Perpetual Trustee Co Ltd v Valuer-General (No 2) - [2007] SASC 340

SUPREME COURT OF SOUTH AUSTRALIA
(Land and Valuation Division)
PERPETUAL TRUSTEE CO LTD & ANOR v VALUER-GENERAL; TRUST CO OF AUSTRALIA LTD & ANOR v VALUER-GENERAL (No 2)
[2007] SASC 340
Judgment of The Honourable Justice Debelle
24 September 2007
REAL PROPERTY - VALUATION OF LAND - STATUTORY VALUES - CAPITAL VALUE
Appeals against assessment by Valuer-General of the capital value of land – definition of “capital value” – whether “capital value” equivalent to “market value” – meaning of “fee simple in possession” – definition of “possession” – whether lease is an encumbrance – leases not a burden to the subject properties and must be considered when determining capital value – appeals dismissed.

PROCEDURE - JUDGMENTS AND ORDERS - AMENDING, VARYING AND SETTING ASIDE
Power to set aside order – orders previously made in answer to preliminary questions of statutory construction – recall of order – answers to preliminary questions amended.
Land Tax Assessment Act 1910 (Cth) s 3; Valuation of Land Act 1971 s 5(1), s 24, s 25B, s 25C; Valuation of Land Act 1916 (NSW) s 5, s 6; Supreme Court Rules 1987 r 3.04, r 75.02, r 84.12, referred to.
Belverdere Court Management Ltd v Frogmore Developments Ltd [1997] QB 858; CSR Ltd v Valuer-General (1977) 17 SASR 446; District Bank Ltd v Webb [1958] 1 WLR 148; Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490; Gollan v Randwick Municipal Council [1961] AC 82; Harry v Valuer-General (1975) 12 SASR 446; Leslie v Earl of Rothes [1894] 2 Ch 499; Royal Sydney Golf Club v Federal Commissioner of Taxation (1955) 91 CLR 610; Spencer v Commonwealth (1907) 5 CLR 418, applied.
AG Robertson Ltd v Valuer-General (1952) 18 LGR (NSW) 261; Andreas v Valuer-General (1953) 19 LGR (NSW) 200; Commissioner for Railways v Andreas (1955) 55 SR (NSW) 323, distinguished.
Perpetual Trustee Co Ltd v Valuer-General (2006) 95 SASR 338; Shell Co of Australia Ltd v City of Melbourne [1997] 2 VR 615, not followed.
Adelaide Clinic Holdings Pty Ltd v Minister for Water Resources (1988) 65 LGRA 410; Allen v Roughley (1955) 94 CLR 98; Ardoch Pty Ltd v Valuer-General (No 2) (2006) 148 LGERA 408; Baggett v Meux (1844) 63 ER 355; Beiler v Valuer-General (1980) 23 SASR 385; Carr v Finance Corporation of Australia Ltd (No 1) (1981) 147 CLR 246; Commissioner of Land Tax v Nathan (1913) 16 CLR 654; Commissioner of State Revenue v Bradney Pty Ltd (1996) 34 ATR 233; Copping v ANZ McCaughan Ltd (1997) 67 SASR 525; Darling Harbourside (Sydney) Pty Ltd v Sanirise Pty Ltd (Federal Court of Australia, Full Court, 17 May 1996, unreported); Doe d Davies v Davies (1851) 20 LJ QB 408; Federal Commissioner of Land Tax v Duncan (1915) 19 CLR 551; Fenton Nominees Pty Ltd v Valuer-General (No 1) (1981) 27 SASR 258; Fenton Nominees Pty Ltd v Valuer-General (No 2) (1982) 29 SASR 348; Licul v Corney (1976) 180 CLR 213; McMullin v ICI Australia Operations Pty Ltd (No 7) (1999) 196 ALR 227; Myer (SA) Stores Ltd v Valuer-General (1986) 40 SASR 102; Sydney City Council v Valuer-General (1956) 1 LGRA 229; Wallace v Love (1922) 31 CLR 156, considered.

WORDS AND PHRASES CONSIDERED/DEFINED
"capital value", "fee simple in possession", "encumbrance"

PERPETUAL TRUSTEE CO LTD & ANOR v VALUER-GENERAL; TRUST CO OF AUSTRALIA LTD & ANOR v VALUER-GENERAL (No 2)
[2007] SASC 340
Land and Valuation Division

DEBELLE J. When I was a young solicitor, a wise and learned Queen’s Counsel gave me this sound advice, “If you have had a look at the law and the result does not make common sense, then go and have another look at the law”. I believe that he in turn had received that advice from Sir George Ligertwood. The issues in this case are testimony to the wisdom of that advice and my failure to heed it earlier in these appeals.
Ever since 20 July 2006, when I answered the preliminary questions in these appeals, I have been troubled that the answers did not all accord with common sense and, more importantly, with the intent of the definition of “capital value” in s 5(1) of the Valuation of Land Act 1971. The manner in which this appeal has been heard has provided an opportunity to consider the issues afresh. That reconsideration has disclosed that most of my answers were wrong. I take this opportunity to correct them.
Before the court are two appeals against assessments by the Valuer-General of the capital value of two separate parcels of land. In each appeal, there was 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 the land the subject of each assessment. The parties in each appeal agreed the relevant facts and asked for the determination of some preliminary questions. On 20 July 2006, I answered those questions. Before noting the questions and the answers, it is convenient to set out the facts relating to each appeal.
Perpetual Trustee Co Ltd and Westfield Management Ltd
The appellants are each the owners of one undivided moiety of a substantial parcel of land at West Lakes. For convenience, I will refer to the appellants in this appeal as “Perpetual”. The land has been developed as a substantial regional shopping centre 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 20.37 hectares. It is the subject of several certificates of title. Access to the shopping centre is gained by Brebner Drive and Turner Drive.
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. An objection to the valuation was lodged by letter dated 11 September 2002. 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. Perpetual was so informed by letter dated 19 December 2005. By notice dated 10 January 2006 Perpetual appealed to this Court pursuant to s 25C of the Act.
The shopping centre contains a number of buildings, each containing premises available for leasing. The total lettable area is approximately 48,746 square metres. The valuers have agreed that the gross rental is $18,356,433 and that the net income for capitalisation purposes is $11,999,031. The premises are let to about 150 commercial tenants. There are five major tenants, namely, a David Jones department store, two discount department stores operated by Kmart and Harris Scarfe, and two supermarkets operated by Coles and Woolworths respectively. In addition, there are 123 speciality shops and other tenancies. There is car parking for 3,550 cars. Immediately to the east of the shopping centre and on the other side of Turner Drive is the AAMI Stadium, a large stadium at which Australian Rules Football is played. Perpetual leases its car parking area to the South Australian National Football League for patrons of football matches played at the AAMI Stadium. The valuers are agreed that the highest and best use of the subject land is as a regional shopping centre. That use is entirely consistent with the zoning of the subject land under the City of Charles Sturt Development Plan. Shortly put, zoning is not an impairment to value.
Trust Co Australia Ltd and 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 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.
The property is irregularly shaped and comprises some 31.95 hectares. It is the subject of a number of certificates of title. The land was originally developed and used as warehouses for wool storage. Twelve buildings have been erected on the subject land and they are available for letting. At the date of valuation, these buildings were all let save one which was occupied by the appellants’ manager. The buildings were let to some 13 separate tenants. The buildings range in age. Two buildings originally used as wool stores were constructed in the 1940s. The remaining buildings were constructed in the 1980s and 1990s. The office which is shown as building 26 on a plan of the premises is a dated building constructed in the 1970s. It is of older style and construction. Apart from buildings 25 and 26, the buildings are all modern, well-constructed buildings capable of being used as stores or warehouses. They were in fact used for that purpose as at the date of valuation. It is convenient to call the development an industrial park.
