Trust Co Ltd v Minister Administering the Crown Lands Act 1989
[2012] NSWLEC 73
•05 April 2012
Land and Environment Court
New South Wales
Medium Neutral Citation: The Trust Company Limited v Minister Administering the Crown Lands Act 1989 [2012] NSWLEC 73 Hearing dates: 18 - 21 October 2011 Decision date: 05 April 2012 Jurisdiction: Class 3 Before: Pain J Decision: 1. The appeal is dismissed.
2. The Minister's redetermination of rent of $136,400 pa is affirmed pursuant to s 142(6) of the Crown Lands Act 1989.
3. The exhibits are to be returned.
4. Costs are reserved.
Catchwords: APPEAL - redetermination of rent of Crown land under Crown Lands Act 1989 - whether onus of proof lies on a party in appeal - role of court in appeal
STATUTORY CONSTRUCTION - construction of principles for redetermining market rent - whether restrictions in lease must be considered when determining market rent
VALUATION - appropriate valuation approach to the disregard of improvements-whether valuation evidence complied with obligation on expert to identify reasoning and assumptionsLegislation Cited: Crown Lands Act 1989 s 10, s 141A, s 142, s 143, 145(2)
Evidence Act 1995 s 56, s 79
Interpretation Act 1987 s 33
Land Acquisition (Just Terms Compensation) Act 1991
Land and Environment Court Act 1979 s 19(a), s 30
Port Stephens Local Environmental Plan 2000
Uniform Civil Procedure Rules 2005 Pt 31, Sch 7
Valuation of Land Act 1916 s 40(2)
Valuation of Land Act 1971 (SA) s 25C(3)Cases Cited: AG Robertson Limited v Valuer-General (1952) 18 LGR (NSW) 261
Brewarrana Pty Ltd v Commissioner of Highways (1973) 6 SASR 541
CIC Insurance Ltd v Bankstown Football Club Limited [1997] HCA 2; (1997) 187 CLR 384
Commonwealth Custodial Services Ltd v Valuer-General of New South Wales [2006] NSWLEC 775
Commonwealth Custodial Services Ltd v Valuer-General [2007] NSWCA 365; (2007) 156 LGERA 186
Commonwealth Custodial Services Limited as Trustee For Burwood Trust Fund v Valuer-General (NSW) [2006] NSWLEC 400; (2006) 148 LGERA 38
Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation [1981] HCA 26; (1981) 147 CLR 297
Corlette Concerned Citizens Associated Incorporated v Anchorage Port Stephens Pty Limited and Port Stephens Shire Council (NSWLEC, Hemmings J, 21 September 1990, unreported)
Dasreef Pty Ltd v Hawchar [2011] HCA 21; (2011) 243 CLR 588
Fenton Nominees Pty Limited v Valuer-General (1981) 27 SASR 258
Flack v Valuer-General (1952) 18 LGR (NSW) 157
Graham Trilby Pty Ltd v Valuer General [2009] NSWLEC 1087
Gwynvill Properties Pty Ltd v Commissioner for Main Roads (1983) 50 LGRA 322
Holcim (Australia) Pty Ltd v Valuer-General [2009] NSWLEC 225
Jessica Investments Pty Ltd v Valuer General [2008] NSWLEC 1375
Leichhardt Municipal Council v Seatainer Terminals Pty Ltd (1981) 48 LGRA 409
Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705
Maurici v Chief Commissioner of State Revenue [2003] HCA 8; (2003) 212 CLR 111
Minister for Conservation and Land Management v Barry Dwarte [1992] NSWLEC 74
Mulwala and District Services Club Ltd v Department of Conservation and Land Management [1992] NSWLEC 66
Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355
Redeam Pty Ltd v South Australian Land Commission (1977) 40 LGRA 151
Spencer v Commonwealth [1907] HCA 82; (1907) 5 CLR 418
Spicer v Valuer-General (1963) 10 LGRA 319
Tomago Aluminium Company Pty Limited v Valuer General [2010] NSWLEC 4
Trust Company of Australia Ltd v the Valuer-General [2007] NSWCA 181; (2007) 154 LGERA 437
Valuer-General v Fenton Nominees Pty Ltd [1982] HCA 46; (1982) 150 CLR 160Texts Cited: A Hyam, The Law Affecting the Valuation of Land in Australia, 4th ed (2009) Federation Press
Rawlinsons, Australian Construction Handbook, 29th ed (2011) Rawlinsons PublishingCategory: Principal judgment Parties: The Trust Company Limited (Appellant)
Minister Administering the Crown Lands Act 1989 (Respondent)Representation: Mr I Hemmings (Appellant)
Mr C Birch SC with Mr J Maston (Respondent)
Lindsay Taylor Lawyers (Appellant)
Crown Solicitor's Office (Respondent)
File Number(s): 30107 of 2011
Judgment
This is an appeal in Class 3 proceedings against a redetermination of rent of Crown land by the Minister Administering the Crown Lands Act 1989 (the CL Act). I thank Acting Commissioner Parker for his assistance in this matter.
The Appellant leases Crown land at Corlette on the shores of Port Stephens, approximately 200 km north of Sydney, where the Anchorage resort and marina is located (the property). In accordance with the terms of the lease a redetermination of rent by the Minister was undertaken, an objection made and rejected by the Minister, and an appeal to this Court pursuant to s 145(2) of the CL Act commenced.
By way of background, on 23 January 1993 the Minister for Lands granted a long-term lease of the land to Anchorage Port Stephens Pty Limited (APS) for a term of 60 years. Prior to the date of the lease, on 21 September 1990, the Court had granted development consent in an appeal instigated by objectors to the development on the Crown land: Corlette Concerned Citizens Associated Incorporated v Anchorage Port Stephens Pty Limited and Port Stephens Shire Council (NSWLEC, Hemmings J, 21 September 1990, unreported). The purpose of use of the land sought by APS was "marina and associated facilities, boat harbour, motel, conference centre and reclamation". (The reclamation is the breakwater enabling the marina.) I note that the evidence and submissions generally refer to hotel rather than motel, as does the judgment. No issue arises from this.
On 3 December 1993 approval was granted to extend the lease term to 75 years. At the commencement of the 75 year lease on 15 November 1994, part of the land (comprising about 2.524 ha) contained an excavated boat harbour with breakwater used as a marina and boat brokerage and there was also an associated chandlery and office building. Erected on the remainder of the land, comprising about a further 2.198 ha which had been partly filled, was an 80 room hotel, conference centre, swimming pool and associated facilities. These improvements were erected by APS, the original lessee. The lease was transferred from APS to the Appellant in 1997. The property comprises a 90 berth marina, 80 room hotel and conference centre. It comprises 4.722 ha (47,220 sqm) with two components, an irregularly shaped area of approximately 21,980 sqm of land (being 10,600 sqm hotel) and 11,380 sqm (breakwater) and an irregularly shaped area of approximately 25,240 sqm of water (marina). The property is within the 3(a) Business General zone as defined in the Port Stephens Local Environmental Plan 2000 (the LEP).
On 25 October 2010 the Minister redetermined the rent of the lease effective from 8 October 2010, pursuant to cl 24(f) of the lease as provided for in s 142 and 143(1) of the CL Act. The rent of the lease immediately prior to the redetermination was $63,000 pa. The redetermined rent was $136,400 pa.
