Perpetual Trustee Co Ltd v Valuer-General
[2006] SASC 216
•20 July 2006
SUPREME COURT OF SOUTH AUSTRALIA
(Land and Valuation Division)
PERPETUAL TRUSTEE COMPANY LTD & ANOR v VALUER-GENERAL, TRUST COMPANY OF AUSTRALIA LTD & ANOR v VALUER-GENERAL
[2006] SASC 216
Judgment of The Honourable Justice Debelle
20 July 2006
REAL PROPERTY - VALUATION OF LAND - STATUTORY VALUES - CAPITAL VALUE
Appeal against assessment by Valuer-General of the capital value of land - definition of "capital value" - meaning of "unencumbered" - whether allowance must be made for a let-up period in determining "capital value".
Valuation of Land Act 1971 (SA) s 5(1), s 24, s 25B, s25B(3), s 25C; Land Act Assessment Act 1910 (Cth) s 3; Valuation of Land Act 1916 (NSW) s 5; Valuation of Land Act 1960 (Vic) s 2(1); Stamp Duties Act 1958 (Vic) s 63, referred to.
Adelaide Clinic Holdings Pty Ltd v Minister for Water Resources (1988) 65 LGRA 410; Andreas v Valuer-General (1953) 19 LGR (NSW) 200; Beiler v Valuer-General (1980) 23 SASR 385; Commissioner For Railways v Andreas (1955) 20 LGR (NSW) 99; Commissioner of Land Tax v Nathan (1913) 16 CLR 654; CSR Limited v Valuer-General (1977) 17 SASR 446; Federal Commissioner of Land Tax v Duncan (1915) 19 CLR 551; Gollan v Randwick Municipal Council [1961] AC 82; Harry v Valuer-General (1975) 12 SASR 446; Royal Sydney Golf Club v Federal Commissioner of Taxation (1955) 91 CLR 610; Spencer v The Commonwealth (1907) 5 CLR 418; Stephen v Federal Commissioner of Land Tax (1930) 45 CLR 122; Spicer v Valuer-General (1963) 10 LGRA 319, applied.
Baggett v Meux (1844) 1 Coll 138; 63 ER 355; Commissioner of State Revenue (Vic) v Bradney Pty Ltd (1996) 96 ATC 5130; District Bank Ltd v Webb [1958] 1 WLR 148; Doe d Davies v Davies (1851) 20 LJQB 408, not followed.
Broken Hill Pty Co Ltd v Valuer-General [1970] AC 627; Commissioner of Succession Duties (SA) v Executor Trustee & Agency Co of SA Ltd (1947) 74 CLR 358; Commonwealth Bank of Australia v Baranyay [1993] 1 VR 589; Gregory v Federal Commissioner of Taxation (1971) 123 CLR 547; Players Ltd v Corporation of the City of Adelaide [2001] SASC 369; A G Robinson Ltd v Valuer-General (1952) 18 LGR (NSW) 261; Shell Co of Australia v City of Melbourne [1977] 2 VR 615; Sydney City Council v Valuer-General (1956) 1 LGRA 229; Tasmania v Victoria (1935) 52 CLR 157; Toohey's Limited v Valuer-General [1925] AC 439, considered.
WORDS AND PHRASES CONSIDERED/DEFINED
"capital value"
PERPETUAL TRUSTEE COMPANY LTD & ANOR v VALUER-GENERAL, TRUST COMPANY OF AUSTRALIA LTD & ANOR v VALUER-GENERAL
[2006] SASC 216Land and Valuation Division
DEBELLE J. Before the court are two appeals against an assessment by the Valuer‑General of the capital value of land. In each appeal there is a preliminary issue as to the meaning of the definition of “capital value” in s 5(1) of the Valuation of Land Act 1971 and, more particularly, the operation of that definition in respect of each assessment. The determination of that question will enable the valuers to proceed on a common basis when making their assessments of capital value. The parties in each appeal have agreed relevant facts and the questions for determination.
Perpetual Trustee Co Ltd & Westfield Management Ltd
The appellants are each the owners of one undivided moiety of a substantial parcel of land at West Lakes. The land has been developed as a substantial commercial complex containing a large number of shops, offices and other tenancies as well as car parking. It is known as “the West Lakes Shopping Centre”. I will refer to it as “the shopping centre”. The land comprises some 20.36 hectares. It is the subject of several certificates of title.
The shopping centre contains a number of buildings, each containing premises available for leasing. The premises are let to about 150 commercial tenants. The relevant date for the valuation is 1 January 2002. The Valuer‑General valued the capital value of the land in the sum of $149,000,000. The Valuer‑General has made a number of valuations of the shopping centre since 1 January 2002. It appears that he has made one in each year.
On 1 July 2002 the owner of the shopping centre was Perpetual Trustee Co Ltd (“Perpetual”). At that time Westfield Management Limited had no interest in the land. It did not acquire an interest in the shopping centre until 10 November 2005 when it purchased one undivided moiety in the shopping centre.
Perpetual has been the owner of the shopping centre since it purchased the land pursuant to a transfer dated 1 March 2002. The transfer was not registered until 2 January 2003. Although Perpetual was on 1 July 2002 the owner of the shopping centre, its ownership was subject to a custody agreement on behalf of Deutsche Property Funds Management Limited, the responsible entity for a property trust called Deutsche Diversified Trust. Notwithstanding that it is the registered proprietor of the shopping centre, Perpetual has continued to hold the shopping centre pursuant to that custody agreement. Deutsche Property Funds Management Limited and the property trust have since July 2002 changed their respective names. It is not necessary to note them. The custody agreement provides, among other things, that Perpetual must give to the responsible entity for the property trust all notices relating to the shopping centre. The agreement also provides that Perpetual is to be reimbursed by the responsible entity for any payments made in respect of liabilities it incurs as the owner of the shopping centre.