The land is within the area of the City of Port Adelaide Enfield (“the Council”). It is within an area which constitutes a well-established industrial precinct in close proximity to the major port facilities at Port Adelaide. Development within the surrounding areas is essentially for transport, warehousing and distribution purposes. The land is close to rail services as well as to the new Port River Expressway which is a new major road. The land is within a General Industry 2 Zone as prescribed by the Council’s Development Plan. The valuers agreed that the highest and best use of the land is as its present use as an industrial park. They also agreed that that use is consistent with the intent of the General Industry 2 Zone and its objectives.
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 ordinary usage, the expression “might reasonably be expected to realise” means market value. For the reasons given later, that is the meaning of that expression in the definition of “capital value”.
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 and, by reference to those sales and making such adjustments as are necessary, will determine the value of the subject land and improvements. In this case it is common ground that there are no sales of comparable shopping centres or industrial parks that have been sold on the basis that the owner can give vacant possession. It is common ground that, in the absence of comparable sales, 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. Both valuers have adopted this approach.
The parties in both appeals agreed that, when assessing the capital value of each property, the definition of “capital value” in the Valuation of Land Act requires the valuer to ignore all existing leases and assume that the land is being sold with vacant possession. However, the approach of the appellants in both appeals diverges from that of the Valuer-General as to the consequences of a sale with vacant possession. The appellants contended that, as the definition of “capital value” in s 5(1) of the Act requires the valuer to ignore all leases, the valuer must value the land on the assumption 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 contended that for that reason the valuer must also assume two things.
1The first was 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 let each of the tenancies in the whole property. That was called “the letting up allowance”.
2The second assumption was 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 fact that parties agreed to ignore all existing leases and assume that the land is being sold with vacant possession has been one reason why I erred in answering the preliminary questions.
For his part, the Valuer-General contended 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 contended 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 there are tenants in possession without leases and that the owner is at liberty to treat with each tenant and may refuse to grant a lease to all tenants and that each tenant is notionally at liberty to choose whether or not to remain a tenant of the premises. The Valuer-General, therefore, contended that the valuer is entitled to have regard to existing tenancies and the extent to which the property is tenanted when estimating the net income of the property.
The Preliminary Questions and Answers
It is against that background that the parties sought answers to the following preliminary questions:
1Does the word “unencumbered” require a valuer of the subject land and improvements thereon to disregard the leases of the subject land?
2If 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?
3If 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?
4If the answer to question 2 is “yes”, is it a correct approach for the valuer assessing the capital value to have regard
4.1to the fact that immediately before the valuation date the land and improvements were occupied by tenants;
4.2to 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
4.3to the prospect of the owner of the land securing as tenants those persons who were in fact in occupation immediately before the valuation date?
On 20 July 2006, I answered 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.
4.1    Yes.
4.2    Yes.
4.3    Yes.
I will not set out my detailed reasons for those conclusions. They are to be found in the report of that decision in Perpetual Trustee Co Ltd v Valuer-General (2006) 95 SASR 338. As I have said, I had some misgivings as to the correctness of the answers and as to the reasons for them.
The same valuers gave evidence in each appeal, Mr Jackson for the appellants and Mr Southwick for the Valuer-General. Both valuers prepared two valuations in each appeal. One was based on the approach for which the appellants contended which, in each appeal, was called “the appellants’ approach”. The other was prepared on the basis of the answers which were given on 20 July 2006 and was called “the court based approach”. Neither set of valuations purported to be an assessment of market value.
The first appeal to be heard was the appeal by Trust Company of Australia Limited and Stockland Trust Management Limited. The evidence in that appeal and, in particular, the evidence of Mr Jackson confirmed my doubts as to the correctness of the answers given to the preliminary questions on 20 July 2006. I informed the parties in both appeals of my concern and asked that they each prepare a valuation of market value. In the course of submissions, the question of the true meaning of “capital value” was again debated. Since the hearing of the appeals, I have, with the assistance of my associate, examined afresh the question of the meaning of “capital value” in the Valuation of Land Act and have concluded that, in the circumstances of this case, capital value means market value as defined in Spencer v The Commonwealth (1907) 5 CLR 418. The answers to questions 1, 3 and 4 were also incorrect and require amendment. The reasons for that conclusion and the amended answers follow.
Revisiting the Definition of Capital Value
As already noted, the relevant part of the definition of “capital value” in s 5(1) of the Valuation of Land Act is 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.
It is convenient first to examine what is meant by the expression “fee simple in the land”.

An assessment of the value of an unencumbered estate in fee simple is an assessment of the value of the largest estate in land known to the law: Harry v Valuer-General (1975) 12 SASR 446 at 450. An estate in fee simple is the most ample estate which can exist in land, to use the words of Megarry and Wade, The Law of Real Property (5^th ed, 1984) at 59, which in turn is based on Coke on Littleton (19^th ed) at 11 and Williams on Real Property (23^rd ed) at 6. As Wells J said in Harry v Valuer-General at 454:
One starts with this: that what is to be valued is not the inanimate, tangible thing, land, but rights in land. The Act directs the Valuer-General to value an estate in fee simple in the land, but the purpose of a direction in that esoteric form is, in my view, to ensure that what the Valuer-General values is a congeries of the most ample proprietary rights recognized by law “protected along the plane of time” (Pollock and Maitland, History of English Law (2^nd ed) vol 2, p 10); one must still ask, “What is the full range of proprietary rights in land, and what makes them valuable?” Traditionally, the amplitude of rights vested in the tenant in fee simple has been equated with the fullest ultimate rights, subject to any restrictions imposed ab extra, of use, enjoyment, destruction and alienation known to the common law. (Compare the dominium of the civilians – see Buckland, Testbook of Roman Law, p. 187).
Putting aside, then, the niceties of the theory of estates, what the Valuer-General is to value (to use Pollock’s definition of “ownership” – see Jurisprudence and Legal Essays, p 97) is the entirety of powers, allowed by law, of the use and disposal of a given parcel of land.
The entirety of powers to which Wells J referred in the second of those quoted paragraphs includes the power to lease land to the profit and advantage of the holder of the estate in fee simple, that is to say, the owner of the land.
Fee Simple in Possession
What is meant by the expression “unencumbered estate in fee simple”? It is convenient to consider first the expression “fee simple”.
The expression “fee simple in possession” does not only mean that the owner of the fee simple must be in physical occupation and possession of the land in order to hold the fee simple in possession. The words “in possession” refer to the possession of the seisin. In the law of real property, the expression “fee simple in possession” has a wider meaning than that in ordinary usage which signifies that the holder of the estate in fee simple, that is to say, the owner is in physical possession. Instead, it signifies both an owner in physical possession as well as an owner who has let the land for a term of years and is entitled to the rents and profits from that land. In other words, a freeholder who has leased the land and is receiving the rents is a freeholder in possession. The position is expressed in these terms in Cheshire and Burns, Modern Law of Real Property (14^th ed, 1988) at 152 where it is said:
Finally, to have the character of a legal estate, a fee simple absolute must be in possession. “Possession” is not here confined to its popular meaning, for it includes receipt of rents and profits or the right to receive the same. Therefore a tenant in fee simple who has leased the land to a tenant for years is the owner of a legal estate even though he is not in physical possession of the land.
The explanation for that proposition lies in the principles of feudal tenure, in the meanings of seisin and possession, and in the ambiguous use of the term “possession” in English law. In An Essay on Possession in the Common Law (1888), at page 1 Pollock and Wright classify “possession” as one of the “most ambiguous” terms in the law, whose “legal senses (for there are several) overlap the popular sense”. When discussing evidence of possession of land, they note (at page 36) that the receipt of rents and services incident to freehold tenure establishes possession. At page 49 the position is summarised in these terms:
An occupying freeholder is both seised and possessed.
A freeholder who has let his land for years is seised, or possessed, of the freehold, but not possessed of the land.
A lessee for years possesses the land even as against the freeholder.
Thus, a freeholder, that is to say, the holder of the estate in fee simple who has leased the land is seised and possessed of the freehold. That person holds the estate in fee simple in possession.