Crown Lands Act 1989
Division 3 "Determination of rent" s 142 of the CL Act relevantly provides:
(1) This Division applies to:
(a) a lease or licence the conditions of which provide for the redetermination of the rent by the Minister (unless those conditions provide that this section is not to apply to the lease or licence), and
...
(2) The Minister shall give notice of a determination or redetermination of the rent of a lease, licence or enclosure permit to the holder.
(3) The notice must indicate that the holder may object to the determined or redetermined rent.
(4) The Minister shall consider any objection lodged and by written notice inform the objector:
(a) whether the determined or redetermined rent is to stand or be varied, and
(b) of the name of the tribunal to which, under subsection (5), the objector may appeal if dissatisfied with the Minister's decision.
(5) An appeal against the Minister's decision lies:
(a) to the local land board if the determined or redetermined annual rent does not exceed $10,000 or such greater amount as may be prescribed, or
(b) in any other case, to the Land and Environment Court.
(6) On such an appeal, the local land board or the Court may affirm the Minister's determination or redetermination or substitute its own.
...
Section 143(1) of the CL Act states:
(1) In redetermining the rent of a lease or licence (the conditions of which provide for the redetermination of the rent) or determining or redetermining rent for the purposes of section 61, 62, 63 or 72 (enclosure permits), the Minister, the local land board and the Land and Environment Court shall apply the following principles:
(a) the rent shall be the market rent for the land comprised in the lease, licence or enclosure permit having regard to any restrictions, conditions or terms to which it is subject,
(b) any improvements on the land which were made by the holder, or are owned or in the course of being purchased from the Crown by the holder, shall be disregarded,
(c) regard may be had to any additional value which, because of the lease, licence or enclosure permit, has accrued, or may reasonably be expected to accrue, to other land held by the holder,
(d) regard may be had to the duration of the time for which the rent determined will be payable.
Court's powers on appeal
The Court's jurisdiction is founded in s 19(a) of the Land and Environment Court Act 1979 and the Court's powers are set out in s 30. Section 142(6) of the CL Act provides that in appeals under s 145(2) the Court may affirm the Minister's redetermination or substitute its own.
The parties made competing submissions about the role of the Court in this appeal. There is apparently no case where this issue has been considered previously. The Appellant submitted that the Court should act as a judicial valuer, applying by analogy the role of the Court recognised under the Land Acquisition (Just Terms Compensation) Act 1991 (the JT Act). It is open to the Court to substitute its own redetermination of rent if it considers it appropriate to do so. It is not correct to focus on the pleadings as if these define the issues between the parties as this is not a matter where strict pleading rules apply. In any event the Points of Defence and the Appellant's reply to these put all matters in issue, not just those in the Points of Claim.
The Minister submitted that the Court should not act as the judicial valuer because of the unique nature of this case and the way the appeal was run. The Appellant filed Points of Claim outlining the essential elements of its case in the appeal, which relies on a certain legal interpretation of s 143(1). That interpretation informs the valuation approach of Mr Dempsey, registered valuer, called by the Appellant. If the Appellant's legal and therefore valuation approach is rejected the appeal must fail and the Minister's redetermination should be affirmed, as provided for under s 142(6). It was strictly unnecessary for the Minister to call valuation evidence but in any event that evidence confirms the Minister's redetermination in broad terms and further supports its affirmation.
Onus of proof
There is no specific provision in the CL Act referring to onus of proof in appeals of this kind. The Appellant submitted that any onus it bears is easily discharged in this case and is satisfied in the circumstances. An objection has been lodged to the redetermined rent amount of $136,400 pa. No party contends that amount is correct as each party's valuer has arrived at a different amount. The Minister should be satisfied that the redetermination is wrong, its valuation evidence suggesting a greater amount is appropriate, but does not press for a redetermination in that greater amount. The Appellant sought a redetermination on the basis of a nominal rent only, being the statutory minimum of $413 as at the review date (8 October 2010).
Alternatively the Appellant submitted that it is probably not appropriate to consider whether there is an onus of proof. Once the Court considers that the redetermination is wrong the Court can and should, as a judicial valuer, redetermine the rent. That is the approach taken under s 40(2) of the Valuation of Land Act 1916 (the VL Act) in this Court which has been upheld by the Court of Appeal. That was also the approach in Commonwealth Custodial Services Ltd v Valuer-Generalof New South Wales [2006] NSWLEC 775 (the Moneybox case at first instance). The approach in Fenton Nominees Pty Limited v Valuer-General (1981) 27 SASR 258 which held that in order to substitute a different amount an error in the valuation approach must be established reflected a different statutory provision (which simply provided for an appeal). That is no longer relevant given that s 25C(3) of the Valuation of Land Act 1971 (SA) now provides that the Land and Valuation Court may "confirm, increase or decrease" the valuation.
The Minister submitted that generally, in valuation cases, the onus of proof rests on the party which seeks to assert that the valuation is incorrect. For example, under the VL Act the objector to the statutory land value has the onus of proving its case: Flack v Valuer-General (1952) 18 LGR (NSW) 157; Fenton Nominees Pty Limited v Valuer-General (1981) 27 SASR 258 at 263 - 264; affirmed by the High Court of Australia in Valuer-General v Fenton Nominees Pty Ltd [1982] HCA 46; (1982) 150 CLR 160. If the onus of proof is not discharged, the determination of the Valuer-General stands. This principle has now been included in s 40(2) of the VL Act. There is no express onus of proof provision in the CL Act but by parity of reasoning with Flack, the same approach applies in the present case.
Consideration of Court's powers on appeal/Onus of proof
The issue of the Court's powers on appeal and whether there is an onus of proof are intertwined and will be considered together. The construction of any statutory provision must be guided first and foremost by the statutory scheme adopting a purposive construction: Interpretation Act 1987 s 33. The CL Act's objects are identified in s 10, the principal object being that Crown land is managed for the benefit of the people of NSW. This is to be achieved by proper assessment of Crown land, management in accordance with the principles of Crown land management, the reservation and dedication of Crown land for public purposes and the regulation of conditions under which Crown land can be occupied, inter alia. The Court's discretion in this appeal under s 142(6) is wide and provides for the Court to affirm the Minister's redetermination or substitute its own. The CL Act contains no guidance on how the Court is to exercise its powers on appeal.
The Appellant's submissions in reply refer to JT Act cases where the role of the Court as a judicial valuer is well recognised to support an argument that the same role should apply here. Given that under s 142(6) the Court has wide discretion to determine what it will do and that role includes redetermining the rent, that is clearly a role the Court can choose, but is not bound, to undertake. Given the broad discretion of the Court under the CL Act, how that is fulfilled will depend on the nature of the dispute and the evidence before it. There is no reason given the broad discretion conferred on the Court to confine the exercise of that discretion by finding that the Court will always act as a judicial valuer in appeals of this kind. How the Court exercises that role will depend on the nature of the case before it, the Minister's submission. Precisely how that will be done in this case will depend on my consideration of the issues and evidence presented.
