Surfers Paradise Resort Hotel Pty Limited v Department of Natural Resources and Water
[2007] QLC 41
•24 May 2007
LAND COURT OF QUEENSLAND
CITATION: Surfers Paradise Resort Hotel Pty Limited v Department of Natural Resources and Water [2007] QLC 0041 PARTIES: Surfers Paradise Resort Hotel Pty Limited
(appellant)v. Chief Executive, Department of Natural Resources and Water
(respondent)FILE NO.: AV2005/0188 DIVISION: Land Court of Queensland PROCEEDING: Appeal against annual valuation under the Valuation of Land Act 1944 DELIVERED ON: 24 May 2007 DELIVERED AT: Brisbane HEARD AT: Brisbane MEMBER Mrs CAC MacDonald ORDERS: 1. The appeal is dismissed.
2. The unimproved value of Lot 11 on CP 866694 and Lot 25 on WD 810225 in the County of Ward, parish of Gilston, as at 1 October 2003 is affirmed at Thirty-One Million Dollars ($31,000,000).
CATCHWORDS: Valuation – unimproved capital value – highest and best use – high-rise hotel on land – highest and best use "unimproved" high rise residential – whether hotel structure "improvement" or "worsement" – applicable test (2 step process) – highest and best use with improvements may differ from highest and best use unimproved. APPEARANCES: Mr R Anderson for the appellant
Mr W Isdale for the respondentSOLICITORS Gadens Lawyers for the appellant
Crown Solicitor, Crown Law for the respondent
Surfers Paradise Resort Hotel Pty Limited has appealed against a determination by the respondent, under the Valuation of Land Act 1944, of the unimproved value of land at $31,000,000 as at 1 October 2003. The appellant estimated the value of the land to be $23,000,000 in the notice of appeal but lead evidence to a value of $22,300,000 at the hearing.
The land comprises two lots which have been valued together as one property. It is situated at Ferny Avenue, Surfers Paradise and has a frontage to the Nerang River. As at the date of valuation, there was a five star hotel (the Marriott Surfers Paradise Resort) on the site comprising 330 bedrooms and various facilities such as restaurants, bars, conference rooms, swimming pools etc. There was also a management agreement in place which was terminable only after 1 May 2008.
The major issue between the parties was the appropriate methodology to be adopted for the valuation. Essentially, the difference between them was whether a determination of the unimproved value of this land required allowances to be made for the costs of demolition of the structures on site and for the early termination of the management agreement.
The valuations
Mr GA Jackson, a registered valuer who gave evidence on behalf of the appellant, summarised his valuation method as follows -
(i) The first step was to determine the highest and best use of the property as it stood at the date of valuation. Mr Jackson's opinion was that the highest and best use of the land was for high rise residential accommodation and, therefore, he considered that the current use as a hotel was not its highest and best use. He also formed the view that the existing hotel structures could not successfully be converted into high rise residential accommodation.
(ii)Having determined that the highest and best use of the site was for high rise residential development, Mr Jackson valued the land on that basis using sales of comparable sites.
(iii)To enable the property to be developed to its highest and best use, Mr Jackson said that the existing structures would have to be removed and negotiations carried out with the hotel operator to surrender its existing management rights. Relying on the decision in Department of Natural Resources and Mines v QNI Metals Pty Ltd (2002) 23 QLCR 261, Mr Jackson therefore deducted the costs of removal of the existing structures and termination of the management agreement from the figure reached in (ii).
(iv)Mr Jackson also deducted the value of the site improvements to arrive at the unimproved value.
Mr Jackson's amended valuation was -
Assessed value of the land $32,312,500
Less demolition and management severance fees $8,279,886
Less site improvements $1,779,457
$22,253,157
Rounded to $22,300,000Counsel for the appellant adopted a different approach to the valuation. Counsel submitted that the hotel structures were a worsement and that the issued valuation was wrong because it failed to account for the costs involved in remediating the worsement on the subject land. Counsel contended that although Mr Jackson had said that his valuation was made pursuant to s.3(1)(b), in fact Mr Jackson had assumed that the subject land was unimproved rather than improved. The difference was, said Counsel, immaterial because Mr Jackson's methodology was sound.
