Paul Holmes A Court and the Nicholson Grazing Co Pty Ltd & Ors and Valuer General
[2012] WASAT 114
•31 MAY 2012
JURISDICTION : STATE ADMINISTRATIVE TRIBUNAL
STREAM: DEVELOPMENT & RESOURCES
ACT: LAND ADMINISTRATION ACT 1997 (WA)
CITATION: PAUL HOLMES A COURT AND THE NICHOLSON GRAZING CO PTY LTD AND OTHERS and VALUER GENERAL [2012] WASAT 114
MEMBER: JUSTICE J A CHANEY (PRESIDENT)
HEARD: 15 AND 16 FEBRUARY 2012
DELIVERED : 31 MAY 2012
FILE NO/S: DR 28 of 2011
BETWEEN: PAUL HOLMES A COURT AND THE NICHOLSON GRAZING CO PTY LTD AND OTHERS
Applicant
AND
VALUER GENERAL
Respondent
FILE NO/S :DR 30 of 2011
BETWEEN :PAUL HOLMES A COURT AND HEYTESBURY PASTORAL PTY LTD
Applicant
AND
VALUER GENERAL
Respondent
FILE NO/S :DR 31 of 2011
BETWEEN :PAUL HOLMES A COURT AND VICDON HOLDINGS PTY LTD
Applicant
AND
VALUER GENERAL
Respondent
FILE NO/S :DR 183 of 2011
BETWEEN :S KIDMAN & CO LTD
Applicant
AND
VALUER GENERAL
Respondent
FILE NO/S :DR 184 of 2011
BETWEEN :S KIDMAN & CO LTD
Applicant
AND
VALUER GENERAL
Respondent
Catchwords:
Valuation of land - Pastoral leases - Ground rent - Rent that land might reasonably be expected to realise - Whether market rent - Requirement to consult as to the economic state of pastoral industry - Appropriate valuation methodology - Agreed unimproved capital values - Whether rent to be assessed by applying a rate of return
Legislation:
Land Administration Act 1997 (WA), s 101(5), s 123, s 123(2), s 123(4), s 126, s 128, s 129
Pastoral Land Act 1992 (NT), s 55
Valuation of Land Act 1978 (WA), s 4, s 33, Pt IV
Result:
Assessment of ground rentals confirmed
Applications for review dismissed
Category: B
Representation:
DR 28 of 2011
Counsel:
Applicant: Mr I Freeman
Respondent: Mr B King
Solicitors:
Applicant: Lavan Legal
Respondent: State Solicitor's Office
DR 30 of 2011
Counsel:
Applicant: Mr I Freeman
Respondent: Mr B King
Solicitors:
Applicant: Lavan Legal
Respondent: State Solicitor's Office
DR 31 of 2011
Counsel:
Applicant: Mr I Freeman
Respondent: Mr B King
Solicitors:
Applicant: Lavan Legal
Respondent: State Solicitor's Office
DR 183 of 2011
Counsel:
Applicant: Mr I Freeman
Respondent: Mr B King
Solicitors:
Applicant: Lavan Legal
Respondent: State Solicitor's Office
DR 184 of 2011
Counsel:
Applicant: Mr I Freeman
Respondent: Mr B King
Solicitors:
Applicant: Lavan Legal
Respondent: State Solicitor's Office
Case(s) referred to in decision(s):
Nil
REASONS FOR DECISION OF THE TRIBUNAL:
Summary of Tribunal's decision
Each of the five applicants sought a review by the Tribunal of assessments by the Valuer General of the ground rents to be paid following a five year review of pastoral lease rents. The applicants contended that the methodology used by the Valuer General, being directed to ascertaining a 'market rent' was inconsistent with the proper approach to rent reviews under s 123 of the Land Administration Act (1997) (WA). They agreed that the rent should be a 'reasonable rent' having regard to the markets of the State and the obligations of the lessees under the Act.
The Tribunal considered the proper approach to assessment of the rent under the legislation and concluded that the approach of the Valuer General was in accordance with the Act and was preferable to that contended for by the applicants. Having reached that conclusion, the Tribunal considered whether the figures applied by the Valuer General were appropriate having regard to relevant factors, and concluded that they were.
The applications for review
Each of these matters concerns an application for review of a decision of the Valuer General on an objection by each applicant to the assessment of rent for a pastoral lease in the Kimberley region of Western Australia. The assessment was made pursuant to s 123 of the Land Administration Act 1997 (WA) (LA Act). Section 126 of the LA Act applies Pt IV of the Valuation of Land Act 1978 (WA) (VL Act) to assessments of rent under s 126 as if the assessment were a valuation made under the VL Act. Section 33 of the VL Act provides that any person who is dissatisfied with a decision of the Valuer General on an objection may require the Valuer General to refer the valuation to this Tribunal for a review. That has occurred in each of these cases.
