modern development.

70. The Coogee property is a rectangular shaped lot with a frontage of 14.935 metres to the northern side of Coogee Bay Road and with an identical frontage to the southern side of Powell Lane at the rear of the property. The total land area is 600.7 square metres. In the vicinity of this property Coogee Bay Road is a two-lane bitumen sealed main road.

71. The Coogee property is accessible to a larger shopping areas, which are some 400 metres to the east along Coogee Bay Road and 1.2 kilometres to the north-west at Randwick, along Belmore Road. The nearest major shopping centre is Westfield Bondi Junction, which is some 3.7 kilometres north by road. Public transport is available by bus along Coogee Bay Road and Coogee Beach is 600 metres to the east along Coogee Bay Road.

72. Environmental planning for the Coogee property is controlled by the Randwick Local Environmental Plan (“LEP”) in which the land is zoned B1 – Neighbourhood Centre, a zoning which permits shop top housing with development consent. The maximum height of buildings on the site permitted by the LEP is 12 metres and not exceeding three storeys. The applicable maximum floor space ratio is 1.5 to 1.

73. A major issue exists with a staircase at the rear of the Coogee property, which services the upper level residential flats. The staircase is dangerous and rotting due to neglect and lack of maintenance. The NSW Trustee investigated the possibility of replacing the existing staircase with a steel staircase but this was judged not to be cost-effective during the continuance of these proceedings, mainly because issues arose about the structural integrity of the wall that would be used to support the staircase. So the Coogee property has remained both unrepaired and undeveloped throughout the present contest. Challenging financial and practical issues exist in attempting to renovate the existing building on this property to make it lettable.

74. Two valuers were engaged on behalf of the NSW Trustee to value the Coogee property in late September – October 2016. A valuer from Preston Road Patterson (“PRP”), Mr Hamish Goldfinch undertook a valuation as at 29 September 2016. The valuer from MVS Valuers Australia (“MVS”), Mr Mario Paul Vrouxiou undertook a valuation of the property as at 26 October 2016. They reached similar valuation conclusions. Mr Goldfinch concluded that the highest and best use of the property was for it to be redeveloped and on that basis it had a market value of $5,650,000. Mr Vrouxiou concluded that the market value of the Coogee property as at the valuation date was $4,750,000. There was little contest about the value Coogee property. Mr Teale largely confined his criticisms of the PRP and MVS valuations to the George Street and Cleveland Street properties.

75. Mr Goldfinch of PRP used the direct comparison approach as his primary method of valuation, looking to some 5 properties in the Randwick area for his comparisons. It is not necessary to detail these comparable properties in these reasons. In Mr Goldfinch’s opinion an appropriate rate for comparison is $5000 to $7500 per square metre of land area. He adopted the midpoint of this range of $6250 per square metre and applied this adopted midpoint to the gross floor area of 901.05 square metres, giving a net estimated market value of $5,631,563, which he then rounded to $5,650,000. This equates to $9406 per square metre of the land area of 600.7 square metres.

76. Mr Goldfinch crosschecked his conclusions against capitalisation of earnings methodology. On this crosscheck he adopted a net sustainable income per annum of $141,149, (being $401 per square metre), which he capitalised at 4.5% to reach a capitalised valuation of $3,136,434. After deducting and allowance for capital expenditure to repair the stairwell (of $100,000) and various other minor expenses his estimated market value was $2,991,397, which he then rounded down to $3 million.

77. Mr Vrouxiou of MVS used not dissimilar methodology. His capitalisation of income methodology used a net sustainable rental return of $141,560, which he capitalised at rates between 2.75% and 3.25% after which he deducted agents commission and leasing and other incentives and an allowance for capital expenditure ($35,000) leading to a gross yield equivalent in the range of 3.62% to 4.29% and the derived valuation range between $4,268,355 to $5,060,301, from which he adopted a mid-point of $4,700,000.

78. His cross check direct comparison methodology adopted $7750 per square metre to $8250 per square metre of land area, leading to a valuation range of $4,665,425 to $4,955,775, from which he adopted a midpoint of $4,800,000. Using similar methodology for the rate per square metre of building area, he reached a valuation based on a rate per square metre of between $11,750 per square metre to $12,250 per square metre, producing a valuation range with the midpoint of $4,750,000. He ultimately expressed the opinion that a valuation of $4,750,000 is supported by the sales evidence that is considered to be the market value of the Coogee property at the relevant valuation date.

79. Both Mr Goldfinch’s and Mr Vrouxiou’s valuations of the Coogee property are persuasive and the Court accepts that as at October 2016 the market value of the Coogee property was in the range $4,750,000 to $5,650,000. It is not necessary for the Court to choose between these figures, as they are both well below the market value of the George Street property. But were a choice necessary the greater consistency that is found within Mr Vrouxiou’s work between the two methodologies used, reflecting the thoroughness of this approach, gives the Court greater confidence that the appropriate market value if the Court were required to choose is $4,750,000.

The Nine Contested Topics

80. In the oral hearing on 11 December 2018 the parties cross-examined the three experts, Mr Allan Teale, Mr Ronil Besele and Mr John Price who gave evidence concurrently. The parties contested nine major topics with these experts. The first six topics for the experts were raised by Mr Sneddon on behalf of Mr Wardy. The other three topics were raised by Mr Thompson on behalf of the NSW Trustee. The nine topics, recorded in Exhibit D, provided the agenda for the cross-examination of the three experts and in the order they were examined are:

1. Inspection of the properties in respect of valuations;

2. Valuer General valuations of the respective properties, informing values;

3. The appropriate capitalisation rate for the Cleveland Street property;

4. The Vacancy rate for the Cleveland Street property;

5. Highest and best use, informing value of the George Street property;

6. The George Street property residential rentals;

7. The experience and expertise of Mr Teale;

8. The independence of Mr Teale; and

9. The insufficiency of market evidence produced by Mr Teale.

81. Mr Teale’s written evidence did criticise other parts of Mr Besele’s evidence and Mr Price’s evidence but those criticisms were not strongly material to the quantum difference between the parties in valuation and the case was conducted on the basis that these nine topics were the central issues dividing the parties. Based on the way that parties conduct of the case the Court will now deal with each of these nine topics in turn.