In Leslie v Earl of Rothes [1894] 2 Ch 499 at 506 Kekewich J referred to the ambiguous use of “possession” in real property law in these terms:
The ambiguous character of the term “possession” is well known, and has been recognised by high authority. It has several meanings, and it may well have several different meanings in the same instrument, some of them overlapping one another, and some being combinations of more than one. But in an instrument dealing with real estate “possession” means broadly one of two things. It may mean what has been styled during the argument “physical possession,” as when a tenant in fee occupies and farms his own land, or if not farming his own land, still occupies in the sense of receiving his rents from his tenants. In that connection, the alternative to “possession,” natural, proper, technical, strictly legal, is receipt of the rents and profits.
Although there was an appeal from that decision, the decision was affirmed and those remarks were not questioned. In Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490 Issacs J referred to that decision with apparent approval. In the same decision, Griffith CJ described an “estate in possession” in these terms at 498:
The essential element of an “estate in possession” is, in my opinion, that the owner of it has a present right of beneficial enjoyment, whether accompanied by physical possession of the land or not.
There is substantial authority, therefore, for the proposition that the expression an estate in fee simple in possession refers to an estate in fee simple where the owner of the estate is in physical possession as well as to an estate in fee simple where the owner is not in physical possession but is in receipt of the rents and profits in respect of the land. It is a corollary of that proposition that the receipt of rents and profits is evidence of ownership of the fee simple: Best on Evidence (12^th ed, 1922) para 366 cited in Allen v Roughley (1955) 94 CLR 98 at 108 per Dixon CJ.
The proposition is consistently mentioned in the textbooks relating to the law of real property. Mr L A Goodeve notes in The Modern Law of Real Property (5^th ed, 1906) at 366 that “possession” has two meanings. It may mean either having the physical control over, or being the owner of, property. Professor Challis in his Law of Real Property (3^rd ed, 1911) at 99, a classic text in this field, states:
The existence of a prior term of years does not prevent the first vested estate of freehold from being an estate of freehold in possession.
Mr B A Helmore, the editor of Millards the Law of Real Property New South Wales (6^th ed, 1948) at 211-212 expressed the position in these terms:
A freeholder who leases his land for a term of years does not thereby part with the seisin; for a tenancy for years is not an estate of freehold, but a mere chattel interest, and the possession of the lessee constitutes the seisin of the freeholder. The reversioner is therefore in the same position, except as between himself and the lessee, as if he had the freehold in possession, and the reversion could, at common law, be conveyed by feoffment with livery of seisin, with the consent of the tenant for years. But a reversion expectant on an estate for life or on any greater estate could not be conveyed in this way, for the reversioner no longer had the seisin to convey.
As Mr Helmore notes in a footnote to the passage just quoted, where the holder of the fee simple interest has leased land,
it would be more logical to regard his interest as not being a reversion at all, but an estate in possession, subject to the actual possession of the lessee. But estates of this kind are generally called reversions, and the owners of them reversioners, not only by lawyers but also in common language.
That comment is consistent with Megarry and Wade (op cit) at 237 to which I shall refer in a moment. A tenancy for years is not real property but personalty. It is an interest which has been classified under what Megarry and Wade (op cit) at 10 call “the paradoxical heading” of chattels real. In Megarry and Wade, (op cit) at 128-129 it is said:
“In possession” means that the estate must be immediate, and not in remainder or reversion. Remainders and reversions are now equitable interests, taking effect behind a trust of the legal estate. But, in order to prevent temporary interests such as leases from disturbing the legal ownership, “possession” is defined so as to include not only physical possession of the land but also the receipt of rents and profits or the right to receive them, if any. Thus a fee simple is still “in possession” even though the owner as granted a lease, for he is entitled to the rent reserved by the lease, and even if the land has also been mortgaged, for he is entitled to the rents and profits, if any, in excess of any interest payable to the mortgagee. (Citations omitted).
Later at 237, the authors explain why the fee simple estate is still described as being “in possession” even though the holder of the fee simple has granted a lease.
From its very nature it follows that a reversion is a vested interest; for it is the remnant of an estate which has never passed away from the grantor, and he or (if he is dead) his representatives stand ready to receive the land as soon as the particular estate determines. According to feudal principles, moreover, a freehold reversioner on a term of years has an estate which is vested not only in interest but also in possession, for the grant of a lease does not deprive a grantor of seisin, and he therefore has what is properly called a freehold in possession subject to the term. From this point of view a reversion on a lease is not a reversion or, indeed, a future interest at all. This technicality is a relic of the ancient doctrine that leases were not even estates and were to be disregarded for feudal purposes. But, as has been seen, leases have long since achieved the status of estates, and it is therefore common and correct to speak of a landlord’s reversion. (Citation omitted).
The definition of “possession” is s 7 of the Law of Property Act 1935 reads:
possession includes receipt of rents or profits or the right to receive the same (if any).
While that definition applies only to the Law of Property Act, it is consistent with the general law.
It is, therefore, well established that the expression “fee simple in possession” refers both to the situation where the holder of the estate in fee simple is in physical occupation and possession of the land and to the situation where the holder of the estate in fee simple has leased the land for a term of years and is entitled to receive the rents from the land.
Meaning of “Unencumbered”
The next question is what is meant by the epithet “unencumbered” in the expression “unencumbered estate of fee simple in the land”. In ordinary usage the word “encumbrance” signifies that which encumbers something: see the Oxford English Dictionary and Macquarie Dictionary. So, when used in a legal context, it means a burden on property. The Oxford English Dictionary picks up the definition in Wharton’s Law Lexicon which defines an encumbrance as “a claim, lien, liability attached to property; as a mortgage etc”. In Wallace v Love (1922) 31 CLR 156 at 164 Knox CJ and Starke J said:
The word “encumbrances,” in its ordinary connotation, means that a person or estate is burdened with debts, obligations or responsibilities. True, the word is in law especially used to indicate a burden on property, a claim, lien or liability attached to property (see Oxford Dictionary, under title “Encumbrance”). But when we remember that the whole estate of the testator is liable in the hands of his executor for payment of debts and the expense of administering his estate, it is not an extravagant use of language to say that his “whole estate is not free from encumbrances” until those debts and expenses are paid. The estate would, in fact, be burdened with those debts, and no technical use of the word “encumbrance” can alter that result.
Thus, a charge or mortgage is commonly regarded as an encumbrance.
Except when used in legislation relating to real property, the word “encumbrance” is not a term of art. It has not acquired a technical meaning but is a protean word taking its meaning from its context: Harry v Valuer-General (1975) 12 SASR 446 at 450. Other forms of encumbrance include a restrictive covenant or an easement. However, it is necessary to examine all the circumstances before treating either as an encumbrance. For example, where an easement is combined with other easements over other land which together provide the only form of access to land, it might not be regarded as an encumbrance.
The next question is whether a lease is an encumbrance. Although there is very little authority on this question, the reported decisions suggest that it is context which again determines the issue. It is necessary to examine the facts and circumstances of each case to determine whether a lease is an encumbrance. In District Bank Ltd v Webb [1958] 1 WLR 148 at 149-150 Danckwerts J expressed the view that the question whether a lease is an encumbrance or not depends on the circumstances of each case. He said:
In the first place, I am not satisfied that a lease was an incumbrance to these parties. It is true that in certain circumstances a lease may be regarded as an incumbrance, but it seems to me that an incumbrance, normally, is 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 LJ QB 408 a tenancy from year to year was not held to be an encumbrance but in Baggett v Meux (1844) 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. In Megarry and Wade, Law of Property (op cit) at 611 the authors say:
The term “incumbrances” covers all subsisting third party rights such as leases, rentcharges, mortgages, easements and restrictive covenants.
However, in a footnote referring to the decision in District Bank Ltd v Webb, the authors add the comment:
The meaning of “incumbrance” can vary with the circumstances.