Section 123(4) of the LA Act requires that rents for all pastoral leases must be determined as at 1 July 1999, and as at 1 July on each fifth year thereafter. Accordingly, prior to the assessment under review, rents had been determined as at 1 July 2004. The assessments made on 1 July 2009, which are the subject of the present proceedings for review, assessed rental on each of the five properties concerned at a significantly higher figure than the previous assessment. The respondent contends that the methodology undertaken by the Valuer General in assessing rents is flawed, and does not comply with the methodology contemplated under s 123 of the LA Act. In particular, the respondent contends that the Valuer General failed adequately to consider the economic state of the pastoral industry in arriving at the substantially increased rental assessments.
In addressing the parties' differences, it is first necessary to consider the proper construction of s 123 of the LA Act.
Proper construction of s 123 of the LA Act
Section 123 of the LA Act reads as follows:
Assessment of rent
(1)Subject to sections 124A and 124, the annual rent payable for a pastoral lease is the amount, as determined by the ValuerGeneral, of ground rent that the land might reasonably be expected to realize in good condition, for a long term lease for pastoral purposes under which all normal outgoings are paid by the lessee.
(2)In determining the annual rent for a pastoral lease, the ValuerGeneral is to consult the Board concerning the economic state of the pastoral industry.
(3)The ValuerGeneral must determine the rent for a lease proposed to be issued if no valuation in relation to the land under the lease has been made under this section within the previous 5 years.
(4)The ValuerGeneral must determine rents of all pastoral leases as at 1 July 1999, and as at the 1 July of each fifth year thereafter.
(5)A determination under subsection (4) applies from the date referred to in that subsection until a new valuation is made under this section or section 124.
The substantive issue between the parties was as to the proper methodology for assessing ground rent under s 123 of the LA Act.
The respondent's approach
The approach taken by the Valuer General to the assessments in question was explained by Mr Chris Olsen, a licensed valuer employed as District Valuer, within the country rural section of Property and Valuation Services at Landgate. Mr Olsen is responsible for ratings for land outside town sites within Western Australia. He considered that the term 'might reasonably be expected to realize', found within s 123 of the LA Act, contemplates that the rental to be assessed under that section is a 'market rental'. He drew support for that opinion from the use of the expression 'might reasonably be expected to realize' in the definitions of 'capital value', 'gross rental value' and 'unimproved value' within s 4 of the VL Act. He explained that, in applying those definitions for the different types of valuations under the VL Act, the respondent approaches the task by way of an assessment of 'market value'.
In carrying out the evaluations, Mr Olsen said that he had regard to the International Valuation Standards and Guidance Notes which have been incorporated into the latest joint publication by the Australian Property Institute and Property Institute of New Zealand. The International Guidance Note No 2 (page 6.2.2) defines market rent as follows:
Market rent. The estimated amount for which a property, or space within a property, should lease on the date of valuation between a willing lessor and a willing lessee on appropriate lease terms in an arms length transaction, after proper marketing wherein the parties had each acted knowledgably, prudently, and without compulsion. Wherever market rent is provided, the 'appropriate lease terms' which it reflects should also be stated.
Mr Olsen said that there a number of methodologies that might be considered in determining ground rents. He said that the choice of methodology is largely dependent on available sales data and applicability of the methodology to broad area pastoral grazing. He identified four possible approaches to the establishment of a ground rent, which he said were:
i.Direct comparison (unimproved rental evidence). This is the preferred option. However there is insufficient volume of direct rental evidence on which to base a large rental valuation program. What little evidence is available has been used as a 'check'.
ii.Agistment rates. Generally on a $ value per stock unit/week and generally short term on an 'as required' basis. A typical Kimberley agistment rate is $2/week/stock unit. This method is not suitable for long term leases such as the subject pastoral leases. Agistment may also include some management, overseeing stock as well as the use of improvements (water supply, fencing, yards etc) and as such cannot be compared to a ground rental.
iii.Income/gross margin method - percentage of gross margin utilised to determine rent. Due to limited access to data and significant variation in returns due to factors such as management and productivity, this method is not suitable for broad area pastoral leases.
iv.Fair market rate of return on market value of land. The value of the land component is quantifiable along with a rate of return. This option is the favoured methodology utilised in the Northern Territory, Queensland and South Australia with variations in the adopted rate of return.
Mr Olsen considered that the fair market rate of return on the market value of the land was considered to be the most appropriate option, and the present assessments are made on that basis. That involves a process of assessing the unimproved capital value of each property, and then applying an appropriate rate of return.