In relation to onus of proof, the Minister's counsel relies on the fact that in valuation cases the onus of proof rests on the party who asserts that a valuation is incorrect supported by reference to Flack and Fenton Nominees inter alia, as now expressed in s 40(2) of the VL Act. The CL Act contains no provision in relation to onus of proof, unlike s 40(2) of the VL Act. The CL Act is concerned with the management of Crown land. While that may involve matters of land valuation as arises in this case, it is not an Act with the same objects or purposes as the VL Act. The approach under the VL Act does not necessarily apply by analogy. I agree with the Appellant's submission that there is no requirement in the CL Act that it demonstrate particular error in the Minister's redetermination in order to succeed in an appeal (in contrast to the approach under different statutes such as that considered in Flack and Fenton). Having said that, I consider the Appellant bears a practical onus of proof given that it commenced the appeal and is alleging a certain construction of the CL Act, requiring that it identify in this case how the valuation by the Minister under s 143(1) was wrong. It does not mean that the Minister has to "defend" the redetermination by adducing valuation evidence, although prudence suggests this course would be adopted, as occurred in this case.
This is not a court of strict pleading so that the matters in issue are not necessarily confined to those in the parties' pleadings. The Appellant's Points of Claim identify threshold legal issues concerning the construction and application of s 143(1). That is the case the Minister's Points of Defence address and in addition raises a number of further issues which have also been considered.
In conclusion, the approach of the Court in appeals of this kind will depend to a significant extent on the nature of the arguments and evidence the parties adduce. I agree with the Minister's submission at par 10 above to some extent in light of the Appellant's case. This raises the fundamental matter of the construction of s 143(1)(a) and the application in valuation terms of s 143(1)(b). The Appellant's legal approach heavily informs its valuer's approach. If this approach is rejected the appeal must fail unless there is valuation evidence suggesting the amount of rent redetermination should be varied. If there is ultimately no relevant valuation evidence before the Court the Appellant's appeal should be dismissed.
Anchorage lease terms
The terms of the 75 year lease of the property are important to the application of the Appellant's construction of s 143(1). The terms of the lease held by the Appellant and other documents material to the parties' arguments were tendered (exhibit 2).
Clauses of the lease provide for payment of rent and redetermination of rent as provided for in s 143(1). Clause 24 "Payment of Rent (CPI)" defines "Base Annual Rent" in (a) as:
(i) the Initial Rent where the rent has not been redetermined in accordance with subclauses (e) (f) or (g) or
(ii) in any other case - the rent as last redetermined in accordance with those provisions.
...
"Market Rent Review Date" means -
(i) The date specified or referred to in column 2 of Item 7 of Schedule 1 (either being a Due Date or another date); and
(ii) Thereafter the date of the expiration of each period of years as specified or referred to in column 2 of item 8 of Schedule 1 as calculated from the date specified or referred to in column 2 of Item 7 of Schedule 1.
Clause 24(e) provides:
In addition to the rent adjustment provided for in subclause (d) on the first Market Rent Review Date after the Commencement Date and thereafter on each Market Rent Review Date the rent may be adjusted by the Minister redetermining the rent pursuant to the provisions of sections 142 and 143 of the CLA.
A redetermination of rent for the purposes of this subclause shall be taken to have been made on the Market Rent Review Date if it is made at any time within the period of six months before the Market Rent Review Date.
Clause 24(f) provides:
Where the Minister does not redetermine the rent as provided for in subclause (e) he may adjust the rent by redetermining the rent pursuant to the provisions of sections 142 and 143 of the CLA at any time prior to the next Market Rent Review Date and no succeeding Market Rent Review Date shall be postponed by reason of the operation of this subclause.
Clause 30 "Permitted Use" relevantly provides:
(a) This Lease confers on the Holder a right to occupy and use the Premises for the purpose specified or referred to in Column 2 of Item 36 of Schedule 1.
(b) The Holder will not use the Premises or allow them to be used for any purpose other than the purpose specified in column 2 of item 36 in Schedule 1...
Clause 32 "Lessor's Consent to Development Application" relevantly provides:
The Holder covenants with the Lessor that the Holder will obtain the Lessor's consent to the lodgment of any development application in respect of the Land...
Clause 33 "Holder not to undertake Development without consent notwithstanding any other provision of this Lease" relevantly provides:
The Holder will not undertake any development within the meaning of the Environmental Planning and Assessment Act 1979 contrary to the provisions of that Act or in breach of any restriction condition or prohibition imposed by an Environmental Planning Instrument or condition of a development consent ...
Clause 34 "Development Consent" relevantly provides:
(a) The Holder will not undertake any activity on or within the Premises for which consent is required under the Environmental Planning and Assessment Act or any Instrument made thereunder without first obtaining such consent.
(b) Where the Holder obtains consent in accordance with the provisions of this clause the Holder will not undertake any activity on or within the Premises except in accordance with any conditions or requirements of that consent ...
Clause 54 "Construction of Improvements" provides:
(a) (i) For the purposes of subclause (b) "Improvements" means the improvements specified or referred to in column 2 of Item 40 of Schedule 1.
(ii) For the purpose of subclause (a) "Improvements" means any building structure facility or work.
(b) The Lessor and the Holder acknowledge that the Holder has prior to the commencement constructed the Improvements in accordance with the plans conditions and specifications contained or referred to in column 2 of Item 4 [sic - should be 41] of Schedule 1.
(c) The Holder will not construct effect erect or undertake any Improvements on the Premises other than the Improvements specified or referred to in Column 2 of Item 40 of Schedule 1 or which may be authorized or required under any other provision of this lease. (4.077).
In Sch 1:
Item 7 "Market Rent Review Date (First)" provides:
The fifth anniversary of the Commencement Date.
Item 8 "Market Rent Review Period" provides:
Five (5) years
Item 36 "Permitted Use" provides:
Marina and associated facilities, Boat Harbour, Motel and Conference Centre and Reclamation.
Item 40 "Improvements" provides:
The improvements specified in Development consent granted by His Honour Mr Justice Hemmings in the Land and Environment Court (in matter No 10058 of 1990) dated 21 September 1990. See Schedule 4.
Item 41 "Improvements - plans conditions and specifications" provides:
Plans conditions and specifications of the improvements for which Development consent was granted by His Honour Mr Justice Hemmings in the Land and Environment Court (in matter No 10058 of 1990) dated 21 September 1990.
The statutory minimum rent payable under CL Act s 141A according to the parties (calculated as at the rent review date of 8 October 2010) is $413.
Issues for determination
The parties provided an agreed statement of issues as follows:
1.In redetermining rent pursuant to s 143 of the Crown Land Act, are the "restrictions, conditions and terms" in the Lease to be taken into account, or not? (Section 143(1)(a)).
2.It is agreed between the parties that all of the improvements, other than the reclamation, are to be disregarded pursuant to s 143(1)(b). In those circumstances, it will be necessary for the court to determine whether the reclamation is to be disregarded pursuant to s 143(1)(b).
3.Can rent, for the purposes of s 143(1), be determined by the comparative method, by reference to leases and sales of other land (the "transactions")?
4.If the answer to question 3 above is "yes", are the transactions relied upon by the Respondent, capable of adjustment so that they may be relied upon for the assessment of rent pursuant to s 143(1)?
5.If the answer to questions 3 and 4 above are [sic] "yes", what is the rent for the purposes of s 143(1) relying upon the transactions?
6.Can rent for the purposes of s 143(1) be determined by comparing cost to value?
7.If the answer to question 7 above is "yes", what is the rent for the purposes of s 143(1)?