Mr PC Smith, a registered valuer, gave evidence on behalf of the respondent. Mr Smith's methodology was that -
(i)He decided, initially, that the subject land was improved land because the evidence indicated that the structures added value to the land.
(ii)Consequently, he valued the land under s.3(1)(b) of the Act by assuming that the improvements did not exist as at the date of valuation. He made no allowance for the costs of removal of the structures or the termination of the management agreement.
(iii)He valued the subject land in its notionally unimproved state on the basis that as such its highest and best use was as a high-rise residential site. His primary approach was to value the property on a rate per square metre basis by comparison with sales of vacant or lightly improved properties which were to be developed for high rise residential accommodation.
Mr Smith's valuation was -
17,392 m² at $1,900/m² $33,044,800
Less site allowances $1,692,203
Unimproved value $31,352,597
Rounded to$31,000,000
The parties ultimately agreed that if the land had been vacant as at the relevant date its value would have been $31,000,000, although there was some disagreement between them as to the way in which that figure was reached. With the agreement of the parties this decision does not deal with that dispute and starts from the basis that $31,000,000 was agreed to be the value of the land, as at the date of valuation, assuming that it was vacant.
The appellant says, however, that $31,000,000 did not represent the unimproved value of the land because deductions must be made to allow for the costs of remediating the worsement. The respondent says that $31,000,000 was the unimproved value as at the date of valuation.
Statutory provisions
Section 13 of the Act provides that -
"The chief executive must decide the unimproved value of the land to be valued for the Acts under which local authorities are established."
Section 3 deals with unimproved value -
"(1) For the purposes of this Act -
unimproved value of land means -
(a) in relation to unimproved land—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; and
(b) in relation to improved land—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, at the time as at which the value is required to be ascertained for the purposes of this Act, the improvements did not exist.
(2) However, the unimproved value shall in no case be less than the sum that would be obtained by deducting the value of improvements from the improved value at the time as at which the value is required to be ascertained for the purposes of this Act.
…
(4) Notwithstanding anything contained in this section, in determining the unimproved value of any land it shall be assumed that –
(a) the land may be used, or may continue to be used, for any purpose for which it was being used, or for which it could be used, at the date to which the valuation relates; and
(b) such improvements may be continued or made on the land as may be required in order to enable the land to continue to be so used;
but nothing in this subsection prevents regard being had, in determining that value, to any other purpose for which the land may be used on the assumption that any improvements referred to in subsection (1) had not been made."
Valuation methodology
Counsel for the appellant submitted that the appeal turned on two issues –
(i)whether the structures and intangible interests on the subject land were improvements for the purpose of s.3(1) of the Act;
(ii)if the answer to (i) was no, whether in determining the unimproved value of the land developed as an hotel it was proper to bring to account the cost of remediating the subject land so that it might be utilised for residential development, and if so, in what amounts.
Counsel submitted that the structures on the land could not be regarded as improvements within the meaning of s.3(1) of the Act because the highest and best use of the subject as vacant land was for high rise residential purposes. Mr Jackson's evidence was that the hotel structures could not successfully be converted to high rise residential accommodation and therefore the structures and the management agreement were impediments to that use. Counsel submitted that they were not, therefore, improvements, but a disadvantage or worsement and on the authority of cases such as Caltex Oil (Australia) Pty Ltd v Chief Executive, Department of Lands (1996) 16 QLCR 435 and Marano v The Valuer-General (1978) 5 QLCR 194, the land should be valued "as is" under s.3(1)(a) of the Act as unimproved land. If the structures were improvements, the land would be valued as improved land under s.3(1)(b) on the assumption that the improvements did not exist.
I accept that if the structures on the subject land were worsements then the land should be valued as it existed at the relevant date, that is, as unimproved land (s.3(1)(a); Marano v The Valuer-General). The issue here is whether the structures were improvements within the meaning of ss.3(1) and 6(1) of the Act, or worsements.