After a rates notice from SA Water based on the Valuer-General’s valuation had been received, M3 Property Strategists lodged an objection to the valuation by letter dated 11 September 2002 on behalf of the property trust. By letter dated 7 December 2004 the Valuer-General informed Perpetual that he had disallowed the objection.
On 22 December 2004 Perpetual applied for a review of the valuation by an independent review valuer pursuant to s 25B of the Valuation of Land Act 1971 (“the Act”). The independent review valuer declined to conduct the review on the ground that the objection involved a question of law: see s 25B(3) of the Act. The appellants were so informed by letter dated 19 December 2005. By notice dated 10 January 2006 the appellants appealed to this Court pursuant to s 25C of the Act.
There was a question whether both appellants had standing to bring this appeal. The relevant date of the valuation is 1 January 2002. Westfield Management Limited did not acquire an interest in the shopping centre until 10 November 2005. It could not, therefore, have any interest in the valuation dated 1 January 2002, particularly as there have been subsequent valuations of the shopping centre. It is not in any respect affected by the valuation dated 1 January 2002.
At all material times, Perpetual has been the owner of the shopping centre and since 2 January 2003 has been the registered proprietor. As such, it is liable for rates and taxes payable in respect of the shopping centre. It also has the obligation to give all notices to the property trust. Both a request for a review pursuant to s 25B of the Act and an appeal to this Court pursuant to s 25C of the Act may be made by a person who is dissatisfied with either the decision of the Valuer-General on an objection or the decision of the land valuer upon a review under s 25B. In my view, Perpetual is a person dissatisfied within the meaning of both s 25B and s 25C since as owner it is the person who is primarily responsible for rates and taxes which are based on the valuation. The fact that the custody agreement provides that Perpetual is to be indemnified for rates and taxes payable in respect of the shopping centre does not alter the fact that Perpetual is the person primarily liable for rates and taxes. In my view, Perpetual, therefore, has a proper interest and is a person dissatisfied within the meaning of the Act and, therefore, has standing to institute this appeal.
Trust Co of Australia Ltd & Stockland Trust Management Ltd
This appeal concerns the assessment of the capital value of land and improvements at 25 – 91 Bedford Street, Port Adelaide. The first appellant has been the registered proprietor of the land at all material times. The second appellant manages the property on behalf of the first appellant.
The property comprises some 29 hectares and is the subject of a number of certificates of title. A number of buildings have been erected on the subject land and they are available for letting. At the date of the assessment they were let to some 23 tenants.
The relevant date for the valuation is 1 January 2004. The Valuer-General valued the capital value of the land in the sum of $51,150,000.
The appellants objected to the valuation pursuant to s 24 of the Act. The Valuer-General allowed the objection in part and reduced the valuation to $47,750,000. The appellants were nevertheless dissatisfied with the reduced assessment and applied for a review of the valuation by an independent review valuer pursuant to s 25B of the Act. The independent review valuer declined to conduct the review on the ground that the objection involved a question of law. The appellants were so informed by letter dated 2 November 2005. By notice of appeal dated 23 November 2005 the appellants appealed pursuant to s 25C of the Act.
Capital Value
Section 5(1) of the Valuation of Land Act defines “capital value” in these terms:
capital value of land means the capital amount that an unencumbered estate of fee simple in the land might reasonably be expected to realise upon sale, but if the value of the land has been enhanced by trees planted on the land (other than commercial plantations), or trees preserved on the land for the purpose of shelter or ornament, the capital value must be determined as if the value of the land had not been so enhanced
The qualification relating to trees has no relevance in these appeals and may be ignored. It is common ground that the task for the valuer is to assess the capital amount that an unencumbered estate of fee simple in the land might reasonably be expected to realise upon sale.
In each appeal, what has to be assessed is the capital value of a substantial property which is let to a number of commercial tenants for the purpose of generating rental income.
In the ordinary course a valuer will adopt the comparable sales method. He will ascertain whether there are sales of comparable property at or near the date of valuation. By reference to those sales and making such adjustments as are necessary, he will determine the value of the subject land and improvements. In this case it is common ground that there are no sales of similar shopping centres which have been sold on the basis that the owner can give vacant possession. It is, therefore, necessary for the valuer to adopt some other method of valuation than the comparable sales method.
It is common ground that the capital value of a commercial property available for letting to tenants is to a large extent determined by an estimate of the predicted net income of the property divided by a capitalisation rate. The valuers for the parties have adopted this approach.
The parties are agreed that, when assessing the capital value of the property, the subject of each appeal, the valuer must as a matter of law by reason of the definition of “capital value” ignore all existing leases and assume that the land is being sold with vacant possession. However, the approach of the appellants diverges from that of the Valuer-General as to the consequences of a sale with vacant possession.
The appellants in each appeal contend that, as the definition of “capital value” in s 5(1) of the Act requires that the valuer ignore all leases, the valuer must also assume that the land has been developed with improvements available for letting but that the premises are vacant and that it is necessary for the owner to attract tenants. The appellants contend that for that reason the valuer must also assume
1.that it will take time for the owner to secure tenants for all of the property so that the prediction of the income generated by the tenants must take account of the time it will take to generate rental income for the whole property; and
2.that the owner may have to offer incentives to respective tenants to induce them to become tenants in a vacant complex and that those incentives will have to be offset against the predicted income.
The Valuer-General contends that the existing leases should be ignored for the purpose of determining the highest and best use of the land. If the highest and best use of the property is not as a complex of buildings to be let to a number of commercial tenants but some other use, the Valuer-General contends that the valuer must determine the capital value according to that other use. If, however, the valuer determines that the highest and best use of the property is its present use as a complex to be let to commercial tenants, he should value the land on that basis. When doing so, the valuer should give effect to the assumption that there are no leases by assuming that the owner is at liberty to treat with each tenant and may refuse to grant a tenancy and each tenant is notionally at liberty to choose whether or not to be a tenant of the premises. Thus, the Valuer-General contends that the valuer is entitled to have regard to existing tenancies when estimating the net income of the property.