8.Having regard to:
(a)Clause 54 of the Crown lease, and/or
(b)Section 139 of the CL Act, or
(c)Otherwise,
(d)Should the redetermination of the "market rent" for the land under s 143(1)(a) of the CL Act be made on the assumption that improvements other than the existing improvements may be erected on the land.
Section 143(1) identifies four principles which must be applied to redetermine the rent of a lease. The issues raised by the parties concern subsections (a) and (b). The application of subsections (c) and (d) either did not arise or were not in contention. The subsections were referred to in support of the respective parties' contentions on the construction of s 143(1)(a).
By way of background it is useful to identify some general submissions of the Minister which I do not understand to be contentious. Market rent is central to the first principle of rent redetermination under s 143(1)(a), requiring application of the test in Spencer v Commonwealth [1907] HCA 82; (1907) 5 CLR 418 at 441; an opinion of what a willing lessee would pay and a not unwilling lessor would accept is required. This also requires the general law principle to be applied that the rent is assumed to be for the highest and best use permitted of the land to be leased (per Spicer v Valuer-General (1963) 10 LGRA 319 at 320 and Commonwealth Custodial Services Limited as Trustee For Burwood Trust Fund v Valuer-General(NSW) [2006] NSWLEC 400; (2006) 148 LGERA 38 at [15]; upheld on appeal in Trust Company of Australia Ltd v the Valuer-General [2007] NSWCA 181; (2007) 154 LGERA 437). While these general principles apply, as the Applicant submitted the redetermination of rent must be carried out in accordance with s 143(1) of the CL Act which it submitted required an artificial approach to the redetermination of market rent.
Because the construction of s 143(1)(a) and application of subsection (b) raise legal and valuation issues it is useful to now identify the different valuation approaches of the parties' valuers.
Valuation and other evidence
The parties' valuers applied different approaches to the calculation of value reflecting in large part the parties' differing interpretations of s 143(1). Mr Dempsey and Mr Dupont (registered valuer called by the Minister) provided separate written reports (exhibits A, 1 and 5), a joint report (exhibit G), gave oral evidence and were cross-examined.
The Appellant tendered a report co-authored by Mr Bell and Mr Thomson, valuers of Knight Frank Valuations (exhibits C and D) for a valuation of the property as at 8 October 2010. (This is also annexure 5 to Mr Dempsey's report, exhibit A.) Mr Thomson valued the marina as a going concern and Mr Bell valued the hotel as a going concern. The report concluded that the combined value is $17,500,000 (excluding GST). The report states the basis of valuation is on a "going concern" basis with the property "valued as an operational entity having regard to trading potential inclusive of the trade furniture, furnishings and equipment" and with "the benefit of all necessary licences, fixtures, fittings, furniture, furnishings and equipment to enable it to continue in full operation as a business entity" but excluding "wet and dry stocks". That report states, "we have undertaken the valuation on the accounts method having regard to trading ability, location, competition, quality of operation, facilities provided for guests, wants of repair and further development opportunities". The report was not challenged by the Minister directly but what it valued was disputed by the parties' respective valuers.
Mr Dempsey considered the report by Knight Frank to be a valuation of "real estate that generates income" based on "24 hour licences" and not of a business as a going concern. Mr Dupont considered the report by Knight Frank to be the valuation of a business as a going concern. This difference of opinion is not of great consequence in light of the way issues were presented by the parties.
The cost of replacing the existing improvements on the property (including the marina) was $34,113,096 (including GST) as at 8 October 2010 as identified in a report by Mr Collins, quantity surveyor of Altus Page Kirkland, dated 16 March 2011 attached to Mr Dempsey's report (exhibit A annexure 4). Mr Collins estimated the current cost of constructing a marina berth at the property as approximately $56,000 (when his figure in exhibit A annexure 4 p 1 of greater than $5,000,000 for the construction of a 96 berth marina is divided by 96). This evidence was not disputed by the Minister.
A report of Mr Britton, civil engineer, dated 13 September 2011 (exhibit B) was tendered but was not ultimately relevant to the issues in dispute. The parties agreed that the breakwater is not to be disregarded for the purposes of s 143(1)(b).
Mr Dempsey, valuer called by Appellant
Mr Dempsey tendered as evidence a redetermination assessment of the subject property dated 6 July 2011. He assessed the market rent in accordance with the lease to be $1, representing a peppercorn rent, as at 8 October 2010. The Appellant accepts that it is required to pay at least the statutory minimum rent of $413. Mr Dempsey's evidence was based on legal advice provided by the Appellant's counsel dated 24 September 2010 exhibited to his report which stated that the market rent for the land must be determined by applying the principle that the unimproved land may only be used for the permitted use. The permitted use under the lease is the Anchorage marina and resort complex as approved by the Court, identified in Sch 1 of the lease and this is the only use permitted on the land. Mr Dempsey adopted the legal advice that the permitted use was the marina and associated facilities, boat harbour, motel and conference centre and reclamation erected on the land.
The Appellant's counsel's advice (summarised in Mr Dempsey's report) follows. Clause 30 is the "permitted use" provision and provides that the lease confers on the holder a right to occupy and use the property for the purpose specified or referred to in Sch 1 Item 36, being "Marina and Associated Facilities, boat harbour, Motel and Conference Centre and Reclamation". The cost of the improvements today is so significantly in excess of the value of the improvements that no prudent person would enter into a lease with the intention of erecting the improvements necessary for the permitted used. The valuation exercise is one where, even if the rent for the land was to be a peppercorn rent only, no prudent person would take the lease. As it must be assumed that a party does take the lease the result must be that the rent can be nominal only. The advice of the Appellant's counsel summarised in Mr Dempsey's report at par 28 - 37 confirmed that all improvements including structures and reclamation work must be disregarded (about which there is no dispute before me).
The permitted use of comparable sales must be similar to the permitted use of the subject property. Mr Dempsey was not aware of any properties with a similar use (meaning all facets of the permitted use being conducted together on one site). He asserts it would be incorrect to consider market evidence that bears little relationship to the highest and best use (permitted use) of the property. As he did not consider that there were any sales comparable to the subject property an alternative method of valuation should be adopted, being a basic hypothetical development method which he called "cost versus value". A key assumption made by Mr Dempsey is that in order to comply with s 143(1)(b) (disregard improvements) exactly, those improvements on the property built in accordance with the lease are constructed in new condition immediately prior to the date of the rent review (exhibit A p 23 par 93).
Mr Dempsey considered that the parties to a hypothetical transaction would be fully informed of the cost of developing the land for the permitted use. Mr Dempsey adopted the cost of replacing the existing improvements of $34,113,096 (including GST) in accordance with the report by Altus Page Kirkland dated 16 March 2011.
Mr Dempsey considered that the parties to a hypothetical transaction would be aware that the market value of the completed property would be in the order of $17,500,000 (excluding GST), which is the market value of the land plus the improvements subject to the lease, according to the report by Knight Frank dated 8 October 2010.
Mr Dempsey assumed that the rent payable under the lease is premised on the viability of the permitted use where the value of the completed property ($17,500,000 excluding GST) is less than the cost of replacing the existing improvements in the permitted use ($34,113,096 including GST). As no prudent person would enter into a lease with the intention of erecting the improvements necessary for the permitted use given that the cost of doing so was much greater than the market value only a peppercorn rent of $1 would be payable.