Section 6 of the Act provides an extended definition of the word "improvements". Relevantly, the section provides that
"(1) Improvements means, in relation to land, improvements thereon or appertaining thereto, whether visible, invisible or intangible, and made or acquired by the owner or the owner's predecessor in title, …".
In Morrison v Federal Commissioner of Land Tax (1914) 17 CLR 498 at 503, Griffith CJ said:
"… any operation of man on land which has the effect of enhancing its value comes within the definition of improvement."
The appellant's submission that the highest and best use of the subject land was for high rise residential purposes was made on the basis that the land was assumed to be vacant. The respondent agreed that if the land were vacant its highest and best use was for high rise residential purposes. However, as was pointed out in Caltex (at 458) it cannot be assumed at the start of the statutory valuation process, that land is vacant.
Caltex concerned an appeal to the Land Appeal Court against a determination by the Land Court of the unimproved value of land used for service station purposes which had been entered as a “probable site” in the Contaminated Sites Register maintained under the Contaminated Land Act 1991. The case was decided in a context where the parties had agreed that the highest and best use of the land was residential and that the figure of $135,000 (which was the unimproved value determined by the Land Court) was the starting point for determining the effects of the contaminated land legislation or the risk of actual contamination of the land. Although the Court proceeded in terms of the parties' agreement, the majority (Fryberg J and Mr Neate) considered that the agreement that the highest and best use of the land was residential was inconsistent with the evidence of the appellant's valuer that the land with the service station structures in place was worth more than the land without such structures. (That evidence was subsequently abandoned by the parties). In the course of explaining their reasons for that conclusion the majority said (at 458) -
"It cannot be said whether a structure on or other quality of land amounts to an improvement in this sense until it is known whether the structure or quality enhances the value of the land. Any enhancement in turn will usually depend upon whether the structure or quality advances or inhibits a particular use. Thus, whether the structure or quality constitutes an improvement cannot ordinarily be known until the highest and best use of the land is determined.
The Valuation of Land Act is not a code of valuation methodology. It assumes the existence of the valuation process and requires its application in the cases and with the modifications prescribed by the Act. The starting point of that process is the determination of the highest and best use of the land being valued [Adelaide Clinic Holdings Pty Ltd v Minister for Public Resources (1988) 65 LGRA 410, at p.415 per Jacobs J.]. Only when that is done can it be seen whether the land is to be valued as improved or unimproved land. If, but only if, it is to be valued as improved land, the statutory assumption must be made. The highest and best use of the land is not to be determined on the assumption that the structures do not exist because whether the Act requires that assumption to be made ultimately depends on what is the highest and best use of the land. The Act does not refer to highest and best use and does not require the separate determination of such a use for land as unimproved land. The fact that land is being valued having regard to the "special provisions" of the Valuation of Land Act does not justify departure from the basic principles of Spencer v The Commonwealth which are as applicable to valuations under the Act as to any other valuations." (Footnotes omitted, citation added.)
That passage indicates that the majority considered that the first step in carrying out a valuation under the Act is to determine the highest and best use of the land as it existed at the date of valuation, that is with any structures in place. The next step is to determine whether the structures are improvements, which decision must be made in the light of the previous finding as to the highest and best use of the land.
In QNI the Land Appeal Court approached the valuation by saying (at 264) -
"[9] It is to be observed that s.3(1) of the Act provides two definitions of unimproved value – for land which is unimproved land and land which is improved. The first issue to be determined, therefore, is whether the land was improved or unimproved as at the date of valuation. This will depend on whether the structures on the land constitute improvements. In Morrison v Federal Commissioner of Land Tax (1914) 17 CLR 498 at 503, Griffith CJ said:
"… any operation of man on land which has the effect of enhancing its value comes within the definition of improvement."
[10] Whether these structures are improvements is a question of fact which will be answered by determining whether, in the market place as at the date of valuation, the land with the structures in place was worth more than it would have been without them. If the structures enhance the value of the land, they are improvements and the unimproved value is to be determined as though the structures did not exist.