In Belvedere Court Management Ltd v Frogmore Developments Ltd [1997] QB 858 at 876-877 Sir Thomas Bingham MR, with whom Rose and Hobhouse LJJ both agreed, observed that the authorities yield no conclusive answer to the question whether a lease is an encumbrance. After referring to District Bank Ltd v Webb, he concluded that the resolution of the question depended on context. It is important, therefore, that a lease is not necessarily an encumbrance. Whether it is a burden on the estate in fee simple will depend on all the relevant circumstances of each case.
A lease is not necessarily an encumbrance in the sense that it will cause a reduction in the value of the fee simple. Generally speaking, a lease is a benefit to the holder of the estate in fee simple in that it provides a profitable source of income. However, a long lease at a rental below market rental may impair the enjoyment of the fee simple because the rent is considerably lower than market rents or because the length of the term of the lease may cause the market value of the land to be significantly less than the market value of comparable land without a lease. In that latter case, the question whether the lease impairs value might depend on the purpose for which a purchaser might acquire the land. If a lease does impair the value of land, the lease will be ignored as an encumbrance so that the market value will be the same as the market value of land not encumbered by a lease. In that way the value of the land is not diminished by the lease. If, however, the lease is not an encumbrance in that it does not impair the value of the estate in fee simple, it will not be ignored.
This conclusion is consistent with the reasoning of Wells J in Harry v Valuer-General. In that case, 91 acres of rural land was subject to 166 leases for 1000 years. Those leases were, on any view, a burden which impaired the enjoyment of the fee simple interest. They encumbered the estate in fee simple and impaired the value of the land. Wells J held that those leases were an encumbrance. He said:
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 encumbered 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, 1^st 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 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.
On one reading, the above reasoning might suggest that all leases are encumbrances. I do not think that His Honour intended to express that view. As is apparent from the first sentence of the second paragraph, it was the particular leases in that case which caused him to treat them as encumbrances. They would have been encumbrances on the approach I have adopted.
In my previous decision I had agreed with Batt J in Shell Co of Australia Ltd v City of Melbourne [1997] 2 VR 615. However, after further consideration, I am unable to agree with it. In my respectful view, Batt J failed to have sufficient regard to the fact that there will be occasions when a lease will not be an encumbrance. Furthermore, Batt J did not have sufficient regard to the fact that the estate in fee simple means estate in fee simple in possession. At page 668, Batt J said that the determination of the question whether the lease was or was not a burden would cause inconvenience and difficulties in administration. I respectfully disagree. The nature of the lease and whether the lessor is recovering a market rent are questions which valuers confront as a matter of course. Furthermore, the valuation of land involves dealing with any number of adventitious circumstances. It is a factor that valuers not infrequently encounter. When determining the value of the fee simple, the valuer will, therefore, have to determine whether a lease is a burden in the sense that it diminishes the value of the estate in fee simple. That is a task which is the very stuff of valuation practice.

The decision Commissioner of State Revenue v Bradney Pty Ltd (1996) 34 ATR 233 is to be put to one side as it deals with stamp duties legislation.
The conclusion that a lease is an encumbrance only if it impairs the value of the fee simple interest is consistent also with the reasoning of the High Court in Royal Sydney Golf Club v Federal Commissioner of Taxation (1955) 91 CLR 610. In that case, 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). That definition was in these terms:
“Unimproved value,” in relation to land, means 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 (if any) thereon or appertaining thereto and made or acquired by the owner or his predecessor in title had not been made.
The court held that the expression “fee simple” meant an unencumbered estate in fee simple. It said:
By s 3 “unimproved value” is defined in relation to improved land to mean 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 at the time as at which the value is required to be ascertained for the purposes of the Act, the improvements did not exist. There is a long definition of “improvements” which it is unnecessary to consider. “Unimproved value” in relation to unimproved land is defined to mean 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.
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 evidence 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. Doubtless estates in fee simple may be granted by the Crown subject to conditions or reservations which operate only in the public interest. The corresponding advantages which ensue may be enjoyed only as of public right: they are not an interest in land enjoyed by a specific person or persons. But the Act does not draw any distinction based upon this possibility. The general policy was reflected in a general rule. The interpretation of the Act which seems best to accord with the policy appearing from its provisions and also to flow from its language is that in assessing the unimproved value an estate in fee simple must be taken as the hypothesis unencumbered and subject to no condition restricting the use or enjoyment of the land. (Emphasis added).
The emphasised passage indicates that the purpose and intent of qualifying the expression “estate in fee simple” by the word “unencumbered” is to exclude that which impairs the value of the land. That is apparent also from the next sentence in that passage. Earlier in that passage, the High Court points out that, in the Commonwealth Land Tax Assessment Act, the owner of the first freehold estate was selected as the taxpayer who was to represent all persons beneficially entitled to the land. The Valuation of Land Act of this State has the same intent. The appellants’ approach defeats that intent because it excludes the value of other beneficial interests in the land. On the appellants’ approach notwithstanding that the value of the estate in fee simple is enhanced by the leases, that value will be excluded from the assessment. The appellants’ approach is the antithesis of the intent of the legislation as identified by the High Court.
The reasoning in Royal Sydney Golf Club was approved and applied by the Privy Council in Gollan v Randwick Municipal Council [1961] AC 82. That decision put to rest a dispute as to the proper means by which to value land held in fee simple, the grant of which was subject to a condition or other restriction requiring the land to be used for a public purpose such as park lands, a racecourse, or for some other recreational or public purpose. The history of that dispute is noted in Gollan at 95-97 and later in Sydney City Council v Valuer-General (1956) 1 LGRA 229. The Privy Council held that “the fee simple of the land” as used in s 6 of the Valuation of Land Act1916 (NSW) (see para 36 below) does 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. Restrictions requiring the land to be held for a public purpose are, therefore, to be ignored when valuing the land. In the result, the value is the value of the absolute estate in fee simple. In the same way, where a lease is a burden on the enjoyment of the estate in fee simple, the lease is ignored when valuing the absolute estate in fee simple. However, in the case of a lease which is not a burden, the lease will not be ignored. By whatever approach, a common basis for assessing the value of the absolute estate in fee simple is derived.
The appellants acknowledged that the expression “unencumbered estate of fee simple” meant an estate of fee simple in possession but submitted that possession referred to physical possession. It followed, they said, that the reference in the definition of “capital value” to the unencumbered estate in fee simple required the assumption that, on the hypothetical sale, the owner of the land is able to give vacant possession. For that reason, they said, a lease was to be ignored no matter how favourable or unfavourable its terms were to the owner. They relied on the decisions of the Supreme Court of New South Wales in AG Robertson Ltd v Valuer-General (1952) 18 LGR (NSW) 261 and in Andreas v Valuer-General (1953) 19 LGR (NSW) 200 which was affirmed on appeal by the Full Court of the Supreme Court of New South Wales in Commissioner for Railways v Andreas (1955) 55 SR (NSW) 323.
In AG Robertson Ltd v Valuer-General Sugerman J had to consider the meaning of the expression “fee simple of the land” when used in the definitions of “improved value” and “unimproved value” in ss 5 and 6 of the Valuation of Land Act 1916 (NSW). In that case, one question was how to determine the improved value of land subject to leases. The leases were an encumbrance in that they were subject to restrictions under the Landlord and Tenant (Amendment) Act 1948 (NSW) which diminished value. Section 5 and 6 were in these terms:
5The improved value of land is the capital sum which the fee-simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona-fide seller would require.
6The unimproved value of land is the capital sum which the fee-simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona-fide seller would require, assuming that the improvements, if any, thereon or appertaining thereto, and made or acquired by the owner or his predecessor in title had not been made.