Mr Dupont, valuer called by the Minister
Mr Dupont produced an undated valuation report of the property in which he stated that the property (without improvements) is within the 3(a) Business General "A" zone in accordance with the LEP as amended. Mr Dupont valued the property without attributing value to any improvements, except for the breakwater, as two components the vacant waterfront hotel site and a wet area lease capable of accommodating a 90 berth marina. Under this approach the sole restriction considered by him was the zoning of the land. Mr Dupont assessed the market rental value as at 8 October 2010 at $102,083 pa based on a direct comparison of sales of commercially zoned land assuming any development permissible under the zoning including a hotel use, with 1993 reclamation costs deducted of $46,317. This approach, called the freehold basis, assumes "it" in s 143(1)(a) refers to land, the primary case contended for by the Minister
In the alternative, using a leasehold basis approach which assumes "it" in s 143(1)(a) refers to a lease Mr Dupont compared sales of tourism use sites to arrive at a rate per room of $25,000 which resulted in a rent of $93,683 pa as at 8 October 2010 when reclamation costs of $46,317 were deducted. This approach considered separate development of hotel and tourist complexes with further allowance for adverse conditions within the Appellant's lease.
According to his report Mr Dupont valued the marina area separately by considering two approaches: a direct comparison of sales and rentals of other marinas and alternatively, a comparison of rent reviews under comparable leases of marina properties, including a wide range of locations, size by number of berths and dates of sale. He did not articulate a distinction between a freehold basis and leasehold basis approach to the marina valuation. He identified a rate per annum of $45,000 per berth for a 90 berth marina. When the hotel and marina values were added together he derived a rent of $147,083 (hotel freehold basis) and $138,683 (hotel leasehold basis).
Construction of s 143(1)(a) (issue 1)
Section 143(1) requires the redetermination of rent in accordance with specified principles. At issue is whether "it" in subsection (a) refers to restrictions, conditions or terms relating to the lease (Appellant's view) or relating to the land (Minister's view).
The Appellant submitted that "it" means the lease so that the restrictions, conditions or terms of the lease must be considered in redetermining the rent under the lease in order to understand the effect upon value of any of those restrictions, conditions or terms. Section 143(1)(a) requires the determination of the market rent for the land comprised in the lease. It is difficult to envisage land being subject to a term or condition or restriction other than under a lease, licence or enclosure permit. Section 143(1)(d) does not assist with the interpretation of s 143(1)(a) as the Minister submits. Its role is to identify a principle of the approach to valuation under the section.
The Minister submitted that "it" means the land so that the market rent is to be determined for the land without regard to the terms of the lease, but having regard to those restrictions, conditions or terms to which the land is subject. The subsection concerns the ascertainment of "the market rent for the land comprised in the lease ..." not for the market rent of the lease. Section 143(1) should be construed in its immediate and wider context in the CL Act given that it is a provision of general application dealing with the setting of rents of a large number of leases and other tenures of Crown land in the State. The four principles for redetermination of rent in subsection (a) - (d) are mandatory (shall apply).
The section overall is considering the redetermination of rent of a lease where the lease so provides, which can be contrasted with "market rent for the land" in subsection (a). The phrase "comprised in the lease..." limits the land for which the market rent must be determined under s 143(1)(a) to the land comprised in the lease. The object of the sentence in subsection (a) is the market rent of the land which these words describe. The words "having regard to" and following are linked to and qualify the notion of determining "the market rent for the land". Section 143(1)(d) permits regard to the "duration of time for which the rent will be payable". It demonstrates that the provisions of the lease are only relevant in one respect being the determination of time for which the rent determined will be payable. Subsection (d) would be unnecessary if restrictions, conditions or terms in subsection (a) meant those in the lease. The most natural reading is that the preposition refers to the land.
Consideration - "it" means the lease
The four principles in s 143(1) must be applied in redetermining rent whether by the Minister administering the CL Act, a local land board or the Court on appeal. As submitted by the Minister there does not appear to be any case where this subsection has been expressly considered. Two cases were handed up by the Minister, Minister for Conservation and Land Management v Barry Dwarte [1992] NSWLEC 74 (Talbot J) and Mulwala and District Services Club Ltd v Department of Conservation and Land Management [1992] NSWLEC 66 (Bannon J). Both refer to s 143(1) and appear to consider a leasehold approach to s 143(1)(a). Neither case had to deal with the issue before me at all and can provide little assistance for that reason.
As submitted by the Minister, the section as a whole should be considered in light of the purpose of the legislation (Interpretation Act s 33; Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355 at 384). In Commonwealth Custodial Services Ltd v Valuer-General [2007] NSWCA 365; (2007) 156 LGERA 186 (the Moneybox appeal case) at [3] - [4] Spigelman CJ in the context of the VL Act referred to the importance of identifying the scope and purpose of the Act within which a particular section is being interpreted and to consider the statutory scheme from the outset. The objects of the CL Act are referred to above at par 14. It is relevant to this analysis that the provision has general application dealing with rents for a large number of leases and other tenures of Crown land throughout NSW. The construction of the principles should enable their application in the wide range of circumstances which arise under the CL Act.
While these submissions on general principles of statutory construction informed by a purposive approach to the CL Act in a wider context are relevant at a broad level, the particular construction of s 143(1)(a) must be considered in its context in the section. No other section of the CL Act or any other Act has been referred to as relevant to the construction of the subsection. I accept the Minister's submissions that the structure of s 143(1) informs the operation of the various subsections including subsection (a) but not necessarily the Minister's submissions as to the effect of that operation. The chapeau of the section refers to the redetermination of the rent of a lease where the conditions of the lease provide for redetermination of rent. Subsection (a) is the first of four principles. Once the four principles are applied, the resultant amount is the "rent of the lease" as the Minister submitted. Nowhere in the four principles is the expression "rent of the lease" used, indicating that it is the four principles alone that yield the amount for the redetermined rent of the lease. That is not conclusive of the issue of the meaning of subsection (a).
Applying a commonsense or plain reading to the words in subsection (a) of restrictions, conditions or terms, I consider these are most apt to qualify the word "lease" rather than "land", as the Appellant submitted. It is far less usual to consider restrictions, conditions or terms in relation to land per se.
The Minister sought to distinguish rent of a lease in the chapeau from the expression "market rent for the land" in s 143(1)(a). While there is a difference between the expressions that does not assist in the construction of the phrase "having regard to any restrictions, conditions or terms to which it is subject" in subsection (a). I consider however that it would be inconsistent to read "conditions" in subsection (a) as referring to those the land is subject to when the chapeau refers to "conditions in a lease". Moreover, I consider subsection (a) should be read as meaning that when redetermining the rent of a lease, it is the market rent for the land which is comprised in the lease.
Contrary to the Minister's submissions, the Appellant's approach does not lead to conflict with the terms of the section. Section 143(1)(b) simply requires the disregard of improvements on the land. That principle applies regardless of whether "it" in subsection (a) means land or lease. In this case either scenario requires improvements on the land to be disregarded. No potential conflict arises in this case where the terms of the lease acknowledge the improvements which exist on the land as those improvements must be disregarded under subsection (b).