(1) Inspection of the Properties in Respect of Valuations

82. Mr Wardy challenged the quality of the access that Mr Price and Mr Besele had to the George Street and Cleveland Street properties, but mainly the George Street property. Put through Mr Sneddon, Mr Wardy’s contention was that Mr Price and Mr Besele only had limited access to those properties, whereas it was contended that Mr Teale had much more satisfactory access, enabling him to make better valuation judgments about the respective merits of the properties.

83. The Court accepts Mr Teale’s evidence that he contacted the managing agent of the George Street property and went through it extensively. The Court accepts that he inspected all common areas in the middle of the building, checked out each of the residential units, looked at the warehouse section at the rear of the property and the retail premises towards the front of the building. He says and the Court accepts, that it took him “nearly 3 hours” to do this. In short he says, and the Court accepts, that he “checked the whole building out”.

84. In contrast Mr Besele admitted that before preparing his earlier reports before his formal valuation date he did not go right into all parts of the property but he walked around its perimeter. He did not go at this earlier time into any of the internal residential units. But Mr Besele did go into the internal courtyard inside the George Street property and into one of the retail shops at its northern end.

85. But before completing his final report (which was more a critique of the other previously submitted reports) in May 2018, Mr Besele did have an opportunity to look inside the George Street property. Of the 40 units in the George Street property he says and the Court accepts that he went into “quite a few” but not all of them. Some of the units were uninhabited. He could look through the windows of some of those and he had the exact floorplans of adjacent units, from which he could ascertain their layout. He took about an hour on this inspection.

86. The Court is well satisfied of Mr Besele’s professionalism as a valuer. The Court judges him to be an expert who would only have offered the opinion that he did if he had sufficient understanding of the condition of the premises to do so. He felt confident from the sufficient information that he had about the units that he had inspected “to make an assumption on the condition of the rest of the units that I may not have been given information on”. The Court accepts that he could “get a good idea of the configuration and of the internal quality of every room”.

87. Mr Teale was critical that Mr Price and Mr Besele may not have been aware of exactly which of the rooms in the George Street property had been refurbished. But Mr Besele satisfactorily answered that criticism by saying that the quality of the PC items in the rooms were fairly standard and had little variance throughout the property so he could draw sufficiently reliable inferences about he could not see.

88. Mr Teale’s criticism of Mr Price’s inspection of the property also fails. Like Mr Besele, Mr Price spent time looking through the doors of the units that all face into the internal light well and he could “see most areas quite clearly”. And he added “where we couldn’t get in, as usual we prudently looked through the windows where we could to see what we could see”. At the time of his first valuation in 2014 he looked at every level of the George Street property, taking photographs through windows and doors. Like Mr Besele, Mr Price admitted that it was not possible to gain full access to all units on both occasions that inspected the George Street property. But according to him some rooms in the property were “locked up completely with no sign of occupation”. And others were “in a state of repair with what you could see inside and more units appearing vacant and occupied”.

89. But he too took a professional approach to inspection with which the Court is well satisfied. The Court accepts his evidence that it is “sufficient that on each level you get a fairly sound idea of the configuration of each flat” and his opinion was that “being an hour and a half on a second inspection is not insufficient, given that I spent numerous hours the first time”.

90. In short the Court accepts Mr Price’s and Mr Besele’s evidence that they did not regard the parts of the property that that they did not see “as likely to impact upon or be material to” their valuations. Moreover, the criticism of Mr Besele’s and Mr Price’s lack of full inspection of the George Street property as at the valuation date was left at a fairly high level of generality. The argument did not show that any failure to look at particular parts of the property by either Mr Besele or Mr Price Teale led to an identifiable reasoning failure in the application of valuation methodology.

91. Mr Teale attempted to be more specific. He said that he believed that a full inspection would have impacted upon valuation in a number of ways. He said that an inspection would have revealed there were 40 apartments rather than 37 which would have impacted upon the rental return on the building when fully leased, ever giving a greater capitalised value to the property.

92. But the Court accepts Mr Price’s evidence in reply that the difference of three units out of 40 in the scale of a property such as this is “immaterial”. The units are all potentially rentable at the “lower end of the market as well as in terms of any ability to derive rental income” and therefore there is a natural uncertainty about the rent that can be derived from them anyway. The variation in three units is just another element of the discounting factor that he used.

93. Moreover, Mr Teale’s evidence on this issue was undermined to a degree by his concession after the morning tea adjournment on the day the joint expert evidence that there were in fact four units to which he himself did not have access. His solution to this challenge was the same as that Mr Price and Mr Besele had adopted: he looked at the adjoining unit on the floor plan.

94. Apart from these matters, the weight of Mr Sneddon’s argument as put, was that Mr Price and Mr Besele were just left generally less well-equipped than they should have been to perform their valuations. But that argument is fully answered by the Court’s judgment about their professionalism and the lack of any obvious gap in their reasoning deriving from any limitation in their capacity to inspect particular aspects of the George Street property.

(2) Valuer General Valuations of the Respective Properties, Informing Values

95. Mr Wardy advances NSW Valuer General’s valuations for each of the George Street and the Cleveland Street properties in support of his contention that the former cannot be substituted for the latter in the clause 3(iv) gift. He submits that the “disproportionality” of the values of the two properties is demonstrated by the “objective third-party assessments” from the NSW Valuer General.

96. He especially cites in his argument valuations for each property as at 1 July 2015 (treated here by the parties as a valuation for the 2016 year). The Valuer General’s assessment for the Cleveland Street property as at 1 July 2015 was $2,140,000; and for the George Street property as at the same date was $5 million.