Sugerman J said at 263:
First, I should indicate that I am in agreement with Mr Hooke’s submissions with respect to the definitions of “the improved value of land” and “the unimproved value of land” in ss 5 and 6 of the Act. The “fee simple of the land” referred to in those sections is, in my opinion, the fee simple in possession. It is not the fee simple in reversion or remainder expectant upon the determination of some prior estate. No more is it the fee simple subject to the rights or immunities conferred upon a tenant or tenant holding over by the legislation already referred to, whether by way of prolonging the contractual tenancy or by way of creating some new estate or interest in the land.
So to say, however, does not mean that the existence of the legislation, as a factor which may in a general sense affect land values, must be left out of consideration. Nor does it solve the problem of the reliability, as guides to the unimproved value of land, of analyses of sales of improved land made while the legislation is in operation. That is something which may vary from time to time, with changing circumstances, and from one class of land to another. I shall confine discussion to the period which is material to the present proceedings (that is having regard to the sales proved, 1950-1951) and to the broad class of land within which the subject land falls, namely urban land whose best use is development by building.
That premises are let to a tenant is not in all circumstances necessarily depreciatory of value. Under appropriate circumstances, premises occupied by a tenant upon terms as to rent, duration, and covenants which are not disadvantageous to the lessor might be expect to bring as much as they if vacant.
That decision concerned land in Lismore. Sugerman J applied that same reasoning in Andreas v Valuer-General, where again the improved value of leased premises was diminished by restrictions under the Landlord and Tenant legislation then in force in New South Wales. Sugerman J said at 204:
It remains to consider the improved value of the subject premises within the meaning of s 5 of the Valuation of Land Act. For that purpose it is necessary to assume, as was held in the Lismore Case, that the owner had, and was free to dispose of, as immediate estate in fee simple, that is to say that the premises were not the subject of any tenancy which would prevent the owner from giving immediate possession to a purchaser.
The reasoning in AG Robertson Ltd v Valuer-General and in Andreas was approved by the Full Court of the Supreme Court of New South Wales in Commissioner for Railways v Andreas. However, Royal Sydney Golf Club had been decided before the Full Court reached its decision in Andreas. In consequence, the Full Court’s approval of the reasoning of Sugerman J was not entirely unqualified.
The appellants fastened on the second two sentences in the first paragraph in the passage quoted from AG Robertson Ltd v Valuer-General. They contended that the effect of that reasoning was to require the assumption that on the hypothetical sale the owner was able to grant vacant possession. The contention overlooks the fact that it was unnecessary for Sugerman J to consider the approach to be taken if the tenancies had enhanced the value of the land, a possibility he recognised in the third paragraph if his reasons. He was concerned to deal only with tenancies which were “depreciatory of value”. Similarly, the Full Court only dealt with tenancies which were depreciatory of value. The reasoning adopted in those decisions was sufficient for the purposes of those cases. The reasoning I have adopted would result in the same conclusion as was reached in those cases in that the value of the estate in fee simple would be market value on the footing that the leases are ignored because that the leases are burden to the enjoyment of the estate of fee simple and thereby a burden to value. As neither Sugerman J nor the Full Court had to address the question of leases which enhance the value of the fee simple, those decisions do not stand in the path of my conclusion. I respectfully suggest that in light of the decision in Royal Sydney Golf Club, Sugerman J and the Full Court would have adopted a different approach in a case where the value of the estate in fee simple is enhanced by a lease. Some support for that is to be found in the reasons of Roper CJ in Eq at 105:
In coming to the conclusion that the value of the fee simple was to be ascertained on the hypothesis that the vendor could and did sell it with the right to vacant possession, the Judge of the Land and Valuation Court followed his own decision in AG Robertson Ltd v Valuer-General. I agree with that decision and the reasons given for it; but in the light of the recent decision of the High Court in Royal Sydney Golf Club v Federal Commissioner of Taxation it may not have gone to the full extent permitted by law in disregarding conditions or restrictions affecting the actual title held by the objectors.
For these reasons the decisions in AG Robertson Ltd v Valuer-General and in Andreas are to be distinguished.
Shortly put, the definition of “capital value” as it operates in the circumstances of this case can be expressed in this way. The expression “unencumbered estate in fee simple” means the unencumbered estate in fee simple in possession. A person will hold an estate in fee simple in possession if that person is in physical possession of the land or if that person has leased the land for a term of years and is entitled to the rents derived from that lease. The term “unencumbered” requires a valuer to determine whether or not a lease is a burden. If it is a burden, the valuer must ignore the lease when assessing capital value. If it is not, the valuer must have regard to the lease and to the rental income when determining the capital value, which will be market value in the sense discussed in Spencer’s Case. This is a result consistent with the evidence of both valuers that the market value of the property the subject of each appeal depends to a large extent on the leases, the rents derived therefrom, the length of the individual leases, and the quality of the tenants. In each of these appeals the holder of the estate in fee simple has leased the subject land in the exercise of the entirety of powers which that estate brings and is profiting from the rents derived from that land so that the lease is not an encumbrance.
Market Value is Intended
The conclusion that a lease is an encumbrance only if it impairs the value of the estate in fee simple is consistent also with the intent of the Valuation of Land Act that capital value will represent the market value of the subject land. That intent is readily apparent from the fact that the definition of “capital value” includes the expression “that the land might be reasonably be expected to realise upon sale”. The same expression is used in the definition of “site value” and “unimproved value” and plainly indicates that the task is to determine market value. What is being valued when determining capital value is the value of land and improvements on the assumption that the holder of the estate in fee simple, that is to say, the owner or freeholder, is selling it.
The Valuation of Land Act was introduced as one of a number of measures reforming the means by which the value of land was assessed for revenue purposes. In the course of his remarks in the second reading speech, the Premier, the Honourable DA Dunstan QC said:
The principles embodied in this Bill are in accordance with the recommendations of the Ligertwood Committee of Enquiry into Land Tax, Council Rates, Water Rates and Probate.
Shortly after, he said:
Because of its artificiality, unimproved value is no longer regarded by many authorities as a reliable measure of the value of land for rating or taxing purposes. They consider that the most appropriate measure of the worth of land is its improved or capital value, which is the value of land and premises that the community readily understands.
The value that the community readily understands is market value, that is to say, the price at which land is expected to be sold or, as the Act expresses it, the value that the land might reasonably be expected to realise upon sale. The report of the Ligertwood Committee had expressed the view that market value was the most appropriate method by which to value land and had recommended that as the means by which land should be assessed for rating and taxing purposes.
The Ligertwood Committee had expressly adopted as the test by which market value is to be determined the test as expressed by Griffith CJ and Issacs J in Spencer v The Commonwealth, namely, the price reached by voluntary bargaining between a vendor and purchaser willing to trade but neither of them so anxious to do so that he would overlook any ordinary business considerations. Griffith CJ spelled out the test in these terms at 432:
In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e., whether there was in fact on that day a willing buyer, but by inquiring “What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?” It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together.
Issacs J elaborated on that test at 441:
To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and 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.
Issacs J reaffirmed that test in Commissioner of Land Tax v Nathan (1913) 16 CLR 654 at 661. Later, in Federal Commissioner of Land Tax v Duncan (1915) 19 CLR 551 at 554, Griffith CJ said that the approach of Issacs J accorded with his own and demonstrated that all of the potentialities of the land must be taken into consideration. That test is commonly called market value and it is the value determined in that way that I will call market value in these reasons.
Although the principle in Spencer’s Case is well established and is well understood by valuers, it has been necessary to quote these extracts in full because all too little regard was had to them when considering the definition of “capital value”. It is common ground in this appeal that the value of land developed to realise rental income is advantageously affected if it is leased and the rental is profitable. Both the shopping centre and the distribution park have been developed to produce rental income. While there will be cases when a lease is a burden and will impair value, that is not the position in this case. Both valuers agreed in this case that the value of each property fully leased was higher than the value of the land with the improvements upon it but unoccupied and to be filled with tenants. The difference between the values reached on each basis is striking. The value of the West Lakes Shopping Centre on the appellants’ approach, namely, assuming that the premises were vacant and to be filled with tenants, was $119,000,000. That is to be contrasted with market value which was, according to the appellants, $148,500,000, a difference of 24 per cent. Similarly, on the appellants’ approach the value of the distribution park at Port Adelaide is $40,000,000 but its market value, according to the appellants, is $49,350,000, a difference of some 23 per cent.