The Minister submitted that her construction resulted is no injustice to the tenant in a long lease where the market rent is for the land but the lease is for a particular purpose. The Minister has broad discretion under the Act to change covenants, conditions or reservations attaching to the holding and can change the use if the tenant requests in the course of the lease. The same submission can apply to the Appellant's case and is relevant to the issue considered in the next section of the judgment of how use under the lease should be considered.
I agree with the Minister's submission at par 44 above that the terms of the lease are relevant for subsection (d) being the time for which the rent determined will be payable, but I disagree with the submission that they are only relevant for that subsection. As already stated above the chapeau makes the lease terms relevant by stating that what is being redetermined is the rent of a lease. Subsection (c) states that "regard may be had to any additional value which, because of the lease ... , has accrued, or may reasonably be expected to accrue, to other land held by the holder". It appears that the terms of the lease are relevant for the consideration of the principle in subsection (c) also. Even if, as the Minister contends (in my opinion incorrectly), "it" does not refer to the lease, subsection (a) specifically makes the lease terms relevant by stating that the land is that which is comprised in the lease. In requiring the disregard of improvements subsection (b) also appears to make the lease terms relevant in referring to improvements on the land made by the holder of the lease. It is likely such improvements would be made pursuant to the terms of a lease.
The answer to issue 1 is yes, namely that in redetermining rent pursuant to s 143 of the CL Act the restrictions, conditions and terms in the lease are to be taken into account in the valuation of market rent. The parties made differing submissions on the nature of these restrictions, conditions and terms.
How should the permitted use under the lease be considered? (issue 8)
Issue 8 is worded as, having regard to cl 54 of the lease (which specifies the improvements allowed under the lease) and s 139 of the CL Act (which allows for amendment of a lease), whether market rental should be determined on the assumption that improvements other than the existing improvements may be erected on the land. Having listened to the parties' arguments I am not sure that is precisely the question raised by them. As I understand this issue now, in light of my finding in relation to subsection (a) does s 143(1)(a) requiring the redetermination of market rent in light of the restrictions, conditions or terms of the lease mean that any valuation is to adopt the permitted use being that specified in Sch 1 Item 36 and improvements specified in Sch 1 Item 41 of the lease as indivisible? The answer to this question may be informed by cl 54 of the lease and s 139 of the CL Act, inter alia.
The Appellant submitted that when valuing the land it is necessary to consider the lease terms. The restrictions in the lease cannot be ignored as otherwise there is a valuation at large which will not be in accordance with the terms of the lease which restrict the use of the land. The permitted use specified in cl 30 (referring to Sch 1 Item 36) was that of marina and associated facilities, boat harbour, motel and conference centre (and reclamation) and the improvements specified were, as identified in cl 54, those granted consent by Hemmings J in Corlette Concerned Citizens Associated Incorporated as reflected in Sch 1 Item 41. Consequently, the Appellant submitted, that the whole of that use and the existing improvements have to be considered as the permitted use under the lease terms. Components of the permitted use and improvements cannot be considered separately from each other so that the hotel and marina cannot be valued separately.
I essentially agree with the Minister's approach to construction of the lease which considers the lease more holistically than the Appellant's approach. The relevant lease provision dealing with use of the land is cl 30 "Permitted Use". Clause 30(a) provides that the holder has a right to use the premises for the permitted use of "Marina and associated facilities, Boat Harbour, Motel and Conference Centre and Reclamation" as identified in Sch 1 Item 36. Clause 30(b) specifies that the land may only be used for that purpose. As the Minister submitted, the reference to purpose in the singular does not require a finding that the use is compendious requiring all the elements contained in Item 36. Nor should "use" be so confined. Clause 3(a) of the lease states that "words importing the singular number shall include plural and vice versa". Clause 30 can be read as referring to purposes as can the uses in that clause and in Sch 1. In so finding I do not need to adopt the Minister's written closing submissions at par 8 that the Court should prefer a commercial construction to the lease interpretation.
Important to my reasoning is that there is no obligation or compulsion under the lease placed on the holder to actually use the land for the permitted purpose(s) or erect any or all improvements. As the Minister submitted the user restriction limits the use of the premises to each or any of the activities in Sch 1 Item 36. As identified in the context of Mr Dupont's evidence below considering issues 3, 4 and 5, that was the basis for his comparability analysis which considered other parcels of land for which the intended use is a form of tourist facility, with the hotel use considered separately from the marina use.
Further, I agree with the Minister's submission that the user restriction in the lease is the principal restriction on the value of the market rental for the purposes of conducting a valuation under s 143(1) rather than any restriction defined by the improvements as these must be disregarded under subsection (b) in any event. The provision of the lease dealing with improvements is principally cl 54 referring in turn to Sch 1 Item 40 which identifies that the improvements erected are those granted consent by the Court in September 1990. By cl 54(b) the lessor and holder simply acknowledge that the holder had, prior to the commencement of the lease, constructed the improvements specified in the development consent of 21 September 1990 granted by the Court identified in Sch 1 Item 41. Clause 54(c) specifies that only those improvements specified in Sch 1 Item 40 are to be erected. These improvements must be disregarded under s 143(1)(b).
While of less immediate relevance given the current use of the land and the existing improvements, I note that there is a statutory right to seek approval from the Minister for conditions attaching to a holding or the purpose of a holding to be conditionally or unconditionally altered, modified or added to under s 139 of the CL Act. A similar provision is provided in cl 32 of the lease, which states that the lessor's consent for the lodgement of any development application in respect of the land may be sought, which could include a change of use. That is the potential source of an authorisation to carry out any development other than that specified in the original development consent of 21 September 1990 granted by the Court. That there is flexibility in the lease to enable a change in the permitted use and improvements built reinforces my finding that the permitted use under the lease is not as inflexible as the Appellant submitted.
The redetermination of market rent under s 143(1)(a) in light of the restrictions in the lease is not limited in terms of use and improvements to the precise development granted consent by the Court referred to in Sch 1 Item 40. The primary relevance of that finding in this case is in relation to the valuation approach that should be taken, discussed below as the two valuers took quite different approaches.
Application of s 143(1)(b) - disregard of improvements (implicitly issue 2)
The other major difference between the parties concerned how s 143(1)(b) should operate. Section 143(1)(b) requires the disregard of improvements as one of the principles which must be applied to the redetermination of rent. The parties disagreed about how the disregard should occur in the valuation exercise. The section does not state how this is to be done. Whether reclamation costs were improvements which had to be disregarded was initially identified as an issue (issue 2) but the Minister accepted that this issue did not need to be determined. The parties agreed that the reclamation is to be regarded as in existence. Although not reflective of the agreed issue 2, the parties' competing approaches to s 143(1)(b) were based on two different valuation approaches.
The Appellant's valuer, Mr Dempsey, considered that the disregard in the subsection required the assumption that the land is vacant and the calculation of the cost of improvements built as if new before every rent review date. Mr Dempsey's approach was largely in accordance with legal advice provided to him by the Appellant's counsel. The advice of the Appellant's counsel attached to Mr Dempsey's report in evidence and summarised at par 28 - 37 of his report identified that the subsection requires that the improvements to be disregarded on the land must have been made "by the holder, or are owned or in the course of being purchased by the Crown by the holder". No issue arises in this case in relation to the application of these words.