97. This section of these reasons concludes that these Valuer General’s valuations are of little relevance to the current dispute.

98. The “land value” of land, as defined in the Valuation of Land Act 1916, s 6A (formerly “the unimproved capital value”, Valuation of Land Act section 6) of a parcel of land is its value before any improvements are made. The expert evidence tended to use both the expressions “land value” and “unimproved capital value”. These reasons will use the current expression in the Valuation of Land Act.

99. The statutory “land value” of land defined under the Valuation of Land Act, s 6A fastens for taxation purposes upon the value of the underlying land, which was once granted by the Crown and ignores the improvements that subsequent owners have placed upon the property for which the Crown is not responsible. The Valuation of Land Act, s 6A (1) defines “the land value” of land as:

“(1)   The land value of land is the capital sum which the fee-simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona-fide seller would require, assuming that the improvements, if any, thereon or appertaining thereto, other than land improvements, and made or acquired by the owner or the owner’s predecessor in title had not been made.”

100. The exception to the definition, “other than land improvements” accommodates the possible inclusion from “land value” of certain changes to the land related to agricultural purposes, extractive industries, drainage and excavation. None of these are relevant for present purposes.

101. Mr Sneddon of counsel put to Mr Price and Mr Besele a table (Exhibit E) which identified the Valuer General’s unimproved capital value of each of the Cleveland Street and George Street properties across the valuation years from 2012 to 2017. The area of the George Street property at 1,252 m² is approximately 50% larger than the area of the Cleveland Street property at 809 m². The formula for the calculation of unimproved capital value is in part related to land size but it is also related to the factors of zoning and location. For each valuation year, Exhibit E demonstrates that the unimproved capital value of the George Street property is greater than the Cleveland Street property. Taking for example the three 2015 to 2017 valuation years (ending on 1 July in each year) the table below shows the difference between the unimproved capital values of each of the properties.

Year	George St	Cleveland St	Difference	Percentage
2015	$2,050,000	$1,650,000	$400,000	50
2016	$5,000,000	$2,140,000	$2,860,000	134
2017	$5,390,000	$3,200,000	$2,190,000	68

102. The Court accepts the evidence of Mr Price and Mr Besele that the land value of each of these parcels of land has little relevance to the market value of the improved land, which is under contested valuation assessment here. Mr Besele said, and the Court accepts, that his “methodology would be different to the Valuer General’s” and that “their purpose is for taxation. It is not market value”. Moreover Mr Besele pointed out that Exhibit E showed the contrary of what Mr Sneddon was submitting and that it actually tended to demonstrate that the Cleveland Street property had a higher market value, or a “stronger value rate in terms of the [per] square metre” than the George Street property.

103. Mr Price warned against overly simplistic thinking. He explained that merely because one “notes a 55% difference in land size” between the two properties that this difference “would not materialise into being a 55% difference in value”. This is because the differences between them are “weighted” by other variables. In the end, even Mr Teale conceded that the statutory land value under the Valuation of Land Act “would not be the market value of the land”.

104. For the most recent valuation year available (2017), the inferred difference in the rate per square metre for each property is not very great, and not so obviously clear that would allow the drawing of any conclusions about relative land values. If one divides the Valuer General’s statutory land value for the George Street property for 2017 of $5,390,000 by its area of 1,252 m², one reaches a rate of $4,305 per square metre. But if one divides the Valuer General’s statutory land value of $3,200,000 for the Cleveland Street property for the same year by its area of 809 m², one reaches a rate per square metre of $3,955.

105. In 2015 the rate per square metre calculated in the same way for the George Street property is $1,637 and for the Cleveland Street property is $2,039. This confirms Mr Besele’s evidence that for some years the Valuer General’s UCV’s actually shows a higher rate per square metre for the Cleveland Street property than the George Street property and it provides the stronger valuation by that measure.

106. Mr Wardy particularly relies upon the statutory land value for 2016 (as at 1 July 2015), which when taken from Exhibit E show a substantially greater statutory land value for the George Street property ($5 million) than for the Cleveland Street property ($2,140,000). There is consequently a higher rate per square metre for George Street in the 2016 year ($3,993) than for Cleveland Street ($2,645).

107. But the variations in the relative rates per square metre evident in a survey of these three years really only illustrates the limitations in Mr Wardy’s approach of using the gross difference in statutory land value as any kind of reliable proxy for the market value of these properties. The massive swings in the rate per square metre from year to year counsel caution in attributing any significance in the current debate to the statutory land values for these two properties.

108. At the end of the expert witness contest on this issue Mr Sneddon switched direction. He commenced to cross-examine on the basis that if one assessed each of the Cleveland Street and George Street properties on the basis of statutory land value plus the value of capital improvements that they are “materially different properties in terms of characteristics, commercial versus residential”.

109. In answer to this line of questioning, Mr Price conceded, and the Court accepts, that they “are not like for like, they are not comparable properties”. But Mr Price rejected the analysis (of statutory land value plus the value of capital improvements) being proposed and said that given the condition of the George Street property and the nature of the Cleveland Street property that both his “reports do not reflect a summation approach” of merely adding the capital value of improvements to the land value, because each property is in a different stage of its utility. Mr Price explained, and the Court accepts, that George Street is becoming “obsolete” in its present condition and may cost a certain amount to rebuild and become functional. But Cleveland Street has a different profile because of its present more immediate utility. The Court accepts Mr Price’s opinion that because of the quite different stages of utility of these two properties that adding statutory land value to the value of improvements is not a valid valuation exercise.

110. Mr Teale did not accept this limitation on his summation approach. He said that there was little difference between assessing the range of PC items required to repair 40 units in the George Street property compared to one set of PC items that would be required in each tenancy in the Cleveland Street building; in both cases one would need to go back to one of the same fundamental building cost measures such as Cordells.