In assessing the appropriate rate of return, Mr Olsen undertook a process of consultation with the Pastoral Lands Board as required by s 123(2) of the LA Act. The rate of return upon which he settled, at the conclusion of that process, was 2%, which was a reduction from the figure of 3% which had previously been applied to unimproved capital values in the assessments undertaken in July 2004. I will return to a more detailed account of that process later in these reasons.
The applicants' approach
The applicants argue that the approach taken by the respondent is flawed, and is inconsistent with the requirements of s 123 of the LA Act. They argue that the concept of a market rent has no application to assessments of pastoral lease rental under the LA Act. That is because, they argue, all pastoral leasehold land is owned by one party, namely the government of Western Australia, which is the only lessor in the market. They argue, therefore, that the market is dysfunctional, and incapable of striking a bargain between a willing lessor and a willing lessee. They argue that supply of pastoral lease properties is limited, because all properties are currently occupied, so that a lessee who has expended significant capital on a leasehold property has limited bargaining power in any lease negotiation.
Rather than a market rental, the applicants argue that s 123 of the LA Act contemplates the striking of a statutory charge. They argue that the scheme of the provision is to establish a reasonable ground rent, being 'a reasonable outcome for lessor and lessee'.
When pressed as to the criteria which it is contended the Valuer General should apply in determining a 'reasonable rent', counsel for the applicants said that to the criteria to be applied are those that 'flow from this being a pastoral lease for long term pastoral purposes'. He contended that the LA Act gives guidance to as what pastoral purposes are and to what the obligations of a lessee are. Reliance was placed on s 101(5) of the LA Act which provides that a pastoral lease must not be granted unless the Board is satisfied that the land under the lease will be capable, when fully developed, of carrying sufficient authorised stock to enable it to be worked as an economically viable and ecologically sustainable pastoral business unit. The applicants also rely on the obligation imposed by the LA Act on a pastoral lessee in relation to control of feral animals, maintenance of indigenous pasture and restrictions on sowing on indigenous pastures. These factors, it was argued, need to be brought to account in the assessment of what is a reasonable statutory charge by way of ground rental for a pastoral lease.
In their statement of issues, facts and contentions, the applicants' construction of s 123 of the LA Act was put slightly differently from the contentions outlined above, which were made in closing submissions. At paragraph 23 of their statement of issues, facts and contentions in matters DR 28, 30 and 31 of 2011 and paragraph 20 in matters DR 183 and 184 of 2011, the applicants said:
Section 123(1):
(a)provides for the determination of the annual rent that is payable for a pastoral lease;
(b)requires that the determination be made by the Valuer General;
(c)does not confer any discretion on the Valuer General, but rather, requires the Valuer General to undertake the requisite determination, on an objective basis, by applying the statutory criterion and by having regard to relevant information;
(d)does not provide for any element of the determination to be generally applicable to all pastoral leases for which the rent is to be fixed as at the same date, but rather, provides for determination of the rent of a pastoral lease, meaning that a separate determination is required to be made in relation to each and every relevant pastoral lease;
(e)requires the determination to be the ground rent that the land might reasonably be expected to realize, i.e., a ground rent that reflects an expectation that is reasonable, thus realistically taking into account all the relevant factors and circumstances;
(f)provides for three specified assumptions that are required to be made when assessing that ground rent:
(i)that-the land is in good condition;
(ii)the rent relates to a long term lease for pastoral purposes; and
(iii)all normal outgoings are paid by the lessee.
The applicants also contended that:
The statutory intention to invoke the concept of a market ground rent necessarily imports an intention that the rent is to be determined having regard to the applicable characteristics and circumstances of each particular pastoral lease in question, including the prevailing and reasonably anticipated economic circumstances affecting the industry, or section of the industry, in which business on that pastoral lease is conducted.
In each of the applicants' statements of issues, facts and contentions they identified what was said to be the correct approach as follows:
(a)For year 1 of each 5-year period, fix a base rental by taking the unimproved capital value of the subject land and applying a percentage rate of return determined by taking into account all factors reasonably viewed as relevant, including:
(i)the return to be received by the State as lessor,
(ii)the desirability of maintaining continuous occupation of the subject land as an economically viable and ecologically sustainable pastoral business unit;
(iii)the economic state of the relevant sector of the pastoral industry, and
(iv)rentals for comparable properties in the adjoining region of the Northern Territory.
(2)For years 2 to 5 of each 5-year period, adjust the base rental by an escalation factor based on a composite cattle price index reflecting the economic state of the relevant sector of the pastoral industry.
Whose approach should be preferred?
In my view, the approach to valuation under s 123 of the LA Act taken by the Valuer General is to be preferred. There are a number of reasons for that conclusion.