In CSR Ltd v Valuer-General (1977) 17 SASR 446 at 450-451 Wells J analysed the definition of “capital value” in these terms:
The crucial definition that falls for interpretation comprises three component passages, which warrant separate examination.
“… an unencumbered estate of fee simple in the land”.
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. Compare Gollan v Randwick Municipal Council, and the cases cited and discussed by their Lordships.
The expression “in the land” means, in my opinion, in the subject land together with all improvements including fixtures that, in law, are part of the land. Plainly, industrial plan and equipment is to be excluded unless it passes the rigorous tests for determining fixtures.
“…might reasonably be expected to realize…”.
This passage directs the valuing authority to assess the value according to what, at the date of sale, the land could fairly be expected to realize 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. 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. In particular, the effect that a suggested demand from any particular quarter may have on the amount expected to be realized ought to be taken into account only to the extent that it is to be predicted with some confidence, and ought not to be entertained if it can only be regarded as remote, fanciful, or speculative: compare Great Central Railway v Banbury Union, especially at pages 84-85.
“… upon sale, …”.
This passage carries with it some of the implications conveyed by the immediately preceding passage. It predicates a market in which the supply, the demand, and the price fixed, are such that the sale would go through. It is impossible, in my view, to contemplate other than a willing seller and a willing buyer; and because the price is “reasonably to be expected” it excludes an anxious or eager buyer or seller. No particular form of sale is designated, so the valuer (and the Court) is to suppose that both principal forms of sale are open – public auction and private treaty.
With one qualification, I respectfully agree with those remarks. The qualification concerns the first sentence following the recitation of the expression “an unencumbered estate of fee simple in the land”. In my view, the adverb “adversely” should qualify the participle “affecting” in that sentence so that it would read:
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 adversely affecting the estate or the land.
Shortly put, my reasons are these. First, as already noted, the absolute estate in fee simple is an estate in fee simple in possession. Secondly, one of the potential advantages of an estate in fee simple in land, as the most ample estate which can exist in land, is the ability to lease the land for profit. That ability is one of the “entirety of powers” to which Wells J referred in Harry v Valuer-General at 454. Thirdly, regard must be had to circumstances to determine whether an interest in the land encumbers the enjoyment of the estate in fee simple.
In Adelaide Clinic Holdings Pty Ltd v Minister for Water Resources (1988) 65 LGRA 410 at 415, Jacobs J said the willing buyer will pay the price which reflects the most advantageous use of the land. At the same time, the prudent vendor will only be too well aware of what is the most advantageous use of the land. In this case, the most advantageous use is to lease the buildings to earn rental income. The appellants’ approach requires that the vendor be prepared to accept a price some 20 per cent or more less than the price which the vendor might reasonably expect to receive. The proposition has only been stated to call into question the validity of the appellants’ approach.
Unreality of Appellants’ Approach
The approach for which the appellants contend requires that the valuer ignore the reality of the market place. Both the West Lakes Shopping Centre and the industrial park at Port Adelaide have been developed for the purpose of producing rental income. The evidence clearly establishes that the market value of each reflects the extent to which each is fully let, the amount of the rent paid by each tenant, the term of each lease, and the quality of the tenants. Other factors such as the age and the quality of the buildings will also be relevant. As Mr Jackson said, the value of each development will be higher if fully let than if only partly let or empty. The commercial reality is that a large shopping centre of this kind and the large industrial park will be sold fully or very substantially tenanted.
In the usual course, neither property will be sold on the basis advanced on the appellants’ approach, that is to say, with vacant possession and with an absence of tenants. Simply put, the appellants’ approach, therefore, bears little or no resemblance to the reality of the market place. That lack of reality is compounded in the case of the West Lakes Shopping Centre by the fact as, Mr Jackson admitted, that a developer would not build a shopping centre as large as the West Lakes Shopping Centre and then search for tenants. Instead, before constructing a centre of that kind, the developer would seek to secure large tenants for a department store, discount department stores, and the supermarkets in order to attract other tenants and so further enhance the commercial success of the venture. During the process of construction, the developer will also seek to attract further tenants. As Mr Jackson said in his evidence:
HIS HONOUR
Q.Just coming back to this point of the major tenants being the drawcard, is it correct to say that a developer would not contemplate erecting a centre until he knew he had major tenants who would be willing to occupy it.
A.That is consistent with my experience.
XN
Q.So, in other words, the developer would require precommitments of some description.
A.Yes, and certainly in the nature of regional shopping centres, where it is such a significant development to embark on. It would simply be prudent, I would seriously doubt whether any finance could be obtained from a prudent lender throughout the development phase without having precommitments from the major tenancies and, with my extensive involvement with those owners who own regional shopping centres, I can’t point to an example where a development anywhere in Australia has been embarked upon without very long, very extensive, very detailed negotiations having been entered into and concluded and that may be just simply – when I say ‘simply’, I shouldn’t say that – that may be on the basis of an agreement to lease, but it is binding prior to going to the formal lease document. There are certainly no examples that I can think of where shopping centre owners have embarked on development of shopping centres without knowing that major tenants are, one, keen to occupy the shopping centre but, secondly, have committed to occupying the shopping centre.
He gave a similar response in the course of his evidence in the Trust Company appeal.
Another instance of the unreality in the appellants’ approach occurred in the course of a long answer by Mr Jackson in the Trust Company appeal. When explaining why he had adopted a profit and risk factor for the purposes of his valuation, Mr Jackson said that a listed property trust would not be a potential purchaser because with the property unoccupied, there would be no stable income stream and it would be outside its investment mandate to purchase a property with no leases in place. Yet the plain fact is that a listed property trust is one of the likely purchasers of the industrial park at Port Adelaide.
For like reasons, the third and fourth answers I gave to the preliminary questions suffer from the serious lack of reality. They were grounded on the assumption that the shopping centre was being sold with vacant possession but with all the existing tenants in occupation. It effectively assumed that all leases would terminate on the day of completion of the contract to purchase and that the purchaser would negotiate with existing tenants who would be at liberty to enter into new leases or quit the premises. It is a factual situation far removed from reality.
These factors call into question both the validity of the appellants’ approach and the concession by the Valuer-General that the leases are to be ignored. While there will be occasional exceptions, the task of valuation under the Valuation of Land Act is essentially intended to be a practical exercise grounded on the reality of the market place. The appellants’ approach and the court based approach both require the valuer to postulate facts which bear little or no relationship to the facts or circumstances in which the properties the subject of these appeals would be sold. Each approach is quite artificial and offends common sense. Those were the reasons which, in my view, required a reconsideration of the meaning of the definition of “capital value” in the Valuation of Land Act.
While the task of valuation on occasions requires a notional value to be determined (as, for example, in Gollan and in Beiler v Valuer-General (1980) 23 SASR 385 where it was necessary to determine the capital value of a perpetual crown lease), as a general rule, it is intended to be a practical exercise reflecting the reality of the market place. The appellants’ approach is so divorced from that reality that common sense suggests that it should be put to one side. The common sense of the matter is confirmed by legal principle.
The Amended Answers
This Court is not bound by the fact that both parties agreed that, when assessing the capital value of a property the subject of each appeal, the valuer must ignore all existing leases and assume that the land is being sold with vacant possession. For the reasons I have already expressed, that argument is not founded on a sound legal footing. The task of this court is to determine the meaning of “capital value” in accordance with principles of law and not as agreed by the parties.