111. But the Court does not accept Mr Teale’s counter argument. Mr Teale really failed to get to grips with Mr Price’s fundamental point that the properties cannot readily be cross-referenced by identifying comparable characteristics to measure their differences. They derive their income differently: with George Street being industrial fringe retail with some residential component; and Cleveland Street being located within a recognised retail precinct with shopfronts and an office/studio and small flat. Mr Price concludes that, “it is not unreasonable for two different properties to come up with similar values” even though they have different underlying factors driving the valuation, including yield, outgoings and how they are managed and their condition.

112. The Court accepts Mr Price’s analysis and rejects the idea of a simple summing of the statutory land value and the capital value of improvements for these two properties.

113. The Court does not accept that the respective statutory land values of the two properties indicate anything reliable for present purposes about the market value of the George Street and Cleveland Street properties in their developed state. Based on the evidence of Mr Besele and Mr Price, the Court has not relied upon the Valuer General’s statutory land value for these properties.

(3) The Appropriate Capitalisation Rate for the Cleveland Street Property

114. Mr Besele’s reasoning in relation to the valuation of the Cleveland Street property in his second report was attacked in Mr John Wardy’s case on the basis that after the $6 million mathematical mistake in Mr Besele’s first report had been discovered (discussed above), he redid his valuation only reaching a new valuation of $7.1 million by choosing to use (contrary to his good professional judgment) a more favourable capitalisation rate that he had previously selected. Mr John Wardy’s criticism of Mr Besele was that in doing his revaluation in his second report he changed the capitalisation rate he had previously used, by lowering it by 1%, from 6% to 5%, thereby substantially increasing the resulting value of the Cleveland Street property.

115. Mr Teale explained that an assumed net income of $400,000 for the Cleveland Street property applying a 5% capitalisation rate produces a value of $8 million and use of a 6% valuation rate produces a value of $6,666,666, a difference of well over $1.3 million. Mr Besele was criticised for making this 1% change on the ground that he had really taken an unjustified and artificial step to inflate the value of the Cleveland Street property once the $6 million error had been revealed.

116. Mr Besele dealt with this criticism in a way which the Court finds convincing. Mr Besele explained that the reason he lowered the capitalisation rate was because there is “a correlation between yield and sustainable rents”. Mr Besele said that before he discovered there was an error in the capitalisation model that he was using, the sustainable rent that was evident to him seemed to be “above market”. He said that the sales evidence in his first report implied a yield in the range of 4.21% to 5.79%. So in his first report he adopted a 6% yield in recognition of the fact that the rental for the Cleveland Street property appeared to him, at that time, to be above market. His view was that the risk to rent sustainability that the above market sustainable rental represented needed to be reflected in the choice of a higher capitalisation rate, so he selected a more conservative 6% capitalisation rate.

117. He went on to explain that when the correct rental area was discovered the rent per square metre also mathematically decreased back to a more sustainable market level. Once he judged the rental to be more sustainable, he reached the view that he needed to adjust his capitalisation rate back to one which reflected the fact that the adjusted rental per square metre was a sustainable rental rate, as distinct from one where sustainability was at risk. The Court accepts that this was genuinely his reason for making capitalisation rate adjustment, simultaneously with the correction of the rental error. He explained that his approach to adjusting the capitalisation rate for these reasons also reflects the way that lenders view the assessment of commercial property security: they require a valuer to disregard whatever rent the property is actually achieving and instead to ascertain a market rent based upon market evidence and then capitalise that rental into perpetuity.

118. This explanation was compelling. The cross-examination of Mr Besele suggested that when he did his first report, reaching a valuation of $11 million, that he knew all the facts that he knew at the time of his second report and that he had merely changed the capitalisation rate to keep the property value up (to $7.1 million) to compensate for some of the reduction brought about by correcting for the earlier error that had been made.

119. To the extent this cross-examination implicitly suggested that Mr Besele had no proper basis for his adjustment of the capitalisation rate and was deliberately taking into account irrelevant considerations to construct a particular outcome, the Court rejects any such inference about Mr Besele. The Court had the advantage of seeing Mr Besele give evidence and be thoroughly tested in cross-examination. The Court took detailed notes of its impressions of all the valuers at the time they gave their evidence. The Court accepts Mr Besele as a highly professional, competent valuer of integrity. There is no basis to infer that he was attempting to manipulate capitalisation rates in his second report to advantage his client. Rather, the cross-examination really failed to make any inroads into Mr Besele’s explanation of the relationship between a valuer’s judgment about sustainable/unsustainable yields and the valuer’s choice of capitalisation rate. The cross-examination tended to focus upon the coincidence in the time of the change in capitalisation rate with the finding of the mistake in the rental area in Mr Besele’s first report. The cross-examination failed to destroy Mr Besele’s evidence the mistake that was revealed in the rental area also led to him falling quite a different view about the sustainability of the rental return on the Cleveland Street property.

120. Mr Teale was invited to comment on Mr Besele’s evidence. Mr Teale’s response rather surprisingly failed to deal directly with Mr Besele’s clear explanation as to why, at the time of his second report, that he had adjusted the first capitalisation rate he had used. So the Court asked him again in the following terms:

“Mr Mr Besele, Mr Teale, has said that once you correct the other error and bring the sustainable rent down to something that looks more realistic and therefore more sustainable, that its appropriate valuation methodology to look at whether you need to adjust the cap rate and he has done that. What do you say to that? That is essentially what he is saying, as I understand it. Why isn't that an appropriate judgment? I want to see you at issue on this. Apart from saying you disagree, I want to know why.”