First, I agree that the words 'ground rent that the land might reasonably be expected to realize' are a well recognised formulation of words used in relation to the assessment of different types of market values. The examples identified by Mr Olsen, and referred to above, illustrate the point. There is no reason to conclude that the use of those words in the LA Act contemplates a fundamentally different approach from the approach to valuations under the VL Act.
Secondly, apart from the requirement for the Valuer General to consult with the Pastoral Lands Board concerning the economic state of the pastoral industry, the Act gives no guidance as to the criteria to be applied by the Valuer General if he is required to assess what might be a 'reasonable statutory charge'. The applicants argue that the 'reasonable rental outcome' is to be determined having regard to various obligations and 'duties of stewardship' of pastoral lessees, in the interests of the State in maintaining a viable pastoral industry which facilitates proper land management. The difficulty with that proposition is illustrated by the fact that the applicants' own expert evidence did not seek to assess a rental by bringing to account those factors, other than to assume them to have been brought to account in the assessment of pastoral lease rentals in the Northern Territory, and then to strike a value for Western Australian pastoral leases by applying calculations based on Northern Territory rents. Because considerable reliance was placed by the applicants on Northern Territory pastoral lease rentals, I will return more detailed consideration of that issue later in these reasons. In the present context, however, it can be observed that the limited information in relation to the assessment of the Northern Territory rentals, does not make apparent what particular considerations were brought to bear by the relevant Minister in setting those rents. It follows that any assumption that the Northern Territory Minister brought to account considerations which reflect obligations and duties on pastoral lessees under the LA Act is not open on the available evidence. Once that assumption is rejected, there is no evidence before the Tribunal which would enable it to meaningfully assess, in any empirical way, the appropriate effect on ground rental of the various obligations and duties arising under the LA Act, nor as to the concessions that might be brought to bear by reason of the State's interest in maintaining a viable pastoral industry. All that can be said (and all that in substance the applicants really said) was that reliance on the Northern Territory comparisons produces a lower rental figure and that a lower figure is less likely to adversely impact on viability than a higher figure.
Thirdly, I do not consider that the construction of s 123 of the LA Act propounded by the applicants is necessary, within the scheme of the LA Act, to preserve the viability of pastoral lease businesses. The scope for that protection arises under s 128 of the LA Act. That section enables the Minister, on recommendation of the Pastoral Lands Board, to delay, reduce or waive entirely the payment of rent. The circumstances in which that relief may be granted arise where a lessee has been adversely affected by drought, fire, cyclone, flood or other disaster, or is suffering personal financial hardship as a result of poor economic conditions in the pastoral industry. To the extent that the maintenance of a viable pastoral industry is an object of the Act, the requirement to have regard to the economic state of the pastoral industry imposed by s 123(2), and the provision for relief under s 128 in the event of particular circumstances arising, serve that purpose. The type of 'political' considerations that the applicants say should be brought to bear by the Valuer General find their place in s 128, not s 123.
Fourthly, I do not accept that references in various passages in Hansard, to which the applicants drew my attention, support the conclusion that the ground rental was, in substance, a statutory charge having regard to the importance of the state of effective land and environmental management of pastoral lease areas. While references to the importance of those matters were made during various parliamentary debates, they arose in the context of discussion as to the frequency of ground rental assessments. The full context of the various passages referred to, which it is not necessary to set out, makes it clear that valuations, whenever they were to be undertaken, would be undertaken on normal valuation principles (subject to the requirement to have regard to the economic state of the pastoral industry). The point was most clearly illustrated during the third reading of the Land Administration Bill when the responsible Minister, the Honourable Max Evans said:
It is not a case of increasing the value of land every five years. In a five year period there can be droughts and the value of the land could change. Valuations should be based on what an honest buyer and seller agree between themselves to be the value of the land. It is not a question of whether the valuation is done every year or every five years; it depends on what people will pay for it. The industry insisted on five years and the government agreed to it.
Fifthly, the assessment of a 'market rent' necessarily involves an examination of the particular market in which the lease operates. Section 123 of the LA Act specifies that the ground rent is 'what the land might reasonably be expected to realize in good condition for a long term lease for pastoral purposes …'. (Emphasis added) A long term lease for pastoral purposes carries with it all of the benefits and obligations of the lessee which arise under the lease. In the case of a pastoral lease under the LA Act (which comprise most, if not all, 'long term leases for pastoral purposes') it necessarily carries with it the attendant obligations under the LA Act. Therefore, in considering what a reasonable lessee would be prepared to pay, and a reasonable lessor might accept, the terms and conditions of the particular lease are inherently brought to account.