The parties in the shopping centre appeal have attached skeleton valuations of their respective valuers for the purpose of illustrating the effect of their approaches and to show the difference which results. I refer first to the valuations of the shopping centre. Mr Jackson is the appellants’ valuer. He assesses the capital value of the shopping centre in the sum of $120,000,000. Mr Southwick is the Valuer-General’s valuer and he assesses the capital value of the shopping centre in the sum of $152,500,000. The difference between the two valuations essentially lies in the fact that Mr Jackson has made a substantial allowance for a let‑up period.
Each valuer has calculated the net rental income on the assumption that the shopping centre is fully leased. Mr Jackson’s assessment of the net rental income is $11,515,000 and Mr Southwick’s assessment is $12,582,000. For present purposes the difference between them is immaterial. The capitalisation rates adopted by each are quite close. Mr Jackson’s rate is 8 per cent and Mr Southwick has adopted a rate of 8.25 per cent. So it can be seen that neither of the respective assessments of net rental nor the capitalisation rates explains the substantial difference between the valuers. On that footing, Mr Jackson assesses the capital value at $147,687,500 and Mr Southwick assesses it at $152,500,00. As I have said, the difference lies in the allowance for the let-up period made by Mr Jackson. Mr Jackson allows a period of 12 months for the shopping centre to be fully leased, which in his assessment results in a loss of gross rents of $17,407,590. Mr Jackson appears to have made no allowance for the fact that some part of the shopping centre might be leased in the 12 month period. However, that criticism may be put to one side for present purposes. Mr Jackson then allows $3,148,829 for expenses associated with letting the premises as well as for expenses incurred in advertising, commissions paid to agents and fees paid to legal representatives to prepare the leases. He also allows $6,490,000 for incentives paid to tenants. Thus, the allowance for the let-up period is $27,046,419, being
Loss of rent $17,407,590
Letting expenses $3,148,829
Costs of incentives $6,490,000
_________$27,046,419
_________
The amount of $27,046,419 is deducted from the value of the premises assessed on the assumption they were fully leased to produce $120,641,081, which Mr Jackson rounds down to $120,000,000. The difference between the valuers is, therefore, some $32,500,000. A number of adjustments might have to be made to Mr Jackson’s assessment. It is nevertheless apparent that the different approaches result in markedly divergent estimates of the capital value of the shopping centre, a difference in the order of 20 per cent.
At this stage there are no valuations in the appeal by Trust Company of Australia Ltd but it is reasonable to anticipate that the valuations will also be quite markedly different because of the different approaches.
Questions for Determination
It is against that background that the parties seek answers for the following questions:
Whether upon the true construction of the definition of “capital value” in s 5(1) of the Valuation of Land Act 1971 and in the circumstances which have happened
1.Does the word “unencumbered” require a valuer of the subject land and improvements thereon to disregard the leases of the subject land?
2.If the answer to question 1 is “yes”, should the valuer of the subject land and improvements thereon next determine whether the highest and best use of the subject land and improvements is its present use?
3.If the answer to question 2 is “yes”, is it a correct approach for the valuer assessing the capital value of the subject land and the improvements thereon to value the land and improvements upon the footing
(a) that the land and improvements were vacant on the date of valuation; and
(b) that an allowance must be made for a period before the premises are let and in addition thereto an allowance for the provision of any necessary inducement to tenants to take up a lease?
4.If the answer to question 2 is “yes”, is it a correct approach for the valuer assessing the capital value to have regard
4.1 to the fact that immediately before the valuation date the land and improvements were occupied by tenants;
4.2 to any rents in fact paid by persons occupying the said land and improvements immediately before the valuation date and the terms of the tenancies; and
4.3 to the prospect of the owner of the land securing as tenants those persons who were in fact in occupation immediately before the valuation date?
Question 1
The first question concerns the meaning of the phrase “unencumbered estate in fee simple in the land” in the definition of “capital value” in s 5(1) of the Act. In my view, the meaning of this phrase is well settled. It denotes an absolute or pure estate in fee simple in the subject land, free of any private conditions, limitations or restrictions affecting the estate or the land but subject to any laws of a general nature that affect the use or alienability of the land. It follows that the valuer must disregard the leases of the subject land. I set out my reasons.
The meaning of the expression “the capital sum which the fee simple of land might be expected to realise” was examined in Stephen v Federal Commissioner of Land Tax (1930) 45 CLR 122. Section 3 of the Land Assessment Act 1910 (Cth) defined “unimproved value” in relation to improved land as “the capital sum which the fee simple of the land might be expected to realize if offered for sale on such reasonable terms and conditions as a bona fide seller would require, assuming that … the improvements did not exist.” The question was whether conditions imposed by the Crown upon the grant of land used as Warwick Farm Racecourse restricting the use of the land to recreation purposes were relevant when determining what the fee simple would realise if sold. The High Court divided on the issue. Isaacs CJ and Starke J decided that they were. Rich and Dixon JJ decided they were not. In his reasons Dixon J said (at 145) that the legislation required:
The ascertainment of the unimproved value of a hypothetical fee simple absolute and not the actual fee simple subject to conditions and encumbrances.
As will be seen, the view of Dixon J ultimately prevailed.