[11] It was accepted by the respondent that if the highest and best use of the site is continued use for a nickel refinery, the structures add value to the land and are improvements as defined above. What is in issue is whether, if the improvements are notionally removed for the purposes of determining the unimproved value under the Act, use as a nickel refinery remains the highest and best use.
[12] The highest and best use of land is determined by the market place where factors such as uses permitted under the planning legislation and the demand for the land are relevant. The current use may be indicative of but is not determinative of the highest and best use."
In my opinion, the effect of the two passages from Caltex and QNI is that the Act requires a determination as to whether any structures on the land are improvements, that is whether they add value to the land. Although the market place determines whether the land is worth more with the structures in place than without, the market will not identify structures as improvements unless the structures advance a use which is seen by the market to be the highest and best use of the land with the structures in place. Thus, implicitly, the decision as to whether structures are improvements involves a recognition of the highest and best use of the land with the structures in place.
The evidence in this matter was that the land with the structures in place was worth more than if the structures were not there. The parties agreed that if the land were vacant it was worth $31,000,000 as at the date of valuation. There was evidence that the property with the structures in place had sold in April 2003 for $59 million. That evidence was disputed by the respondent on the grounds that there had been no transfer of title to the land and that the transaction was a corporate restructuring or a transaction between related parties. It is unnecessary, however, to examine that transaction because there was an earlier sale of the property in 2000 for $64 million. While there were no details as to the terms of either of these transactions, the evidence is sufficient, I consider, to establish that the structures added value to the subject land as at the date of valuation and that they were therefore improvements.
Counsel for the appellant submitted that Mr Jackson's evidence established that even allowing for the costs of demolition, the value of the land for high rise residential purposes exceeded the value of the land as developed for its current use. Mr Jackson said that no one would have bought the land for hotel purposes as at the date of valuation because -
(i)the hotel and land had been purchased for $59,000,000 in April 2003;
(ii)he had obtained a copy of a report by Rider Hunt Terotechnology Queensland Pty Ltd which estimated the costs of constructing the hotel at about $150,000,000; and
(iii)it would not be viable to purchase the land, construct the hotel and realise only $59,000,000 for the property.
I do not accept the appellant's suggestion that because the replacement costs of the hotel are estimated to be in the order of $150,000,000 the land has no value when used as a hotel site. The evidence is that the land, if it were vacant, had a value of $31,000,000 as at the date of valuation. The difficulties inherent in valuing improvements are well known and it is also the case that improvements may not add value to the land commensurate with their cost. In those circumstances it is not a legitimate exercise to assume that the total value of the improved property lies in the improvements.
Counsel for the appellant also referred to the Land Appeal Court decision in QNI where the Court said –
"[13] In many situations the existence of structures on the land makes no difference to the decision as to its highest and best use. In this case the structures are of such a magnitude that, subject to what is said later in these reasons, it is impossible to ignore that they do in fact exist when the question of highest and best use of the land requires determination. This is particularly so because if a different use from that in place at the date of valuation is proposed as the highest and best use, the evidence was that the existing structures would be rendered useless. A purchaser would be faced with demolition costs of the buildings or, perhaps, might decide not to use that part of the land which is occupied by the buildings and For an alternative use to represent a higher and better use, the land would have a value greater than as currently developed for the existing use, together with costs associated with removing the existing structures tailing dams. There was no evidence to suggest that the two alternative uses canvassed at the hearing, namely to use the site for another single industrial purpose or for rural residential purposes would bring a price higher than the value of the land and the buildings. Indeed the evidence was to the contrary."
Mr Jackson said that he had interpreted that extract to mean that when an alternative use is proposed as the highest and best use, the land is to be valued for that alternative use and then the costs of demolishing the existing structures should be deducted because the existing structures were not improvements for that higher and better use.
I consider that this interpretation reflects a misunderstanding of that paragraph in QNI because the Land Appeal Court was discussing the highest and best use of the land as it stood at the date of valuation, that is, with the nickel refinery and other structures in place. The Court concluded that the highest and best use of the land with the structures in place was its current use because there was no evidence that anyone would purchase the site for redevelopment, that is, buy the land and buildings at the market rate and pay for the demolition of the structures to enable the land be developed for an alternative use.