Sixthly, I do not consider that it is relevant that the lessor of all pastoral leases is the State. The definition of market rent applied by Mr Olsen, which is set out above, places no importance on the identity of the lessor. The rental is assessed by considering the position of a hypothetical lessor and lessee, each acting knowledgably, prudently and without compulsion. The availability of alternative properties may or may not be an issue in relation to the particular lease the subject of valuation, but the absence of alternative lessors does not dictate that ordinary valuation principles should not be applied.
I accept, therefore, that the task of the Valuer General is to apply ordinary valuation principles to establish what might generally be referred to as a 'market rent'. As is always the case, the particular nature and features of the market with which the inquiry is concerned will inform the outcome of the assessment. I accept, for the reasons given by Mr Olsen, that his choice of the fourth of the possible approaches to assessment of ground rent, is the appropriate methodology.
The rate of return
Acceptance that the methodology undertaken by the Valuer General is the preferable methodology in the circumstances of pastoral leases, requires that consideration be given to the question of whether components which make up the calculation of the ground rent have been correctly applied.
There are two components to the calculation. The first is the unimproved capital value (UCV) of the land comprised in each lease. The second is the rate of return of 2% which was adopted by the Valuer General and applied to UCV.
The applicants did not challenge the calculation of the unimproved capital value undertaken by the Valuer General. Mr Olsen explained that the value of the land could be quantified from analysis of sales evidence and that the unimproved value varies with every lease due to differences in carrying capacities, land systems, rainfall, size and access. Thus the variability of productivity between leases is encompassed in the market assessed UCV.
The applicants' valuer, Mr Robin Gardiner, reviewed Mr Olsen's calculations of UCV. He noted that Mr Olsen's evidence revealed that the Valuer General had made a subjective adjustment (by way of reduction) to the UCVs which had been analysed on the basis of sales evidence 'as an arbitrary allowance to reflect any market movements/changed conditions, prior to adopting the base UCV values to apply across the leases'. He accepted that the determination of UCVs by the Valuer General remains an appropriate method for determining the relativity between pastoral leases. He did not challenge the UCVs which had been applied by the respondent in any of the five leases the subject of these proceedings (or indeed generally).
It follows that the, at least in implicit, criticism found in the applicants' statement of issues, facts and contentions that the determinations failed to give separate consideration to the characteristics and circumstances of each particular pastoral lease, is without foundation. The UCV of each particular pastoral lease is arrived at, on Mr Olsen's methodology, having regard to the particular features of the lease concerned. That position was accepted by Mr Gardiner without criticism.
Having accepted that the methodology employed by the Valuer General was appropriate, and that the UCVs are not challenged, the question to be determined by the Tribunal is whether the rate of return of 2% is the correct and preferable rate to be applied.
The appropriate rate of return
In order to determine whether the rate of return of 2% was appropriate it is necessary to review the process undertaken by the Valuer General in setting that rate.
As mentioned above, responsibility for the valuation was given to Mr Olsen. In November 2008, he prepared a report entitled Pastoral Lease Rents 2009 Interim Project Report. That report provided a summary of matters including valuation procedure, sales evidence available, market analysis, consultation process, available station data, indicative value trends and issues affecting values including a comment on the possible impact of current economic conditions.
On 10 December 2008, Mr Olsen met with the Pastoral Lands Board (Board). Mr John Rowe (Chief Valuer Country Section) attended with Mr Olsen. They provided a PowerPoint presentation to the Board. The presentation included a summary of indicative rents proposed for 2009 compared to the previous review in 2004. Those indicative rents were based upon a 3% rate of return being applied to the UCV’s which were substantially higher than the previous UCV’s used in the 2004 valuations. In 2004, rents had been based upon the same methodology, and using a 3% rate of return.
Mr Karel Eringa is the Acting Manager - Pastoral for the Department of Regional Development and Lands. He also gave evidence at the hearing. Mr Eringa attended the meeting on 10 December 2008. Prior to the meeting, he had prepared an analysis of the viability of pastoral leases throughout Western Australia. His analysis showed that more than half of the pastoral leases in the Southern Rangelands were unviable as standalone enterprises. He told the Trbunal that the Board expressed its concern about the impact of the proposed increases on the pastoral industry. He said that the Board did not have available to it, at the time, the sort of information required to make a meaningful comment about the economic state of the industry. Accordingly, Mr Eringa was instructed to prepare some modelling which isolated pastoral rent as a variable in order to test the viability of leases under the current rents and the proposed rents. The model indicated that there would be a substantial increase in the proportion of unviable stations as a direct result of the proposed increase in rent, particularly in the Pilbara, Southern Rangelands, and to a lesser extent in the Kimberley.