In Royal Sydney Golf Club v Federal Commissioner of Taxation (1955) 91 CLR 610 the High Court had to determine whether zoning restrictions were a factor to which regard should be had when valuing unimproved land. The court unanimously held in a single judgment that land should not be valued without regard to those restrictions which were imposed by a public law of general application. In the course of its reasoning, the court examined what was meant by the expression “fee simple” when used in the definition of “unimproved value” in s 3 of the Land Tax Assessment Act 1910 (Cth), which was still in the same terms as had been considered in Stephen. The court held that the expression “fee simple” meant an unencumbered estate in fee simple. It said (at 623):
It seems clear enough that the fee simple here means an unencumbered fee simple. Encumbrances upon land or estates in reversion appear to have been regarded as giving to reversioners or encumbrancers beneficial interests to be enjoyed by them. But the owner of the first estate of freehold was selected as the taxpayer who was to represent all persons beneficially entitled to the land. The value upon which he was to be taxed was the unimproved value of the fee simple, that is to say the capital sum which the fee simple might be expected to realize. It seems evident that the fee simple mentioned must be taken as free from encumbrances which, if they impaired the value of his estate, nevertheless operated to confer upon some other person or persons an estate or interest in the land. Were it otherwise the taxable value of the land would be diminished but the correlative estate or interest would not come into tax, unless by some chance it were an interest falling under some specific provision imposing liability. … The expression “the fee simple of the land” naturally means the fee simple as the highest estate unencumbered and subject to no conditions.
The court was not bound by the decision in Stephen because the question in that case was answered as a result of an equal division of opinion which created no precedent for the court pronouncing the decision: Tasmania v Victoria (1935) 52 CLR 157 at 183 – 185. Although it did not expressly say so, the court reached the same conclusion as Dixon J in Stephen. Its conclusion did not, however, mean that regard should not be had to a public law affecting the enjoyment of land. The court, therefore, held that it was proper to have regard to the zoning restrictions. The decision in Royal Sydney Golf Club was followed in Sydney City Council v Valuer-General (1956) 1 LGRA 229.
The decisions in A G Robinson Ltd v Valuer-General (1952) 18 LGR (NSW) 261, Andreas v Valuer-General (1953) 19 LGR 200 and, on appeal, (1955) 20 LGR (NSW) 99 are consistent with that view. In each of those cases the court decided that the definition of “fee simple in the land”, when used in s 5 of the Valuation of Land Act 1916 (NSW), referred to the fee simple in possession.
The issue before the High Court in Stephen was later examined by the Judicial Committee of the Privy Council in Gollan v Randwick Municipal Council [1961] AC 82, this time in the context of the Randwick Racecourse. The Crown grant of the land used as Randwick Racecourse was subject to conditions restricting the use of the land to recreational purposes. They were the same conditions as those which had applied to the Crown grant of land to the Warwick Farm Racecourse. The question was whether those restrictions were relevant when determining the unimproved value of the land for rating purposes under the Valuation of Land Act 1916 (NSW). The definition of “unimproved value” in that Act was in the same terms as in s 3 of the Land Tax Assessment Act 1910 (Cth). In reaching its decision, the Judicial Committee noted that Stephen had not been followed in Royal Sydney Golf Club and it agreed with the reasoning in the latter decision. It held (at 101) that “fee simple” as used in the definition of unimproved value did not refer to the actual title vested in the owner at the relevant date but to an absolute or pure title such as constitutes full ownership in the eyes of the law. The Judicial Committee affirmed that view in Broken Hill Pty Co Ltd v Valuer‑General [1970] AC 627.
Earlier decisions in New South Wales until 1950 were noted by the Judicial Committee in Gollan at 95 – 96. It is unnecessary to re‑examine that history. It is sufficient to note that in most instances it was held that private conditions or restrictions on the use of the land should be ignored when assessing the value of the fee simple.
In Harry v Valuer-General (1975) 12 SASR 446, Wells J adopted the reasoning in Gollan. The appellant owned 91 acres of rural land. The land was comprised in one certificate of title but was subject to 166 leases, each for 1,000 years. One question was whether, when assessing the unimproved value, it was proper to ignore the leases. Wells J had to consider the definition of “unimproved value” in s 5(1) of the Act which defined it as “the capital amount that an unencumbered estate of fee simple in the land might reasonably be expected to realize upon sale assuming that any improvements thereon … had not been made. It will be noticed that it was to all intents and purposes the same definition as had been considered earlier in Royal Sydney Golf Club and in Gollan. Wells J held that the leases should all be disregarded. After referring to Gollan, he said (at 450):
I have subjected the Act to the same sort of tests as commended themselves to their Lordships, and I find myself driven to the conclusion that the whole purpose of the Act, and of any Acts expressly or by implication associated with it, is to provide for assessments of the various types of land values, leaving to the special taxing Acts the task of invoking and applying those values in such manner as the legislature deems proper. I hold that the passage “an unencumbered estate of fee simple in the land” has reference to the particular facts and circumstances under consideration only to the extent that the physical area of land is the subject matter of the estate referred to in that passage, but that otherwise what is to be valued is the notional or pure fee simple estate in that land.
It is wholly consistent with this conclusion that leasehold interests of the kind affecting the subject land in this case should be disregarded. There is, of course, respectable authority for the proposition that the word “unencumbered” when used in a context of wide and general application is apt to exclude any form of ius in re aliena, (see Salmond’s Jurisprudence,1st ed (1902), at p 262, and Paton’s Text-book of Jurisprudence (1946) at p 393 et seq) though the classical conveyancers may take a more limited view.