Similarly, in this case there is no persuasive evidence that a prudent purchaser would have paid something in the vicinity of $60,000,000 for the property as is and then demolished the structures for the purpose of redeveloping the site for high rise residential purposes. Nor is there any evidence indicating that a prudent vendor would sell the existing property at anything less than about $60,000,000. Reference was made to the sale of a hotel complex in the vicinity of the subject land (the Mercure) where, apparently, the purchaser intended to demolish the buildings to redevelop the site for high rise residential purposes. That evidence was not sufficient to establish that the subject property was similarly ripe for redevelopment as at the date of valuation, particularly when the evidence shows that there had been one or possibly two relatively recent sales of the subject and that the hotel business continued to operated after the sales.
It follows that the highest and best use of the land with the structures in place was for a purpose which included use of those structures as a hotel i.e. for hotel purposes or perhaps some other related purpose. On that basis the hotel structures are improvements, not a worsement, and the land is to be valued on the assumption that the improvements do not exist. There is no need to notionally remediate the site and there should be no allowance for the costs of remediation.
I have accepted the parties' evidence that the highest and best use of the subject land, if it were vacant, is for high rise residential development. It is apparent from my finding that the highest and best use of the property with the structures in place was for hotel purposes that I have concluded that the subject land has differing highest and best uses depending on whether it is considered with the structures in place or on the assumption that the improvements do not exist.
Both the Land Appeal Court in QNI (at 264) and the majority in Caltex (at 458) recognized that the highest and best use of land may differ depending on whether the land is valued with the structures in place or on the assumption that the structures do not exist. However, the reasoning in each case differs in that in Caltex the majority said that the Act does not require the separate determination of such a use for land as unimproved land, whereas the Court in QNI said that what was in issue in that case was the highest and best use of the land if the improvements were notionally removed. The Court in QNI determined the highest and best use of the land on the assumption that the improvements did not exist.
In so far as there is a difference in the reasoning of the two Courts, I consider that I am bound to follow the decision in QNI because the relevant part of the decision in Caltex is obiter dicta. The majority had accepted the parties' agreement that the highest and best use of the land was for residential purposes and expressly said (at 442) that they made no finding as to the highest and best use of the land. The discussion quoted in [19] above does not therefore form part of the ratio of the case. By contrast, the discussion as to the highest and best use of the land in its notionally unimproved state was essential to the decision in QNI.
I would also add that I respectfully agree with the reasoning in QNI which is the later decision. The Act requires a determination of the unimproved value of the land (s.13). There is no mention in the Act of "highest and best use" but it is accepted that a valuation made under the Act is to be made on the basis of the land's highest and best use. Where that use varies, depending on whether the land is valued with the structures in place or on the assumption that it is vacant, the statutory requirement that the unimproved value of the land be determined necessarily means, in my opinion, that the highest and best use of the unimproved land be ascertained for the purpose of valuing the land in its unimproved state.
I note that my conclusions are consistent with the decisions of the Land Court in PT Limited v Department of Natural Resources and Mines [2006] QLC 0068 at [135] – [144], Multiplex 240 Queen Street Landowner Pty Ltd v Department of Natural Resources, Mines and Water [2007] QLC 010, and Kent Street Pty Ltd & Ors v Department of Natural Resources and Mines [2007] QLC 0011, decisions handed down after the hearing in this matter.
The result is that I consider that the land as it stood at the date of valuation was improved land within the meaning of s.3(1)(b) of the Act. The valuation is to be made on the assumption that, as at that date, the improvements did not exist. On that assumption, the highest and best use of the vacant land was for high residential purposes and, in accordance with the parties’ agreement, its value was $31,000,000. The unimproved value of the land at the relevant date was $31,000,000.
Orders
1.The appeal is dismissed.
2.The unimproved value of Lot 11 on CP 866694 and Lot 25 on WD 810225 in the County of Ward, parish of Gilston, as at 1 October 2003 is affirmed at Thirty-One Million Dollars ($31,000,000).
CAC MacDONALD
MEMBER OF THE LAND COURT
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