121. The Court received an answer from Mr Teale that did not really address the issue and once again failed to address Mr Besele’s explanation for adjusting his capitalisation rate. Mr Teale’s answer to this question from the Court was an important moment in the Court’s judgment about the overall quality of his evidence. Mr Teale’s unsatisfactory answer to the Court question was follows:

“Because of the strength of the tenancy and the mix in the building, and there is no justification to give it a cap rate and to discount it the way they have because going forward, looking at the building, the risks have not changed. The evidence in the building itself proves that during the - if you look at the rental history of the building and the style of the building. So if we are looking at working out if this building on its tenancy mix is going to justify a cap rate of 4.75 to five per cent, I think that could be arguable and because of the market conditions at the time which we have disagreed on but the conditions do not justify the cap rate I believe that we have adjusted on this property.”

122. The Court came back to the issue, seeking further clarification and asked Mr Teale, “So you disagree that once Mr Besele found the error and reduced the sustainable rent fairly dramatically, that he should revisit the cap rate at all?” Mr Teale then gave another equally unsatisfactory reply as follows:

“Well, I believe that he done all of that research prior to it and it would have been taken into consideration in his initial assessment. In a four week period I would - if I had an arithmetic error in a valuation report, which I hope I don't do, I would expect that I wouldn't be looking at hey, I have now got to adjust my cap rate.”

123. Mr Price immediately pointed out in his evidence in response that he agreed with Mr Besele’s approach to adjusting the capitalisation rate, which had been a holistic judgment. Mr Price said:

“Whenever you have to review, all factors have to come into play again and the yield is something you have to revisit. You have to determine then how that risk has changed and if your sustainability factors have reduced then the cap has to be reviewed.”

124. The Court accepts that such a holistic view needs to be taken when one of the valuation factors changes. Mr Teale was forced back to an answer for why he defended no change to the capitalisation rate by saying, “Your Honour, I don't think the risk did change, the tenancy mix has not changed in the building.”

125. But this explanation fails to deal with Mr Besele’s fundamental logic that the removal of the risk of an unsustainable rental yield from the valuation process, should lead to a re-examination of the capitalisation rate. The plaintiff submits that Mr Teale’s responses show that he could not accept that Mr Besele had made a judgment about the relationship between the security of a future income stream and selecting an appropriate capitalisation rate, when undertaking this valuation.

(4) The Vacancy Rate for the Cleveland Street Property

126. The expert witnesses disagreed about the proper vacancy rate for tenancies that should be used in the valuation of the Cleveland Street property. The principal contest on this issue took place between Mr Teale and Mr Price. In Mr Teale’s judgment the vacancy rate for the Cleveland Street property should be assessed at 5%. He had some support in this conclusion from Mr Besele. Whereas Mr Price judged that the appropriate vacancy rate was the lower figure of between 1% and 3%. Mr Teale’s judgment, with a higher vacancy rate, would produce a lower valuation than Mr Price reached for the Cleveland Street property. This issue became the subject of cross examination of each of the experts, which assisted the Court to decide the issue.

127. Mr Price was cross-examined to suggest that a 1% vacancy rate was “an extremely low vacancy rate”. The cross-examiner’s proposition at first had intuitive appeal: a 1% vacancy rate appears to allow little scope for vicissitudes in marketplace rental demand. But Mr Price defended his position persuasively.

128. Mr Price explained that he inspected the Cleveland Street property after its 2012 sale and after it had been redeveloped. He explained that upon his inspection of the property that out of the whole of the Crown Street and Cleveland Street immediate neighbourhood of the property there was only one other vacant shop observed and that the area was a “fairly well occupied retail strip” and the Cleveland Street property was “an occupied mixed-use property rented out in a steady good retail precinct”.

‘... an executor, where there are debts, may sell a term, and the devisee of the term has no other remedy, but against the executor, to recover the value thereof, if there be sufficient assets for the payment of debts.’

50   In Chaworth v Beech (1799) 4 Ves Jun 555; 31 ER 285 Sir Richard Arden MR said (at 567 of Ves Jun; 291 of ER):

‘It is no more than the case, that was put in the argument, of a legacy of a horse, which the executor refused to let go, least there should be a deficiency of assets, and having used and worked the horse a considerable time, afterwards offered to return him: the legatee then may insist upon the value.’”

261. The core ideas in this statement of the law are that the legatee: has an equitable entitlement, to a process of adjustment of the rights of beneficiaries between one another, “to be put into the position he would have been in if the property the subject of the specific legacy had not in fact been sold”.

262. Mr Wardy contests the way the NSW Trustee proposes to apply those principles in this case. The NSW Trustee says that it proposes to exercise discretions that are available to it as an administrator of the estate and that Mr Wardy is not entitled to attempt to control the exercise of those discretions through proceeding such as these. Those principal positions and related supporting arguments are considered in the next section of these reasons.

Consideration

263. The NSW Trustee’s case is relatively straightforward. It submits there is a strong case that it has a sound basis to exercise its discretion to apply here the principles stated above in Joyce v Cam. The NSW Trustee says that the outcome of the valuation contest clearly shows that the George Street property is an obviously appropriate substitute for the Cleveland Street property in the application of Joyce v Cam principles and that neither the Coogee property nor any other property is an appropriate substitute that complies with those principles. The NSW Trustee’s case is persuasive and the Court accepts it after considering Mr Wardy’s counterarguments. The Court now outlines that case and why it was accepted and then deals with the counterarguments advanced by Mr Wardy.

264. There is no contest between the parties that in the circumstances which have occurred in the administration of this estate it is appropriate for the Court now to apply Joyce v Cam principles. The real issue in these proceedings is what kind of property substitution and what kind of adjustments the application of those principles now requires.

265. The NSW Trustee contends that if Mr Besele’s and Mr Price’s valuations were to be accepted, as the Court has now accepted them, their valuations of the George Street property both come in almost identically for October 2016 at about $7,200,000 and their valuations of the Cleveland Street property range between $7,100,000 and $8 million. Moreover, the Court has also accepted the MVS and PRP valuations of the Coogee property at $4,750,000 and $5,650,000 respectively and if the Court were required to choose between them for the reasons earlier given it would select $4,750,000 as the market valuation of the Coogee property at the relevant date.