For these reasons, when land is subject to a lease, the valuer determining the capital value of the land must consider whether the lease is a burden to the enjoyment of the estate in fee simple and so impairs the value of the subject land. In the case of these two appeals, the leases were not a burden to the respective properties as at the date of valuation. It follows that the valuer should not disregard the leases. Instead, the correct approach for a valuer assessing the capital value of the subject land and the improvements thereon is to value the land and improvements upon the footing that the land and improvements are occupied and subject to the leases or other tenancy arrangements in existence at the date of valuation. Shortly put, the valuer should determine the market value of the land in the sense explained in Spencer’s Case. The answer to the first of the preliminary questions should have been, No.
It is unnecessary to reconsider the answer to question 2 as both valuers have consistently stated that the highest and best use of each property is its present use.
Given that the answer to question 1 is No, it is unnecessary to answer questions 3 and 4.
I would, therefore, amend the answers I gave to the preliminary questions. The answers should have been:
1In the particular circumstances of this case, the word “unencumbered” does not require a valuer of the subject land and improvements thereon to disregard the leases of the subject land.
2Whatever answer was given to question 1, the valuer of the subject land and improvements thereon should determine whether the highest and best use of the subject land and improvements is its present use.
3Not necessary to answer.
4Not necessary to answer.
For the following reasons, I am satisfied, both that I have power to recall the orders made on 20 July 2006 and answer the questions in that way.
Power to Set Aside Orders
Rule 84.12 invests the court with power to vary or set aside a judgment or order at any time if the justice of this case so requires. Rule 3.04(f) supplements that power. The rules invest the court with a wide discretion which is founded on the interests of justice. This jurisdiction is to be exercised cautiously having regard to the importance of the public interest in the finality of litigation: Copping v ANZ McCaughan Ltd (1997) 67 SASR 525 at 569 and the cases there cited. The jurisdiction is to be exercised judicially and not capriciously.
The order that the questions be heard and determined as preliminary questions of law before the hearing of the appeal was made pursuant to Rule 75.02 of the Supreme Court Rules 1987. The determination of those questions did not finally dispose of the rights of the parties. The intent was that the answer to the questions would provide the basis upon which the valuers would prepare their respective valuations. For that reason, the determination and the answers to the questions could be considered to be an interlocutory judgment: Carr v Finance Corporation of AustraliaLtd (No 1) (1981) 147 CLR 246; Licul v Corney (1976) 180 CLR 213. However, it is unnecessary to determine whether the judgment is an interlocutory or final judgment since the rules apply equally to an interlocutory as well as to a final judgment or order.
The Federal Court has held, when considering its Rule 37, a rule in like terms to Rule 84.12, that an interlocutory order of a substantive nature made after a contested hearing will not ordinarily be disturbed unless there has been a material change of circumstances since the original application was heard, or discovery or new material which could not reasonably have been put before the court on the hearing of the original application: Darling Harbourside (Sydney) Pty Ltd v Sanirise Pty Ltd (Federal Court of Australia, Full Court, 17 May 1996, unreported). In McMullin v ICI Australia Operations Pty Ltd (No 7) (1999) 169 ALR 227 at [20] Wilcox J said that an issue should be reopened
only in a clear case, where it is incontestable that the earlier decision is wrong. It would not be right to reopen an issue merely to enable a party to re-agitate arguments already considered by the court, even if the re-agitation has the benefit of a more recent High Court decision.
However, that principle applies when the court has made an interlocutory decision after a contested hearing of facts which are in dispute. I do not think that the principle should apply to an interlocutory judgement determining a question of statutory construction after a hearing in which no evidence has been led. In addition, the evidence led on the hearing of each appeal has demonstrated that some of the assumptions on which the preliminary questions were argued were wrong. It is preferable to recall an erroneous order rather than to allow it to stand until quashed on appeal. There is a further advantage in this course. If the appellants appeal against the orders I now make, they will be able to canvass all of the issues, that is to say, the issues canvassed both in these reasons and in the reasons for judgment delivered on 20 July 2006. For these reasons, the interests of the parties as well as the interests of justice are best served if I recall the order made on 20 July 2006. It is not possible to recall the reasons for judgment. It is sufficient to note the amended answers to questions 1, 3 and 4.
The Nature of the Appeal
Before determining the value of each property I briefly note also the principles that apply on an appeal under s 25C of the Valuation of Land Act. I also comment briefly on the evidence of the valuers who were the only persons who gave oral evidence in each appeal.
In Ardoch Pty Ltd v Valuer-General (No 2) (2006) 148 LGERA 408 I discussed the nature of an appeal to this court pursuant to s 25C of the Valuation of Land Act. That discussion was grounded on the decisions of this court in Fenton Nominees Pty Ltd v Valuer-General (1981) 27 SASR 258 (Fenton No 1) and on appeal in 29 SASR 348 (Fenton No 2) as well as in Myer (SA) Stores Ltd v Valuer-General (1986) 40 SASR 102. It is unnecessary to repeat the discussion. I adopt it and incorporate it in these reasons. It is sufficient to note that the appeal is not an appeal strictly so called but an appeal de novo on the footing that there has not been a prior hearing. The Valuation of Land Act contemplates a full hearing inter partes with each party leading evidence, including valuation evidence, testing the opposing evidence and making submissions. The court will then determine whether the valuation should be confirmed, increased or decreased: s 25C(3) of the Act.
The appellant has the burden of demonstrating that the valuation is erroneous. When considering what must be established to demonstrate that the valuation is erroneous, it must be remembered that valuation is an art, not a science. It is a field where reasonable and experienced valuers, both applying correct legal and valuation principle, may reasonably disagree as to the value of a parcel of land. As Wells J said in Fenton (No 1) at 263, there is no such thing as an ideally correct value. Expressed another way, an assessment of the value of land is ultimately an opinion based on the available evidence drawn from comparable sales. Two valuers may quite reasonably and without error form a different opinion as to the value of a parcel of land. So an appeal should not be allowed because of a mere difference in the opinion of valuers.
The court will not interfere with a valuation unless the appellant demonstrates that the valuer whose assessment is subject to appeal has made some error of law; has acted on a wrong principle of valuation; has misapprehended, misused or excluded relevant material, in other words, has failed to have had regard to relevant factors or has had regard to irrelevant factors; has misapplied principle or has in some other way erred in discharging the task of a valuer: Fenton (No 1) at 263-264 per Wells J. The court will also interfere where the valuation is manifestly excessive or manifestly low. To adapt the observations of Jacobs J in Fenton (No 2) at 356, as a matter of practical reality the court will not be likely to interfere unless it is shown that the valuation is either erroneous in principle, or tainted by significant error of fact, or so obviously excessive or so obviously low that some such taint or error must be inferred. The court will have little difficulty interfering where the valuer has made an error of principle or has misapplied principle. An incorrect analysis of comparable sales or a failure to mention relevant comparable sales are instances of a misuse or exclusion or relevant material. Shortly put, the court will not interfere if the difference between the Valuer‑General’s valuation and that of the appellant is essentially a mere difference of opinion. It will interfere only if the appellant demonstrates error of the kind just mentioned.
The Valuers
Both valuers had extensive experience. Both had impressive qualifications and expressed their opinions confidently. Mr Jackson has had experience valuing a wide range of property and in the past 10 to 15 years has been instructed to value substantial property for owners such as property trusts, superannuation funds and substantial corporations. He has had extensive experience valuing major shopping centres including in the past 10 years shopping centres in South Australia.

Mr Southwick has also valued a wide range of property. About 20 years ago he was employed by the AMP Society, as it was then known, to manage its investment properties in the form of high rise buildings in Adelaide and in Darwin. In recent years, his practice has included acting for tenants of shopping centres, including tenants of the West Lakes Shopping Centre, when negotiating operational issues with landlords. While he did not have the same breadth of experience as Mr Jackson in valuing large district or regional shopping centres, he has extensive practical experience of valuation issues relating to shopping centres.