In relation to s 143(1)(b) requiring disregard of improvements, as summarised at par 33 above, the Appellant's counsel stated that the unspecified cost to erect the improvements today is so significantly in excess of the value of the improvements even allowing for depreciation that no prudent person would enter into a lease with an intention of erecting the improvements necessary for the permitted use. As it must be assumed that a prudent party will take the lease a prudent party would pay a nominal rent only. The legal advice attached to Mr Dempsey's report considered the correct question to ask was whether the lessee would rent the property when building the existing improvements was not justified given the valuation of these. Why that is the case was not articulated in the legal advice or in Mr Dempsey's report.
Mr Dempsey identifies in his report that the Spencer principle applies so that the parties are assumed to be fully informed of relevant matters such as cost of building improvements. A prudent lessee would not enter into the lease and pay any sum where the permitted lease was not viable. He states that in his opinion it must be assumed that the improvements as they relate to the permitted use are assumed to be constructed in new condition immediately prior to the rent review date. The permitted use assumed to be constructed must be in accordance with the decision of Hemmings J in Corlette Concerned Citizens Associated Incorporated. He concludes that the parties to the hypothetical transaction would recognise that the improvements would diminish over time and that the unexpired term of the lease would result in the acquisition of the lease being less attractive as the term diminishes. These considerations are relevant to the rent review.
The Minister submitted that the requirement to disregard improvements does not require an assumption that the land be regarded as vacant and for the improvements to be built anew at current prices immediately before the rent review date. There is sufficient compliance with the requirement to disregard improvements in subsection (b) if the land is considered to be unimproved and there is no attribution of value to the improvements, a common and accepted approach in valuation practice. This was the approach of the Minister's valuer, Mr Dupont. Properly understood subsection (b) is a directive to ensure that the rent is not calculated on the basis that it contains a component for improvements but only of the unimproved land, which prevents double dipping.
Consideration
The application of s 143(1)(b) does not raise issues of statutory construction in this case given that the meaning of the subsection is not in dispute. I simply note that "improvements" is not defined in the CL Act. No issue ultimately arose as to the meaning of improvements in this section in light of the Minister not seeking to argue whether the reclamation was an improvement. As noted above, the section does not provide guidance on how the disregard of improvements is to be achieved. The subsection applies to the Appellant as the holder of the lease and owner of the improvements on the land. The difference between the parties' approaches resulted from the different valuation approaches, influenced in part by the differing approaches to construction of s 143(1)(a). Ultimately the approach to the disregard of improvements is a matter of applying the appropriate valuation approach regardless of the construction of s 143(1)(a).
As submitted by both parties, the purpose of subsection (b) is the avoidance of double counting to prevent unfairness which would arise if the tenant was levied for rent on the improvements that the tenant had constructed or paid for. This was identified at par 16 in the Appellant's counsel's legal advice attached to Mr Dempsey's report and was also submitted by the Minister.
I have identified Mr Dempsey's approach above as based largely on legal advice received. Mr Dempsey appears to have taken the same approach to s 143(1)(b) as the Appellant's counsel. I was unable to discern where, if at all, Mr Dempsey applied his own independent valuation expertise on this issue as opposed to adopting the approach of counsel. It may be that given the scope of the legal advice provided he did not consider he had any ability to apply any other approach. As submitted by the Minister, Mr Dempsey's approach does not disregard the improvements given their attribution of value as part of his process of reasoning.
I agree with the Minister's submissions on the appropriate approach of Mr Dupont identified in par 65 as that is my understanding of the usual approach in valuation to the disregard of improvements. As the Minister submitted, such an approach would not exclude methods of valuation that make reference to improvements in the process of calculation or analysis provided that the rent determined has no component attributable to the improvements. When Mr Dupont deducts a sum for the reclamation costs there is no portion of rent then attributed to these.
I consider the Minister's valuer's approach more closely accords with usual and appropriate valuation practice where the unimproved value of the land is to be valued. Why that is particularly the case here will be demonstrated when Mr Dempsey's approach is considered below as it arrived at an unrealistic result of a zero or nominal rent in large part because of his approach to the disregard of improvements under s 143(1)(b). As the Minister submitted, the Court should reject a construction of a statute that produces a result that is absurd or irrational per Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation [1981] HCA 26; (1981) 147 CLR 297 at [25]; CIC Insurance Ltd v Bankstown Football Club Limited [1997] HCA 2; (1997) 187 CLR 384 at 408. I am not construing a statute but I am determining what valuation approach should be taken to implement a statute and by analogy the same reasoning should apply.
Can rent be determined by "cost versus value" approach? (issues 6, 7)
The next issue to consider is whether Mr Dempsey's valuation approach can be accepted in light of the above findings (issues 6 and 7). His approach was called "cost versus value", not a description of any common valuation method I am aware of. It was also described by him as a hypothetical development approach. As to the limits of the hypothetical development model, both parties or their valuers referred to different passages of Sugerman J in AG Robertson Limited v Valuer-General (1952) 18 LGR (NSW) 261 at 262, a case decided under the VL Act 1916 - 1921. As the Minister submitted the limitations on using the hypothetical development model have been identified by Cripps J in Gwynvill Properties Pty Ltd v Commissioner for Main Roads (1983) 50 LGRA 322 at 326 inter alia. Given my conclusion above in relation to a less restrictive approach to permitted use under the lease in the context of s 143(1)(a) and my acceptance of Mr Dupont's approach based on comparable sales, I do not need to consider these authorities in detail.
The legal advice relied on by Mr Dempsey identified that s 143(1)(a) requires regard to the restrictions, conditions or terms of the lease especially in cl 30 which specifies the permitted use as marina and associated facilities, boat harbour, motel and conference centre (and reclamation). The market rent must be determined applying a principle that the unimproved land is only used for the permitted use. The advice identifies an approach to valuation which reflects counsel's view that s 143(1)(a) requires the restrictions under the lease to be considered (rather than restrictions on the land). While I have accepted the Appellant's construction of s 143(1)(a) in relation to the meaning of "it", I have not accepted the Appellant's restrictive interpretation of the permitted use under the lease for valuation purposes. Consequently an important basis for Mr Dempsey's conclusion that there are no comparable sales is undermined. I agree with the Minister's submission that the hypothetical development model was used by Mr Dempsey as if, because the current development was unviable on his calculation, there could be no comparable sales.
Further in relation to s 143(1)(b) I have held that the requirement to disregard improvements does not require an assumption that the improvements be constructed as new immediately before the rent review date. The consequence of such an assumption is the illogical scenario that new improvements with a long life continue to be assumed to be constructed as new at each regular rent review date despite the lease progressing to an ever shorter life.
As the Minister submitted, the Appellant's valuer, Mr Dempsey, relies on the Knight Frank report which valued the business (whether as a going concern is disputed) at $17,500,000 (excluding GST) with an enduring right to occupy land supporting the business into the future. That evidence alone suggests that there is a valuable right to occupy which must have a greater than nominal value. This further suggests the Appellant's assumptions in relation to subsections (a) and (b) must be wrong.
Subsection 143(1)(a) requires rent to be calculated on a market basis which, applying the Spencer test, requires hypothetical willing, but not anxious, lessor and lessee acting prudently and with appropriate knowledge to be considered. If the Appellant's approach was correct this transaction could not be achieved as a prudent lessor would not accept $1 for the land as Mr Dempsey finds and a prudent lessee would not build a $34,113,096 development if it could only be sold for $17,500,000. Mr Dempsey's approach in his report was to consider the position of the lessee only, not that of the lessor, an important oversight in this context.