266. The NSW Trustee argues that the Coogee property is far less valuable (by at least $2 million) than the Cleveland Street property at the relevant date and on that basis alone, apart from difficulty in earning income from the Coogee property in the short term, it is not an appropriate substitute for the Cleveland Street property. And the NSW Trustee further argues that the George Street property is an appropriate substitute at an equal exchange market value of $7,300,000 at the relevant date.

267. In my view, $7,300,000 is an appropriately conservative market value to be chosen as the basis for making the proposed substitution. It is not overly generous to the Hassiba Wardy interests, nor does it disadvantage the residuary beneficiaries. But for the substitution the residuary beneficiaries would otherwise receive the market value George Street property, which the Court has determined at the relevant time was $7,200,000. But under the proposed substitution the residuary beneficiaries are receiving with the consent of the Hassiba Wardy interests value which is arguably $100,000 greater than their existing entitlement.

268. And the Hassiba Wardy interests are content to receive the George Street property at an exchange value of $7,300,000, which they regard as sufficiently putting them in the position they would have been in if the Cleveland Street property had not in fact been sold. In my view it does that in circumstances in which they do not seek any further adjustment in their favour. On the valuation evidence considered they could perhaps have argued for an adjustment beyond $7,300,000 but the Court well understands the counterarguments and the judgment that has clearly been exercised by the NSW Trustee that such further contests are likely to be unproductive and to further delay the final administration of this estate.

269. In light of the ready substitution of the George Street property for the Cleveland Street property, the Court considers there is no basis for considering the purchase by the estate of other substitute properties.

270. Mr John Wardy’s various arguments to the contrary of these conclusions are now considered. These arguments were set out in a combination of written and oral submissions but may be condensed into a number of main points. Mr John Wardy has already failed on his principal argument, which was that substitution of the George Street property for the Cleveland Street property should not occur because the George Street property is far more valuable than the Cleveland Street property. But Mr Wardy had a number of other arguments

271. First, Mr John Wardy is critical of the process the NSW Trustee has adopted to lead to this proposed substitution, on the basis that somehow the Hassiba Wardy interests are controlling the NSW Trustee’s exercise of its discretion. Mr John Wardy submits that it is not acceptable for a beneficiary, even in the context of this case with the apparent concurrence of the executor, to seek to “elect or choose the property of their liking”. Mr John Wardy submits that this is “not the appropriate mechanism by which substitution, marshalling or the process of adjustment of the rights of beneficiaries between one another… is to be achieved”.

272. This argument is not persuasive. There is no evidence that in the exercise of its discretion that the NSW Trustee has been dictated to by the Hassiba Wardy interests. Correspondence such as Exhibit C in November 2018 rather shows the NSW Trustee exercising its independent discretion but doing so in a consultative way that is designed to reduce future conflict by seeking the agreement of the Hassiba Wardy interests to the course proposed. That does not mean the the Hassiba Wardy interests are “choosing” property of their liking. And even if it was their choice, as by their expression of agreement it clearly is, that does not invalidate the NSW Trustee’ exercise of discretion which is engaged for proper purposes, within power and on the basis of factually correct valuation evidence.

273. Second, Mr John Wardy argues that the proposed substitution is inappropriate based upon the testator’s intentions. Mr John Wardy submits that if the testator “thought that the George Street property was the most appropriate property for Hassiba (with the gift over to their three children), one can readily infer the deceased would have given her the George Street property rather than the Cleveland Street property”.

274. This argument is also not persuasive. It is little more than a restatement of what was in the will, which the subsequent administration of the estate, recognising its tax debts, has proved to be unachievable without the sale of the Cleveland Street property. In the assessment of his estate the time of making the will the testator plainly did not anticipate the events which have occurred. It is unhelpful speculation and would be the source of endless argument were it legitimate to try and infer what the testator would have done had he realised at the time of making his will that the Cleveland Street property would have to be sold.

275. And the argument is based on a false premise inconsistent with Joyce v Cam. The Court does not have to enquire whether or not the testator thought that the George Street property “was the most appropriate property” for the Hassiba Wardy interests. All the Court has to do is to satisfy the principles in Joyce v Cam, which require the executor/administrator by a process of adjustment of the rights of beneficiaries, to put the Hassiba Wardy interests “in the position they would have been in if the property the subject of the specific legacy had not in fact been sold”. The application of these principles does not require the court to ascertain the testator’s intention.

276. Third, Mr John Wardy argues that In light of the “complete disparity” of rental yields between the George Street property and the Cleveland Street property that the former should not be substituted for the latter. This submission should not be accepted. The Court’s findings above do not show there is a “complete disparity” in rental yields between the Cleveland Street property and the George Street property, whatever that expression is said to encompass.

277. But more importantly the argument contains a fundamental error of principle concerning the valuations which the Court has now assessed. The capital market value of commercial and industrial properties of the kind the subject of these proceedings are assessed by one methodology on the basis of a capitalisation of maintainable earnings; and by another methodology, the direct comparison method, which also relies upon implicit judgments about maintainable earnings. Rental yields are one component of valuation methodology and the choice of capitalisation rate to be applied to those rental yields is an equally essential factor to derive the market value of a property.

278. In approving whether the NSW Trustee can proceed with the proposed substitution to put the Hassiba Wardy interests “into the position [they] would have been in if the property the subject of the specific legacy had not in fact been sold” the Court has used comparative market values of the George Street and Cleveland Street properties. This is a more comprehensive comparator or which includes a judgment about maintainable earnings and capitalisation rate. Merely to point to actual earnings, as distinct from maintainable earnings, is to use an incomplete and inappropriate measure to determine what position the Hassiba Wardy interests would have been in if the Cleveland Street property had not been sold.