But the truth is, in my opinion, that, except when it is used in the Real Property Act 1886 (as amended) and Acts in pari materia, the word “encumbrance” – and the same applies to “encumber” – has not acquired the sort of technical meaning that one associates with such words as “demise” or “seisin”; it is not yet a true term of art. I regard it rather as a protean word that takes its precise meaning from the particular context in which it appears. I do not find it necessary to arrive at this precise meaning from the particular context in which it appears. I do not find it necessary to arrive at its precise meaning for the purposes of this appeal. Whatever its true meaning in the definition may be, the whole effect of the Act, in my judgment, is imperatively to require the Valuer-General to value the largest estate in the subject land known to the law, and not a particular taxpayer’s interest in that land. I hold, therefore, that whether a fee simple estate is, within the meaning of the definition, encumbered by the grant of a term of years or not, the terms granted in the present case are not to be taken into account; it matters not whether leaseholds are excluded by the word “unencumbered” or by what is necessarily implied by the legislative description of what is to be valued. What is to be valued is a specified estate in the land, by whomsoever held.
This reasoning as well as that in Royal Sydney Golf Club and Gollan concerned the meaning of the expression “the fee simple of the land” in the definition of “unimproved value”.
The same reasoning has been applied when determining the meaning of the expression “an unencumbered estate in fee simple in the land” in the definition of “capital value” in s 5 of the Act. In CSR Limited v Valuer-General (1977) 17 SASR 446 at 450 Wells J defined the expression in these terms:
In my opinion, these words denote an absolute or pure estate in fee simple in the subject land, free of any private conditions, limitations, restrictive covenants, or other inherent restrictions affecting the estate or the land, but subject, of course, to any laws of a general nature that affect the use or alienability of the land.
In Beiler v Valuer-General (1980) 23 SASR 385, Jacobs J held that, when determining the capital value of land held under a Perpetual Crown Lease, the lease was to be ignored. At 386 – 387 Jacobs J said:
[The Act] postulates, for taxation purposes only, a basis of valuation which might in some cases be wholly artificial qua the particular land, or the particular taxpayer, or both. It creates a statutory assumption. The question which the valuer must ask himself in arriving at the capital value is, what might this land reasonably be expected to realize upon sale assuming that the purchaser is to acquire an unencumbered estate of fee simple in the land? So much is established by the decision of this Court in Harry v Valuer‑General which attracts to this legislation the interpretation of legislation in pari materia, which was adopted in Gollan v Randwick Municipal Council. It is unnecessary to repeat the exposition in those cases. The construction of the legislation which they support leads to the conclusion that in ascertaining the capital value of the subject land, in terms of the statute and upon the footing that what is notionally offered for sale is an unencumbered estate of fee simple in that land, the Valuer-General is obliged to ignore any restrictions or disabilities affecting the land by reason only of the fact that it is held under a Perpetual Crown Lease. (Citations omitted)
There is, therefore, a well established line of authority to the effect that, the meaning of the expression “unencumbered estate in fee simple in the land” when used in the definition of “capital value” requires the Valuer‑General to ignore any restrictions affecting the land, other than any public law of a general application affecting the use or alienability of the land.
In Shell Co of Australia Ltd v City of Melbourne [1997] 2 VR 615 Batt J in the Supreme Court of Victoria adopted this reasoning when examining the definition of “capital value” in s 2(1) of the Valuation of Land Act 1960 (Vic) which provides:
Capital improved value means the sum which land, if it were held for an estate in fee simple unencumbered by any lease, mortgage or other charge, might be expected to realize at the time of valuation if offered for sale on any reasonable terms and conditions which a genuine seller might in ordinary circumstances be expected to require.
It will have been noticed that the definition includes a lease as a form of encumbrance. The lease in that case was beneficial to the owner in that the rental was higher than market rent. It was contended that the lease did not, therefore, encumber the land. Batt J held that the meaning of the expression “unencumbered by any lease” in the definition meant “unaffected by”, “not subject to” or “without” a lease, rather than “not burdened” or “not hampered” or “not depreciated” by it.
In a number of instances it has been held that a lease is not an encumbrance. In District Bank Ltd v Webb [1958] 1 WLR 148 at 149 – 150, the question was whether the words “seised in unencumbered fee simple in possession upon trust for sale” was a representation that no lease existed. Danckwerts J held that they were not. The decision turns on its own facts. In addition, Danckwerts J acknowledged that in certain circumstances a lease might be regarded as an encumbrance but in his view it is normally something in the nature of a mortgage and not something in the nature of a lease or tenancy.
In Doe d Davies v Davies (1851) 20 LJQB 408 at 411 it was held that a tenancy from year to year was not an encumbrance. The decision turned on its own facts. In Baggett v Meux (1844) 1 Coll 138; 63 ER 355, it was held that a lease was an encumbrance within the meaning of a clause in a will prohibiting a mortgage charge or encumbrance. I agree with Batt J in Shell Co of Australia Ltd v City of Melbourne that the decision too turns on its somewhat special facts. The decision in Commonwealth Bank of Australia v Baranyay [1993] 1 VR 589, also mentioned by Batt J, does not, I think, bear on the question whether a lease is an encumbrance.
These decisions all turn on their facts. In addition, as was noted in District Bank Ltd v Webb, while an encumbrance normally means a mortgage and not something in the nature of a lease or tenancy, in certain circumstances a lease may be regarded as an encumbrance. As the decisions in the valuation cases noted above demonstrate, one example of that exception is the reference to “an unencumbered estate of fee simple” in the definition of “capital value”.
As far as my research has disclosed, the only decision in which the word “encumbrance”, when used in revenue legislation, has been held not to include a lease is Commissioner of State Revenue (Vic) v Bradney Pty Ltd (1996) 96 ATC 5130. The question concerned the meaning of “encumbrance” in the Stamp Duties Act 1958 (Vic). The Act defined “a reference to the value of real property or property” as a reference
(a)in relation to a conveyance on sale of the real property or property –
(i) to the consideration for the sale; or
(ii) to the amount for which the real property or property might reasonably have been sold if it had been sold, free from encumbrances, in the open market on the date of the sale – whichever is the greater; and
(b)in any other case, to the amount for which the real property or property might reasonably have been sold if it had been sold, free from encumbrances, in the open market on the date of the conveyance, direction, consent or application.