Mr Eringa’s modelling was presented to Mr Olsen and others at a meeting on 25 March 2009. The issue of reduction of rates of return was discussed, but Mr Olsen and the other officers from the Valuer General's office indicated they had an objection to applying a rate of return less than CPI. Following that meeting, the Valuer General reviewed the rents, taking into account the effect of the global financial crisis and economic factors within the industry.
There was a further meeting between officers of the Valuer General's office and the Pastoral Lands Board on 15 April 2009. A PowerPoint presentation was made by the Valuer General's representatives. That PowerPoint indicated that the rate of return would be reduced from 3% to 2%. The Valuer General's officers also advised that sales evidence used to assess the UCV had been approached conservatively, by applying factor of 65% of assessed value to allow for current economic circumstances, the downturn in the market, and the absence of reliable sales data since October 2008.
Following the meeting, Mr Eringa ran the figure of 2% into his model. He calculated a median new pastoral rent in the State to be less than $100 per week, ranging from around $60 per week in the Southern Rangelands to $173 per week in the Pilbara and $430 per week in the Kimberley. Mr Eringa believed that these numbers substantially reduced the negative impact on the viability of pastoral leases (compared to a 3% rate of return). He noted that there were still some 'hot spots' where the market value of pastoral leases had increased substantially, although in some areas the rents actually decreased. He considered, however, that it was impossible to avoid anomalies of that kind because of the absence of sufficiently detailed economic data for each and every lease. Mr Eringa told the Tribunal that, having undertaken his analysis, he considered rents based on a rate of return of 2% were sustainable, but rents based on 3% were not.
Mr Olsen explained that, in assessing the rate of return to be applied, he had regard to a range of information. There was no direct market information as to rates of return in relation to pastoral leases. Accordingly, it was necessary for Mr Olsen to look at other factors to apply. He described and commented on the factors which he considered in the following way:
(a)limited historical evidence of improved and semiimproved subleases of cattle properties which showed a rate around 6%;
(b)improved remote area agricultural and horticultural leases, for example in the Broome and Ord irrigation areas, showed 5% to 7%;
(c)the Reserve Bank inflation target was less than 3%;
(d)Government long-term bond rate was 3.5% (3 years) and 4.5% (10 years) as at late 2008;
(e)other Australian States pastoral lease rentals. Northern Territory, Queensland and South Australia employ an identical methodology to Western Australia in determining market unimproved values. In the Northern Territory and Queensland the rental rate is determined by the respective Minister (not market related). In South Australia and Western Australia the rental return is determined by the Valuer General (market related).
The rates applied in other states were as follows:
States
Rate of return for land utilised for pastoralism
Assessed by
South Australian
2.7% maintained for 2009 review
VG
Queensland
0.02 - 0.33% (2010)
Minister
Northern Territory
1.124% (2010)
0.24% (2011)
Minister
Western Australia
3% for 2004 review
VG
(f)typical rates of return for other 'rural' land uses in WA as follows:
(i)cropping leases 5% - 7%
(ii)improved south-west grazing 2% - 5% depending upon rainfall.
On the basis of those general indicators as to rates of return, and having regard to the concerns expressed through the Board as to viability of pastoral leases, the rate of 2% was settled upon by the Valuer General. Mr Olsen explained that he considered 2% was as low as could be applied in assessing a reasonable rental return to a lessor. He knew of no other market where land would provide such a low return.
The applicants relied upon the approach taken by Mr Gardiner. He was instructed to make an assessment of ground rent taking account of the following considerations:
(a)the economic state of the pastoral industry; and
(b)the lessor's (in this case the State's) intention to facilitate economically viable and environmentally sound use of the land for pastoral purposes to advance the economic interest of the State. In other words, the lessor is concerned to achieve broader objects in the interests of the State than simply obtaining the best possible rental return.
Although not expressed in quite the same terms as appear in either the applicants' statement of issues, facts and contentions or in their oral submissions, the instructions to Mr Gardiner in broad terms reflected the approach to valuation which they contended for at hearing. That is an approach which I have rejected earlier in these reasons.
Mr Gardiner was also instructed that the factors recited above 'are to be determined and applied to each pastoral lease, having regard to the characteristics and circumstances of each lease'.
Mr Gardiner expressed opinions as to the appropriate ground rent for each of the five properties the subject of these proceedings, having regard to comparison with the rent paid in relation to a number of Northern Territory pastoral leases. He approached the matter by having regard to the carrying capacity of the Northern Territory properties and their rental, so as to produce a dollar figure which represented the rental per carrying unit. As it happened, the figure for rental for each station was almost exactly half of the figure assessed by the Valuer General in relation to the properties the subject of these proceedings. In other words, the effect of Mr Gardiner's conclusions was to apply a 1% rate of return (or as he preferred to call it, a 1% factor) to the UCVs as assessed by the Valuer General.