279. Fourth, Mr John Wardy argues that the Hassiba Wardy interests are so far as is possible and subject to adjustments, to be put in the same positon as if the Cleveland Street property had not been sold. He argues that they “are importantly not – to the prejudice of competing beneficiaries (including Mr Wardy) – to be placed into a better position or receive a windfall”. In my view the simple answer to this argument is, as the Court has demonstrated in the calculations above, that far from receiving a “windfall” the the Hassiba Wardy interests have to a degree compromised their potentially arguable entitlements to an adjustment upon the substitution in order to avoid unnecessary argument. The valuations which the court has accepted clearly show they will not receive a “windfall” upon the substitution being proposed.

280. Fifth, Mr John Wardy argues that neither the George Street property nor the Coogee property, having regard to income potential, capital value and potential repair costs, may be an appropriate substitution for the Cleveland Street property. And as a result Mr John Wardy argues that the NSW Trustee should acquire a property for substitution for the Cleveland Street property. To illustrate this, he points to other properties available in the market at the time of the hearing, properties in Redfern, Sydney and Camperdown. But to isolate income potential, repair cost or any other factor suffers from the same defects as the Court has exposed in dealing with Mr Wardy’s third argument above: it is to judge substitution by an incomplete rather than a complete measure. And for the reasons already given, it is not necessary to look at the possible purchase of these alternative properties.

281. Sixth, Mr Wardy argues that the fact that Hassiba Wardy and her children are beneficiaries in two different “capacities”, Hassiba having a life interest in Cleveland Street and also being a residuary beneficiary of personalty; and her children’s remainder interest in Cleveland Street and one-half residuary beneficiaries of realty, “does not mean that they are exonerated from contribution pari passu with Mr Wardy, he being the other one-half residual beneficiary of realty”. Mr John Wardy points out that evidence has not been led by either Hassiba or any of her children as to their respective financial positions, so that the Court can infer that such evidence if led would not assist their position for the George Street property being the appropriate substitute property.

282. The difficulty with this argument is that in applying the test in Joyce v Cam, the Court can assess the substitute property for the one of which the Hassiba Wardy interests have been deprived then compare that with the interest of all the residuary beneficiaries who are affected by the proposed substitution. The Court does not have to go into the kind of analysis of the position of individual residuary beneficiaries that Mr John Wardy suggests here. And White J has already determined the respective interests of Hassiba Wardy and her children within the envelope of the Hassiba Wardy interests and further sub- analysis is not required here.

283. Seventh, Mr John Wardy makes a number of related points that the NSW Trustee’s valuation evidence does “not warrant substituting the George Street property for the Cleveland Street property”. This is said to be for various reasons that have been covered in the detailed analysis of the valuations above. He raises issues such as Mr Besele’s and Mr Price’s quality of inspection, the contest about the “highest and best use” for the George Street property, the contest about the relative occupancy rates in the buildings on the two properties, the degree of capital expenditure required to be undertaken on the properties and the relative residential and commercial mix of the buildings. But these matters have already been considered adequately in the course of the discussion above of the valuations and have been factored into the Court’s conclusions about the market value of the properties as a basis for substitution.

284. The NSW Trustee raises a number of other arguments against those deployed by Mr John Wardy. It is not necessary to consider them any further in light of the Court’s conclusions. Among those was an argument that residuary beneficiaries in this as yet not fully administered estate, such as Mr John Wardy, have no standing to assert control over discretions being exercised by the administrator exercised bona fide for the purposes of administering the estate. The submission pointed out that a beneficiary such as Mr John Wardy has no proprietary interest in the George Street property: Commissioner of Stamp Duties (Queensland) v Livingston[1965] AC 694. But it should be observed that a residuary beneficiary such as Mr Wardy at least has an interest in ensuring that the estate is properly administered and he at least has standing to do that and the Court has considered this contest on that basis.

285. There was also debate about how debts, testamentary and administrative expenses should be borne by the beneficiaries in the estate. But all that needs to be observed here is that is White J has already found that the expense of providing the substitute gift is to be borne as to 86.5% by the residuary real estate beneficiaries and as to 13.5% by the residuary personal property beneficiaries. Otherwise the scheme provided for in the Probate and Administration Act, s 46C will be applied and the Court does not need to consider such issues further.

Rent Earned on Cleveland Street Up To the Substitution

286. The NSW Trustee claims the rent for derived from the Cleveland Street property up to the date of the substitution be paid to Hassiba Wardy. As a life tenant she is entitled to that rent. The only contest between the parties appeared to be as to its quantum. The amount claimed is based on the amount which Mr John Wardy contends is the net rental return on Cleveland Street, namely $349,080 per annum. But although the amount is unproven it is considerably less than the assessed rentals for the Cleveland Street property made by of the valuers called by the NSW Trustee, which are in the range of $427,000 to $465,000. The Court is prepared to adopt this figure and will make a declaration to that effect. But the net result will need to be checked by the parties, as it cannot exceed White J’s finding at [36] in Wardy v Salieh; Wardy v The Estate of the late Edmond Wadih Wardy [2014] NSWSC 473.

287. There may be residual issues of costs and other adjustments that are required consequent upon these reasons. The plaintiff cross-defendant has been largely successful in proceedings that became contested and they may wish to seek a cost order against the defendant cross claimant, Mr John Wardy. Such an order has not yet been made in the orders below. Also one or other party may seek a special costs order, for example. The proceedings will be adjourned for mention to the date nominated below, but if it is not convenient they will be adjourned to a date to be agreed between the parties and notified to my associate, to allow the parties to put any motions to deal with any such matters as may arise. At that adjourned date, and before the Court finally disposes of these proceedings it wishes to hear short updated evidence as to how the fire safety and security issues are presently being addressed in relation to the George Street property.