The definition in para (b) was also to be found in s 63(3)(b)(ii) of the Act. In that case the question concerned the proper assessment of stamp duty in respect of a transfer of land subject to a 50 year lease. If the lease was treated as an encumbrance and so ignored, the value was $13,000,000. If the valuer had regard to the lease, the value was $398,000. O’Bryan J noted that the ordinary dictionary meaning of “encumbrance” was a burden or claim upon property and that it could include a lease. After considering the authorities, including Royal Sydney Golf Club, Gollan, Harry v Valuer-General and CSR Limited v Valuer-General, he concluded that the word “encumbrance” takes its meaning from the context in which it appears. In his view, the Act intended to use the word to mean a burden or claim upon property so that it did not include a lease. He concluded that, if it included a lease, difficulties would be created in administering the Act not only for conveyancers but also for the Comptroller of Stamps in the way of disclosing a lease and in assessing whether a lease is favourable or unfavourable to the market value of the land. The reasoning of O’Bryan J makes it clear that he accepted that the meaning of the expression “an unencumbered fee simple” in valuation legislation differed from that which was applicable for stamp duties legislation.
Thus, none of the decisions where a lease has been held not to be an encumbrance in any way qualify the decisions in the valuation cases referred to above.
For these reasons, the expression “unencumbered estate of fee simple in the land” in the definition of “capital value” denotes an absolute or pure estate in fee simple in the subject land, free of any private conditions, limitations, restrictive covenants, or other inherent restrictions affecting the estate or the land, but subject to any laws of a general nature that affect the use or alienability of the land. The answer to question 1 must, therefore, be “Yes”.
Question 2
The next question is whether the valuer must determine whether the highest and best use of the subject land and improvements is its present use? It is common ground that the answer to this question must be “Yes”.
As Wells J noted in CSR Limited v Valuer-General at 450, the expression “might reasonably be expected to realize” in the definition of “capital value” directs the valuing authority to assess the value according to what, at the date of sale, the land could fairly be expected to realise having regard to the market of the day, disengaged, on the one hand, from unduly sanguine hopes or fancies, and on the other, from unfounded despondency or pessimism. He added that the extent and strength of the potential market is to be judged according to how a prudent and informed man of commerce would judge it. The willing buyer will pay a price which reflects the most advantageous use of the subject land: Adelaide Clinic Holdings Pty Ltd v Minister for Water Resources (1988) 65 LGRA 410 at 415.
The approach to be adopted when valuing land is well settled. It is to assume a hypothetical sale to determine what a hypothetical purchaser would have to pay for the land to induce a willing vendor to sell it: Spencer v The Commonwealth (1907) 5 CLR 418 at 432 per Griffith CJ and at 441 per Isaacs J. In Commissioner of Land Tax v Nathan (1913) 16 CLR 654 at 661, Isaacs J said:
The ordinary principle of ascertaining the value of land on a given date, is stated in Spencer v The Commonwealth, in these words, from which we see no reason to depart:- “To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property.”
The amount of profits or losses which actually at that date are being made does not constitute the test, because into them possibly enters the element of the personal skill or popularity of the present owner, and similar circumstances which cease when his ownership ceases; but, though not the test, no prudent man would fail to inquire into them, and weigh the fact for himself.
Later (at 662) Isaacs J added:
[T]he “improved value” is arrived at by taking into account as evidential, but not as ultimate facts, all existing and all past circumstances affecting the land, and these include its past and present use, as well as its present improvements. (Citations omitted)
In Federal Commissioner of Land Tax v Duncan (1915) 19 CLR 551 at 554, Griffiths CJ said that the approach of Isaacs J accorded with his own and demonstrated that all of the potentialities of the land must be taken into consideration. In Duncan, the question was whether the valuer of unimproved land included its potential for subdivision. The court held that it did. Isaacs J said (at 558 – 559) that, when considering the position of the hypothetical vendor and purchaser, regard should be had from both standpoints to “ordinary business considerations”, a view consistent with his reference to “the business notion of the matter” in Nathan at 662. In summary, the hypothetical purchaser will be a prudent and informed person in commerce with a knowledge of the market and of the potentialities of the land as well as being cognisant of all facts which might affect its value, either advantageously or prejudicially, including all existing and all past circumstances.
I assume that it was these considerations and his knowledge of valuation practice that caused Else‑Mitchell J to state in Spicer v Valuer-General (1963) 10 LGRA 319 at 320:
The law is quite plain that under the Valuation of Land Act [1916 (NSW)] the unimproved value of land must be based upon the best or most profitable potential use …
All of these considerations point to the conclusion that the valuer must first consider whether the land is being put to its highest and best use. That will either be the existing use or some other use. In that way, regard will be had to all of the potentialities of the land.
For these reasons the answer to question 2 must, therefore, be “Yes”. The parties are agreed that in both of these appeals the highest and best use of the subject land in each appeal is its present use as commercial premises available for leasing.
Questions 3 and 4
It is apparent from the foregoing, that the issues in this appeal do not so much concern the meaning of “capital value” in s 5(1) of the Act but the operation and the application of that definition to the particular circumstances of the land and improvements the subject of each appeal. The answers to questions 3 and 4 are intended to guide the valuers when determining the capital value of the subject land and improvements. It is convenient to discuss the issues first in relation to the shopping centre.
The definition of “capital value” may create a fiction in that it requires an assumption to be made, an assumption which might, according to circumstances, be at odds with the real facts. To repeat what Jacobs J said in Beiler at 386, the definition “postulates, for taxation purposes only, a basis of valuation which might in some cases be wholly artificial qua the particular land, or the particular taxpayer, or both.” In the case of land on which a dwelling is erected and which is owned and occupied by the same person, there is neither a fiction nor any artificial assumption as to the basis of valuation. However, if that same dwelling house is occupied by a tenant, there is a fiction in that the lease must be ignored for the purposes of the valuation. In the result, the fiction should cause the two valuations to be the same.