Mr Jackson’s approach to the task of valuing the respective properties was not as careful as it should have been. He was prepared to advance opinions without checking the facts upon which the opinions depended. He attempted to explain this failure by asserting that a valuer does not have the time or the resources to do so. He described the task as unrealistic. He was speaking of the task of checking the actual occupancy of each of the buildings which comprised the industrial park. The occupancy of each was relevant to the question whether it was appropriate to allow a profit and risk factor and, if so, the amount to be allowed. It was relevant also to the assessment of the letting up allowance or in checking his allowance to see whether it accorded with the reality of the market place. His explanation lacked any credibility especially given the relatively few tenancies in the industrial park. In addition, it would have been a relatively simple task for Mr Jackson to obtain this information from his own client. In the case of the West Lakes Shopping Centre the task of checking basic facts was clearly a substantial but not a burdensome one. It is a task which, in my view, should have been undertaken. On occasion, Mr Jackson also became an advocate for his respective client, putting the objectivity of his opinion into serious question. It was also noticeable that, when he had a choice between alternatives, he consistently chose the alternative which diminished the assessment of value.
Mr Southwick impressed me as a careful witness. He had checked his facts. He had a detailed knowledge of both properties and, in particular, the West Lakes Shopping Centre. His assessment of the property the subject of each appeal was thorough. I found Mr Southwick to be a more reliable witness and, generally speaking, prefer his evidence to that of Mr Jackson.
Perpetual Trustee Co Ltd
Given the conclusion that “capital value” means “market value” in the sense explained in Spencer’s Case, it is unnecessary to consider the detail of the valuations prepared by the two valuers on either the appellants’ approach or the court based approach. It is sufficient to consider only the evidence of market value on which both parties in each appeal gave evidence.
The West Lakes Shopping Centre was sold in November 1998 for the price of $145,000,000. That sale provides a helpful starting point for a determination of value as at 1 January 2002. A one half interest of the shopping centre was sold in August 2004 for $122,500,000. The evidence suggested that it was inappropriate to multiply that sum by two to determine the value of the whole centre in August 2004. However, it is clear that the value of the shopping centre had substantially increased since October 1998. The evidence was that the value of shopping centres had as a general rule increased since 1998. There was no evidence to suggest that the position was any different in metropolitan Adelaide.
As already noted, an assessment will be set aside where the appellant demonstrates that the Valuer-General has made some error of law, has acted on a wrong principle of valuation, has failed to have regard to relevant factors or has had regard to irrelevant factors, has misapplied principle or has, in some other way, erred in discharging the task of a valuer. The court will also interfere where the valuation is manifestly excessive or manifestly low. The central issue on which Perpetual challenged the assessment was that the Valuer-General had misapplied the definition of capital value so that the valuation should have been $119,000,000 and not $149,000,000 as assessed by the Valuer-General. For the reasons given above the appellant has failed to establish that ground of appeal. The appellant has failed, therefore, to demonstrate any error of principle.
Mr Jackson’s assessment of market value is $148,500,000, which is $500,000 less than the Valuer-General’s assessment of $149,000,000, a variation of some 0.3 per cent. That is an inconsequential variation. It plainly falls within the range in which reasonable valuers may reasonably disagree on the value of land. By no means is the Valuer-General’s assessment excessively high. Perpetual has failed to discharge the onus of proof.
For these reasons, the appeal by Perpetual is dismissed.
Trust Company of Australia Ltd and Stockland Trust Management Ltd
The Valuer-General’s initial assessment of capital value was $51,150,000. On the appellants objecting to it, he reduced the assessment to $47,750,000.
Here again, the central issue on which these appellants challenged the assessment was that the Valuer-General had misapplied the definition of capital value so that the valuation should have been $40,000,000 and not $47,750,000. For the reasons given above, the appellants have failed to establish the ground on which they contend for the lower value. They have failed to establish any error or misapplication of principle on the part of the Valuer-General. As Mr Jackson’s assessment of market value is $49,344,283, it exceeds the assessment as amended after the objection. The appellants have, therefore, failed to discharge the onus of establishing that the assessment is erroneous. It follows that the appeal must be dismissed.
The Valuer-General contended that the assessment should be increased to $51,400,000. This court has the power on appeal to confirm, increase or decrease the Valuer-General’s valuation: s 25C(3) of the Act. As the Valuer-General propounded an increase in the assessment, he has the onus of establishing that the increase should be made. That conclusion is reinforced by the fact that the Valuer-General had reduced his initial assessment.
The evidence is not in an entirely satisfactory state. For example, there is a substantial difference between the valuers as to the gross and net rental income. Mr Jackson’s assessment of net income is $5,888,914 while Mr Southwick’s is $5,615,228. While those differences were explained in part, the gross rental income and the outgoings ought to have been capable of being agreed. These are objective facts which are capable of being readily established particularly in a case such as this where there is not a large number of tenants. In that respect, it is relevant to note that the valuers agreed the rental income for the West Lakes Shopping Centre.
Another difference between the valuers concerned the value of an unimproved section of the subject land. The valuers agreed that the area was 9,000 square metres. Mr Jackson assessed the value of that land at the rate of $30 per square metre. Mr Southwick’s assessment was $40 per square metre. I prefer Mr Southwick’s assessment which is based on firmer ground than that of Mr Jackson. However, in the result, the value of this parcel does not significantly affect the overall value of the appellants’ property. It is, therefore, unnecessary to resolve the difference between the valuers on this issue.
The valuers also differ as to the capitalisation rates, Mr Jackson adopting 12 per cent and Mr Southwick 11 per cent. It is difficult to conclude that a capitalisation rate of 11 per cent is to be preferred to a rate of 12 per cent. The evidence as to the capitalisation rate was inconclusive. There was evidence of yields of six properties at the time each of those properties was purchased. Five of those properties were located in the general area of the subject land and the sixth, which is the former General Motors Holden site, is on Port Road, Woodville. The five premises in the locality of the subject land were all considerably smaller than the subject land and occupied by a single tenant. The yields for the five properties in the general area of the subject land ranged between 9.2 per cent and 12.6 per cent. The sale of these properties occurred over a period from July 2001 to March 2004. Generally speaking, the earlier sales represented the sales with the higher yield. This evidence only serves to emphasise the difficulty in determining a capitalisation rate with any degree of certainty. The yield on the Woodville site which is 232,000 square metres and comprises 19 buildings was 13.5 per cent. The subject land has an area of 315,950 square metres and has 12 buildings. The Woodville site is plainly the most comparable. It is closer in size to the subject land and has a number of buildings let to a number of tenants unlike the other sales of land which is considerably smaller and occupied by a single tenant. The fact that its yield was 13.5 per cent lent support to Mr Jackson’s capitalisation rate of 12 per cent. In other words, it cannot be said that Mr Jackson has erred in adopting a capitalisation rate of 12 per cent.
Mr Jackson’s assessment that the market value was $49,344,283 was represented by capitalising the net income of $5,888,914 at the rate of 12 per cent. That produced $49,074,283 to which Mr Jackson added $270,000 for the value of the unimproved land. Mr Southwick’s assessment of market value was $51,400,000. He capitalised the net income of $5,615,228 at the rate of 11 per cent, to which he added $360,000 for the value of the unimproved land. It is very difficult to determine whether a capitalisation rate of 11 per cent is to be preferred to a capitalisation rate of 12 per cent. As Mr Jackson said in his evidence, the appropriate capitalisation rate is a matter which reflects valuer’s opinion. In my view, in the absence of compelling evidence and provided the difference between the valuers is not large, the capitalisation rate is an area where reasonable valuers may reasonably disagree. I am, therefore, not persuaded that Mr Jackson has erred when adopting a capitalisation rate of 12 per cent. In that event, the Valuer-General has not discharged the onus of establishing that I should accept Mr Southwick’s valuation. It follows that the Valuer-General has not discharged the onus of establishing that the assessment of the appellants’ property should be increased to $51,150,000.
For these reasons, but not without a degree of hesitation, I am not prepared to increase the assessment as requested by the Valuer-General. On this appeal, the only order will be, appeal dismissed.