Conclusion and Orders

288. For these reasons, the Court makes the following declarations, orders and directions:

1. Declare that the Plaintiff as Administrator of the estate of the late Edmond Wadih Wardy who died 19 July 2009 (“the testator”) is entitled and authorised to appropriate the property at and known as “the George St Property” [address not published] by holding and/or conveying the same upon trust for the beneficiaries who would have been entitled to the bequest of “the Cleveland St Property” [address not published] provided for in clause 3(iv) in the will of the testator dated 7 November 1992 (had the Cleveland St Property not been sold in November 2012 for the purpose of administering the estate) as a gift in substitution for the Cleveland St Property, such appropriation to be made to the said beneficiaries upon the same trusts and interests as the Will provided in respect of the Cleveland St Property, namely: for Mrs Hassiba Wardy for her life with remainder to Anthony Wardy, Roger Wardy and Robert Wardy.

2. Declare that for the purpose of such appropriation and substitution the current value at the date of such appropriation and substitution of each of the Cleveland St Property and the George St property shall be treated as equal, with each of the Properties having a current value of $7,300,000.

3. Declare that the Plaintiff as administrator of the estate of the testator is entitled and authorised to offer and pay compensation (“the Net Rental Compensation Amount”) to Mrs Hassiba Wardy for net rents and profits that she has not received because the Cleveland St Property was sold, calculated on the basis that Cleveland St Property was able to earn net rental income of $350,000 per annum for the period between the sale of the Cleveland St Property and the appropriation of the George St Property in substitution as contemplated in declaration 1.

1. Declare that the cost of the said substitution and appropriation, being $7,300,000 and the Net Rental Compensation Amount, is an “administrative expense,” the cost of which is to be allocated in accordance with Part 2 of the Third Schedule as required by section 46C of the Probate and Administration Act 1898.

2. Declare that as between the two gifts of residue provided for in clause 3(v) and clause 4 of the testator’s will (as adjusted under orders of White J in Proceedings 2010/226874; 2010/233072 and 2010/237742 – see [2014] NSWSC 437), the burden of the said administrative expense is to be allocated as to 86.5% against the residuary gift of realty in clause 3(v) and as to 13.5% against the residuary gift of personalty in clause 4.

3. Order that the Plaintiff’s/Cross-defendant’s costs of the Statement of Claim for Judicial Advice filed on 19 April 2016 and Cross Claim filed 6 November 2017 be paid out of the estate on the indemnity basis.

4. Adjourn the proceedings to Monday, 2 March 2020 at 9:30 AM for the return of any further motions in, including motions as to whether the defendant/cross claimant should pay the plaintiff cross-defendant’s costs of these proceedings on the ordinary basis or the indemnity basis or whether some other special costs order should be made and any motions in related proceedings.

5. The Cross-claim is otherwise dismissed.

6. His Honour notes that the NSW Trustee and Guardian undertakes to the Court by its solicitor, Mr Jackson, that it will not act on the declarations made today before the 2 March 2020.

7. Grant liberty to apply.

**********

Amendments

12 February 2020 - [2] - italicise "1925"
[13] - line 4, space between "reconstituting" and "judicial"
[18] - within quote, third like delete "10" before property
[23] - line 4, delete comma after "contest"; third last line, "George" replaced with "Cleveland"
[28] - third last line, "at" instead of "a liberty"
[42] - second line, "story" to "storey"
[47] - third line, "$3,500 - $4500" to "$3500 to $4500"
[65] - last line, "billion" to "million"
[67] - third line, delete "Saying" before "As between"
[76] - fourth line, "$" before "3, 136,434"
[80] - third last line, "Exhibit" capitalised
[81] - fourth last line, second "case" deleted
[93] - fourth line, delete "of that" before "Mr Price"
[98] - add quotation before the word "unimproved"
[99] - second line, delete "to" after "upon"
[133] - fifth last line add "to" before "bring; third last line, delete "on" before upon", second last line, delete "and approach for this property that" and delete "also" before "rejected" and after "rejected add "this,"
[145] - third line, delete second "will" and add "be"
[153] - third line, capitalisation of "Reconciliation"
[179] - last line, italicise "Valuers Act 2003"
[180] - fifth line, quotation before "the qualifications"
[185] - italicise "Duties Act 1997"
[188] - add "he" before "gave"
[189] - second last line, "at" before "liberty"
[193] - third last line, "PI" to "Professional Indemnity"
[206] - second line, quotation after "father"
[207] - fourth line delete "-" before "office"
[208] - second line, add "s" after "seem"; second last line, "been" to "mean"
[213] - second line, add "ly" after "active"
[230] - second last line, add "In" before "The Court's"
[231] - second line add "in" after "with"
[232] - second line, add comma after "property"
[233] - third last line, add "a" before "similar tenant"; capitalisation of "Weighted Average Lease Expiry"
[240] - second last line, "be" before "seen"
[241] - third line, "$7.34M" to "$7.34 million"
[244] - second line, add "to" after "apply"
[247] - second last line, add "a" before "figure"
[252] - fourth line, add comma after "St"; third last line add "a" after "for"
[256] - third line, delete "is" after "reasoning"
[260] - fourth line, "in this Court" moved after ""restated"
[261] - first line add "are" before "that the"
[262] - first line, delete "to" after "way"
[263] second last line, add "was" before "accepted"
[270] - third last line, "clever" to "Cleveland"; second last line, delete "of" and add "Street" after "George"
[271] - third line "Trustees" to "Trustee's" and delete "and are"; fourth last line, "choos" to "choose"
[278] third last line, comma after "earnings"
[281] - fifth line, delete "that" before "they"
[282] - fourth line, "are" before "affected"
[283] - fifth line, "Mr Besele premise the prices" to "Mr Besele's and Mr Price's quality"; third last line delete "above" before "in the course"
[284] - fourth line delete "Court" before "such"; capitalisation of "Duties"
fourth last line, "Ward" to "Wardy"
[286] fourth last line, "of" before $427,000"
[287] - second last line, add "to" before "how"

Decision last updated: 12 February 2020