It could be noted in passing that the approach ultimately adopted by Mr Gardiner did not, save as was inherent in the establishment of the UCVs, 'have regard to the characteristics and circumstances of each lease' to any greater extent than the valuations undertaken by the respondent.
Essentially, Mr Gardiner's approach was to use, for comparison purposes, Northern Territory pastoral lease rental rates. He considered pastoral leases in the Northern Territory to be superior to those in Western Australia, and accordingly applied a 10% reduction to be applied to the Western Australia properties for comparison purposes. He considered, however, that the approach taken in the Northern Territory better represented an approach which reflected the assumptions which he was instructed to make (and which, in his evidence, he argued were appropriate). He said that the Northern Territory rentals 'represent rental levels that have been established by ongoing negotiations between the lessee and the lessor (NT Government) with the appropriate level of economic and environmental stewardship consideration'. He said that:
The NT Minister effectively sets the rental level by applying a percentage of the assessed UCV (as assessed by the Valuer General), after reflecting on the state of the pastoral industry and representations from the lessees (pastoral industry lobby groups etc) and due regard to the interests of the Territory. Rents are reviewed each year by the Minister under s 55(2) of the NT Pastoral Land Act 1992.
Section 55 of the Pastoral Land Act 1992 (NT) provides:
Rent
(1)Subject to subsections (3) and (4) but notwithstanding anything in the lease document, the rent payable in respect of a pastoral lease for a financial year is the percentage of the unimproved value of the leased land determined by the Valuer-General under the Valuation of Land Act, declared by the Minister in accordance with this section in respect of the District in which the land is situated.
(2)The Minister may, before 30 June in a financial year, by notice in the Gazette, declare the percentage of the unimproved value of pastoral land in a District to be the rent payable for pastoral leases in the District for the next following financial year.
(3)If by 30 June in a financial year the Minister has not declared a percentage in respect of a District in accordance with subsection (2), the rent payable for a pastoral lease in the District in respect of the next following financial year is an amount equal to the rent payable for the lease in respect of the financial year ending on that date.
(4)Notwithstanding the Valuation of Land Act, in determining the unimproved value of pastoral land the Valuer-General shall disregard any existing or potential use of the land that is inconsistent with the use of the land for pastoral purposes.
Thus, as can be seen, the percentage (or rate of return or factor) applied in the Northern Territory system is determined not by the Valuer General, but by the Minister.
There was little information before the Tribunal as to the precise basis upon which the Northern Territory rents had been fixed, or as to the factors taken into consideration by the Minister. The anecdotal evidence from Mr Gardiner was that considerable lobbying had been undertaken by the pastoral industry to contain rents in the Northern Territory given the state of the pastoral industry.
Mr Olsen rejected the reliance on Northern Territory rentals. He said that assessed rentals between 2006 and 2009 in the Northern Territory have remained stable due to the adoption of a rent rate which contained the rent increases within an agreed limit. To illustrate the point, he said that when UCVs increased from 2009 to 2010 in the Northern Territory, the percentage dropped from 1.22% to 0.248%.
Mr Gardiner's rents for comparative purposes were those arrived at by applying a factor of 1.22% to valuations of Northern Territory pastoral leases carried out in 2006. Mr Olsen said of this:
This method is highly arbitrary as it is far removed from sound valuation and business principles with the adopted Northern Territory UCV being 3 years earlier than the WA date of valuation and the determined rent rate being significantly influenced by Northern Territory Government political considerations - that being to contain the rent increases within predetermined limits. These levels of increases appear to be around the CPI.
I agree with Mr Olsen's criticisms of Mr Gardiner's approach. The fundamental difference between the rents for pastoral leases in the Northern Territory and Western Australia is that the assessment of the ground rent in Western Australia is entrusted to the Valuer General. The Valuer General's function is to apply proper valuation principles (albeit having regard to the economic state of the pastoral industry). The requirement to have regard to the economic state of the industry does not remove the rental assessment process from the application of ordinary valuation principles. Mr Olsen acknowledged that s 123 of the LA Act requires the respondent to be cognisant of the economic state of the industry when examining the property market and determining market based rents. He said:
In this regard, the Valuer General's approach is no different to any other valuation determined whether it be an urban residential gross rental, unimproved or market valuation - all of which are undertaken against a knowledge of the underlying industry and general economy - but which are still determined upon real estate market realities. Property values are determined by a market place which is the result of the interrelationship between general and industry economics as well as social, political and individual property factors. It is appropriate to consider all these factors only to the extent to which they are reflected in the property market.