In the case of the shopping centre, the definition of “capital value” again creates a statutory fiction in that it requires an assumption to be made by the valuer which is at odds with the true facts. However, the assumption which the valuer must make is limited to the legal consequences of the leases of the subject land and requires that they be ignored. The definition of “capital value” does not require the valuer to make any further assumptions. In particular, no assumption is to be made as to any fact other than that the owner holds an unencumbered estate in fee simple in the land.
The task of the valuer is to determine the capital amount that an unencumbered estate in fee simple in the shopping centre might reasonably expected to realise upon sale. In other words, the valuer must assess the market value of the unencumbered estate in fee simple, assuming a hypothetical sale of the shopping centre at which the owner as vendor is granting vacant possession. As the parties have agreed that the highest and best use of the land and improvements is as a shopping centre leased to a number of tenants, the valuer can assume that the purchaser intends to lease the shops and other premises in the shopping centre. The question then arises as to the consequences of the statutory assumption that the shopping centre is being sold on the footing that the purchaser will have vacant possession. The difference between the parties lies in how they respectively answer that question.
Shortly stated, the appellants contend that, because the assumption must be made that the purchaser will be purchasing the shopping centre with vacant possession, it must also be assumed that the centre is vacant so that the valuer must proceed on the footing that it will take time for the purchaser to secure tenants for the whole property (a period which is called “the let‑up period”). For that reason there must be an allowance for the let‑up period and for any inducements necessary to attract tenants. Broadly speaking, the Valuer‑General’s approach is that no allowance has to be made for any let‑up period. The appellants’ contention is invalid for two reasons. The first is that the assumption of law which the definition of “capital value” requires does not require that any further assumption of fact be made. The second is that the contention misconceives the manner in which the valuer should assess the market value of the shopping centre. No allowance is necessary for a let‑up period except in the limited circumstances I shall explain later. I now develop these reasons.
All that the definition of “capital value” requires is that the valuer assume that the owner of the shopping centre is selling it with vacant possession. That assumption does not affect or displace the uses to which the land is being put. It does not require the valuer to ignore the reality of the market place. It is not necessary, therefore, to assume that at the time of the hypothetical sale the shopping centre was untenanted. Instead, it is assumed that there are tenants but their leases will determine before the completion date for the sale. The position is similar to that which would obtain if it were assumed that all leases in a shopping centre determined on a particular date and the shopping centre was being sold with the intention that leases were determined before the purchaser took possession.
This process does not conflict with the statutory assumption that the premises are being sold with vacant possession. When the valuer has regard to the existing tenancies and the rent being paid by existing tenants, the valuer is not assuming a tenancy or tenancies contrary to what the definition of “capital value” requires. Instead, the valuer is having regard to those tenancies only as evidence of the ability to let the premises which are being sold and the rents that will in all likelihood be paid, an approach entirely consistent with that identified by Isaacs J in Nathan at 662.
In this respect it is useful to contrast the assumption in the definition of “capital value” with the assumption in the definition of “site value”. The definition of “site value” in s 5(1) of the Act relevantly reads:
site value of land means the capital amount that an unencumbered estate in fee simple in the land might reasonably be expected to realise upon sale assuming that any improvements on the land, the benefit of which is unexhausted at the time of valuation, had not been made;
That definition requires the valuer to assume as a matter of fact that the improvements have never been made. As the Judicial Committee of the Privy Council said in Toohey’s Limited v Valuer-General [1925] AC 439 at 443, the valuer must proceed on the footing that the improvements must be taken, not only as non‑existent, but as though they had never been made. That is quite a different assumption from the assumption in the definition of “capital value” which requires only the assumption that the owner is selling with vacant possession. No further assumption is required and the assumption of a sale with vacant possession does not require an assumption that the premises are not occupied by tenants. Effect is given to that assumption by assuming that the purchaser is at liberty to deal with the shopping centre in whatever way he chooses. That assumption creates no difficulty in this case because the parties are agreed that the purchaser will continue to use the land and improvements as a shopping centre. Equally, the tenants are at liberty to decide to continue as tenants in the shopping centre or to decide to leave it. Thus, the purchaser does not assume that any of the leases has continued to exist. Instead, he is simply using the existing tenancies as evidence for the purpose of determining how quickly the purchaser of the shopping centre would find tenants to occupy it and the rents they would be likely to pay. Put another way, there is no reason to exclude from the pool of prospective tenants those who are in occupation but who are at liberty to remain as tenants or go.
The second reason why the appellants’ approach is invalid is that it misconceives the task of the valuer which, shortly stated, is to determine the market value of the unencumbered estate in fee simple assuming that, in this hypothetical sale, the owner as vendor is giving vacant possession. Here again, it is relevant to note that the parties are agreed that the highest and best use of the land and improvements is as a shopping centre leased to a number of tenants so that the valuer will proceed on the footing that the purchaser will continue the existing use.
When determining market value, the valuer will have regard to the manner in which the prudent purchaser in this hypothetical sale would act when determining the price to be paid for the shopping centre. The valuer, like the prudent purchaser, will have regard to all of the factors which might affect the value of the shopping centre including its past and present use as well as any other past or present circumstances affecting its value. Those past and present circumstances include existing tenancies and the rents paid by tenants. As Isaacs J noted in Nathan at 662, they are taken into account as evidential facts affecting the value of the land and improvements and not as ultimate facts. The valuer will, therefore, make all relevant enquiries and determine, among other things, how many of the existing tenants will remain and the rents they will be likely to pay. That is an important factor in determining the price because it is evidence of how quickly the shopping centre will be occupied. The question whether a tenant will remain or leave and, if he remains, the amount of the rent he will pay is a question of fact to be determined by the valuer. If the valuer concludes that some existing tenants will not continue as tenants, he will make due allowance for the time and cost taken to find a suitable tenant or tenants. To that extent only will it be necessary to make an allowance for a let‑up period. The question whether any allowance should be made for an inducement to attract a tenant or tenants will depend on the nature and number of tenancies to be filled and the difficulty in filling them. It may be necessary for the valuer to have regard to other factors such as the age of the shopping centre, its location, and the proximity of other like shopping centres. Another relevant factor in this case is that this shopping centre has been operating for quite a long time and will have an established patronage. There may be other factors. The relevant factors will vary from case to case. However, for present purposes, it is sufficient to consider only the question whether allowance should be made for a let‑up period.
It is apparent that an approach which does not allow for a lengthy let‑up period of the kind for which the appellants contend is more likely to result in a valuation that reflects the true market value of the shopping centre. Common sense suggests that, as a general rule, the price for a shopping centre with an established history of tenancies will be higher than the price of the same shopping centre which is seeking tenants. If the appellants’ approach is adopted, the capital value of shopping centres will, as a general rule, be less than market value. One fault with the appellants’ additional assumption that an allowance must be made for a let‑up period is that it will realise a market value which will always lag substantially behind market value. That is not the intention of the Act. In addition, as the Solicitor‑General commented, if the approach of the appellants is adopted the valuer will ignore the success (or failure) of a shopping centre.
Expressed another way, the approach for which the appellants contend is at odds with the true facts and commercial reality. The owner of a shopping centre will not, as a general rule wait until all tenancies have determined before seeking to sell it. That is an obvious means of reducing its value. Instead, the owner will seek to sell it fully occupied or at least with as many tenants as possible. The statutory assumption does not negate that fact. It simply requires the assumption that the leases and tenancies will all determine before completion so that the purchaser will have vacant possession and tenants are free to remain or leave as they decide.
The appellants’ approach is at odds with commercial reality in another respect. The shopping centre contains several large tenants. They include a David Jones department store, a Harris Scarfe discount department store, K‑Mart and supermarkets operated by Coles and Woolworths. Before constructing a large shopping centre of this kind, a developer will usually seek to secure large tenants of that kind for the two‑fold purpose of underpinning the commercial success of the project and in order to attract other tenants, and so further enhance the commercial success of the venture. During the process of construction, the developer will no doubt seek to attract further tenants.
The commercial reality is that a shopping centre of this kind will not be allowed to become vacant. While, of necessity, there might be small tenancies which are vacant for a short time (as Mr Southwick acknowledged in his valuation), the owner of a large shopping centre of this kind will seek to keep it fully tenanted. The assumption required by the definition of “capital value” does not require that the commercial realities be ignored. Instead, it requires an assumption of law in relation to any hypothetical sale.
The agreed facts include instructions by the Valuer-General as to the approach to be adopted by the valuer when considering the rents paid by tenants in the shopping centre. Among other things, the valuer is directed to examine whether the rents paid are above or below market rates and, if the rent is above market rates, the valuer is directed to ignore the amount of the excess. The question whether the excess must be ignored was not argued. Although the issue was examined by Batt J in Shell Co of Australia Ltd v City of Melbourne, I prefer to express no opinion as it is unnecessary to decide the issue at this stage.
It is common ground that the issues in the appeal by Trust Co of Australia Ltd and Stockland Trust Management Ltd are the same as in this appeal. The same principles apply. There is no need for any further examination of the issues.
No Uncertainty
The appellants contended that any uncertainty in the application of the definition of “capital value” in s 5(1) of the Act should be resolved in favour of the appellants as taxpayers. In Commissioner of Succession Duties (SA) v Executor Trustee & Agency Co of SA Ltd (1947) 74 CLR 358 at 373 – 374 , Dixon J noted that, while the basis of valuation was the same for revenue purposes as when assessing compensation to a dispossessed owner, there were differences in principle which might affect the application of that test. He said:
I should like, however, to add for myself that there is some difference of purpose in valuing property for revenue cases and in compensation cases. In the second the purpose is to ensure that the person to be compensated is given a full money equivalent of his loss, while in the first it is to ascertain what money value is plainly contained in the asset so as to afford a proper measure of liability to tax. While this difference cannot change the test of value, it is not without effect upon a court’s attitude in the application of the test. In a case of compensation doubts are resolved in favour of a more liberal estimate, in a revenue case, of a more conservative estimate.
In Gregory v Federal Commissioner of Taxation (1971) 123 CLR 547 at 565 Gibbs J agreed with that approach. See also Shell Co of Australia Ltd v City of Melbourne at 668. The remarks of Dixon J were made in the course of determining the basis upon which shares should be valued for succession duty purposes. The Act provides a tool to assist the State and local authorities in raising revenue. The principles expressed by Dixon J therefore apply. I expressed a contrary view in Players Ltd v Corporation of the City of Adelaide [2001] SASC 369 at [15]. I correct what I there said. However, the principle does not avail the appellants as, in my view, there is no doubt as to the meaning and operation of the definition of the definition of “capital value” in s 5(1) of the Act in the circumstances of this case.
Conclusion
For all of these reasons, I would answer the questions as follows.
1 Yes.
2 Yes.
3(a) The valuer must assume that there are no leases in existence and that the vendor of the land and improvements will give vacant possession but it is not necessary to assume that the land and improvements are vacant.
(b)No, unless the valuer determines that a tenant or tenants will not remain in possession, in which case the valuer will assess how quickly the owner will find a tenant or tenants to replace those tenants and make such allowance for that and for any necessary inducement to attract new tenants.
4.1Yes.
4.2Yes.
4.3Yes.
10
10
1