Information on the economic state of the pastoral or any other industry may give a valuer an indication of the likely trend of property values as they pertain to that industry, and may temper his decision on the degree to which he may introduce changes on level of value or relativity between property values.
The different process of assessment of pastoral lease rents between this State and the Northern Territory is likely to result in discrepancies between the outcome in each case. To adopt the approach advocated by Mr Gardiner would be to, in effect, simply apply the Northern Territory's Minister's determination to pastoral leases in Western Australia. To do so would, in my view, be to fail to properly apply the requirements of s 123 of the LA Act.
In my view, the figure of 2% adopted by the Valuer General as a rate of return should not be set aside. I accept that there is an element of arbitrariness in the selection of that figure. Having regard to the various rates of return in respect to other land uses, rates of inflation and rates of return on Government bonds, no particular figure emerges as appropriate. It may well be that the original proposal to apply a 3% rate of return could be more easily supported having regard to those comparative factors. The history of the valuation process makes it clear that the relatively low figure of 2% was adopted in order to ameliorate the effect on viability of an increased rental which would otherwise have been a consequence of what were very substantial increases in the UCVs of pastoral leases between 2004 and 2009. It was also designed to accomodate the expressions of concern to that effect made by the Pastoral Lands Board when consulted. The adoption of a lower figure than had hitherto been applied was, in my view, justified and appropriate having regard to that consultation process.
On the basis of the information before the Tribunal, I am satisfied that the correct and preferable decision as to the rents applicable on the five properties the subject of these proceedings as at 1 July 2009, was that assessed by the Valuer General.
The economist's evidence
As well as the valuers, each of the parties adduced evidence from agricultural economists. The applicants called Mr Terry McCosker, and the respondent called Mr Francis Bright. Mr McCosker extrapolated data which he had gathered in relation to the cattle industry in North Queensland to the Kimberley area in which the five properties the subject of these proceedings are located. He concluded that the profitability of the North Australian Beef Industry had been in decline since 2001, and the rate of return on assets had progressively declined over that period. He readily acknowledged that there is an absence of reliable data, particularly in relation to the Kimberley region, upon which to draw conclusions as to the state of the Kimberley beef industry.
Mr Bright was critical of Mr McCosker's methodology, although he made no attempt separately to analyse any data to form his own opinions as to the trends within the industry.
It is not necessary for me to traverse the analysis undertaken by Mr McCosker, or the criticisms of it by Mr Bright. I am prepared to accept for present purposes that, as of 2009, the relevant date for present purposes, the beef industry was in a period of downturn, and that pastoral stations, including in the Kimberley region, were faced with increasing costs and falling margins. There is, however, no information put forward by the applicants as to their own specific financial positions nor of the impact of the increased rent on their operations. It is impossible, therefore, to say what impact the increased rentals might have on the viability of any of the properties the subject of these proceedings. In the absence of reliable relevant data in relation to the stations the subject of these proceedings, or the Kimberley region generally, I have great difficulty in utilising Mr McCosker's data to quantify the appropriate rental figures for the subject properties. The adoption of a rate of return of 2%, instead of the previously applied 3%, is, as is discussed above, a recognition of the state of the pastoral industry as at July 2009. Having rejected adoption of Northern Territory rental assessments as comparable, there is, in my view, no cogent evidence to depart from the expert assessment of the Valuer General.
Conclusion
It follows that I am of the view that the valuations carried out in each case by the Valuer General should be affirmed, and the applications for review of those valuations are dismissed.
Orders
DR 28 of 2011
1.The rental assessment No J3114/976 in the sum of $41,208 per annum exclusive of GST for Nicholson Station made 1 July 2009 is affirmed.
2.The application is dismissed.
DR 30 of 2011
1.The rental assessment No J3114/1141 in the sum of $39,725 per annum exclusive of GST for Flora Valley Station made 1 July 2009 is affirmed.
2.The application is dismissed.
DR 31 of 2011
1.The rental assessment No J3114/643 in the sum of $54,692 per annum exclusive of GST for Gordon Downs Station made 1 July 2009 is affirmed.
2.The application is dismissed.
DR 183 of 2011
1.The rental assessment No J3114/1162 in the sum of $30,710 per annum exclusive of GST for Sturt Creek Station made 1 July 2009 is affirmed.
2.The application is dismissed.
DR 184 of 2011
1.The rental assessment No J3114/1242 in the sum of $38,478 per annum exclusive of GST for Ruby Plains Station made 1 July 2009 is affirmed.
2.The application is dismissed.
I certify that this and the preceding [60] paragraphs comprise the reasons for decision of the State Administrative Tribunal.
___________________________________
JUSTICE J A CHANEY, PRESIDENT
0
3