Further, even if the Appellant's approach was correct in theory I was unable to understand why the disregard of the improvements required the assumption that these be built as new before each rent review (every five years until the end of the approximately 60 years remaining under the lease) rather than a depreciated sum for the building of these. The explanation from counsel was that as this is market rent when the market improves, the sale price will increase and at the point this exceeds the replacement cost, more than nominal rent will be payable. On the figures in evidence here there will have to be a substantial increase in the market before more than nominal rent is payable given that the replacement cost of $34,113,096 is nearly double that of the estimated sale price of $17,500,000. That approach does not give any weight to the principle in s 143(1)(d) that regard may be had to the duration of the time for which the rent to be determined is payable. In this case that is every five years until the expiry of the lease (cl 24(a), Sch 1). The artificial approach of the Appellant is not required by the terms of the section, although I understand the Appellant's submission that the terms of s 143 result in an artificial approach to the determination of market rent because the principles specified therein must be applied.
As I have not accepted Mr Dempsey's approach for the reasons stated I do not need to identify his oral evidence or issues raised in cross-examination about his approach.
Comparable leases approach (issues 3, 4, 5)
As Mr Dempsey's approach is not accepted that leaves Mr Dupont's approach which is reflected in issues 3, 4 and 5 (par 23 above). Issue 3 is whether the rent can be determined by a comparative method by reference to sales and leases. It follows from my finding on issue 8 that the permitted use allowed on the land under the terms of the lease can be considered as components, here a hotel and marina. Issue 3 can be answered in the affirmative that the rent can be determined by a comparative method by reference to sales and leases. As I have determined that "it" refers to the lease, Mr Dupont's comparable approach to the dry land (hotel) component on a basis described by him as leasehold and the wet land (marina) component separately is most relevant, rather than his freehold basis. That brings me to issue 4, whether the transactions relied on by him are capable of adjustment so that they can be relied on. If the answer to that is yes the market rent can presumably be identified as called for by issue 5.
Hotel (dry land) - tourism use
For his leasehold approach Mr Dupont valued the hotel site on a tourism use basis and submitted six comparable sales of "tourist/semi commercial sites" and "large rural sites", including a wide range of locations, site areas and dates of sale, at Nabiac Caravan Park Pacific Highway Nabiac, Raffertys Resort, Cams Wharf, Halliday Point, Crooked River Road Gerroa, Lakes Way Forster and Gan Gan Road Anna Bay. Two further comparable lease transactions are referred to although these were not considered further by Mr Dupont.
Mr Dupont analysed the six comparable sales of tourist/semi commercial sites and large rural sites on an unimproved rate per unit/room basis, deriving a range of $11,944 - $243,333 and concluding that the rate of $23,817 was "encouraging" and $41,666 especially relevant.
At the hearing, Mr Dupont submitted details of a lease renegotiation in 2010 at Batemans Bay of a mixed use tourist resort and marina lease being an existing 96 berth marina publicly tendered in 2008 for a 70 year lease with the same rent and terms as the subject property. The lease and variation were tendered (exhibit 4). The site is 1 ha of dry land. The tenant agreed to a rental of $250,000 pa excluding GST for the first three years increasing to $300,000. Mr Dupont considered this supported his valuation for the subject land as it is a comparable use to the subject property, the most comparable available. The lease required redevelopment of the existing old marina, removal and replacement of the rock wall resulting in a 246 berth marina with associated dry berthing, storage, small commercial centre and 60 accommodation units.
Mr Dupont adjusted his analysed range of $23,817 - $41,666 pa unimproved rate per unit per room for tourist/semi commercial sites and large rural sites and adopted $25,000 per room for application to the property taking into account the waterfront location. The amount of rent payable per annum was $140,000 from which reclamation costs had to be deducted.
Mr Dupont modified the amount of rent in exhibit K in light of 2010 reclamation costs to $54,508. The deduction for these costs increased to $85,492 from $17,790.
Marina (wet land) - sales and rent reviews approaches
According to his report, Mr Dupont valued the marina by considering two approaches:
(a) direct comparison to sales and rentals of other marinas, and
(b) comparison to rent reviews under comparable leases of marina properties (check method).
These two approaches did not appear to reflect the freehold/leasehold distinction applied to the hotel (dry land) valuation. On closer analysis these were not two different approaches, both informed his overall conclusion of rent of the marina area.
(a) sales and rentals approach
In relation to approach (a), Mr Dupont identified seven comparable sales of marinas, including a wide range of locations, size by number of berths and moorings and dates of sale and analysed these on a rate per berth and yield basis to derive a range of $30,700 -$166,666 per berth and 6.5 - 11.6 per cent yield. He concluded that returns for marinas are generally between 8.25 and 11.5 per cent.
Mr Dupont further analysed the gross income or average tariff per month for a 12m boat at 12 marinas in NSW and derived a range of $390 - $956 per month, concluding that the current tariff of $770 per month at the subject marina is at the lower end of the range and can be adopted.
Mr Dupont also analysed the operating expenses for 29 marinas on the NSW coast and derived a range of 45 - 55 per cent of rental income was taken up by operating expenses depending on the number of berths, concluding that 45 per cent for the subject marina was appropriate reflecting onshore infrastructure and the passive nature of the marina.
Mr Dupont adjusted his analysed range of 8.25 - 11.5 per cent yield and adopted 12.5 per cent for application to the subject marina as "yields have generally softened".
Mr Dupont applied his adopted rates of $770 per month tariff, 45 per cent outgoings and 12.5 per cent yield, together with an allowance for vacancies of 15 per cent, to the subject property and derived an estimated net rental wet land of $44,059 pa equating to $490 per berth pa:
90 berths at $700/month/berth (being $770 less $70 GST)
$756,008
Less allowance for vacancies at 15% of $756,008
- $113,401
Subtotal
$642,606
Less allowance for outgoings at 45% of $642,606
- $289,173
Subtotal
$353,434
Less allowance for return on cost of improvements, being 12.5 per cent of construction cost of $27,500/berth
- $309,375
Estimated net rental wet land
$44,059 say $45,000
Mr Dempsey was critical of Mr Dupont's approach to wet land rents which criticism was set out in a note (exhibit J) that as improvements are required to be ignored there was no evidence in the proceedings of wet land rents where there were no improvements and the lessee needed to construct the improvements in order to operate the marina. He considered there was no reliable basis of assessing the neutral value of wet land unless such evidence was available. All of the sales relied on by Mr Dupont fitted in a category of secondary reliance being a rent agreed between a lessor and sitting tenant. Primary reliance should have been placed on a new lease of unimproved wet land being entered into following reasonable marketing, according to Mr Dempsey, but this was not done.
(b) rent review approach (check method)
In relation to approach (b), described as a check method in the report, Mr Dupont submitted six comparable rent reviews under leases of marina properties, including a wide range of locations, size by number of berths (42 - 164 berths) and dates of rent review.
The comparable rent reviews were analysed on a rent per berth at rent review (which I note is a less voluntary bargain between the parties than may occur at letting or at lease renewal, potentially impacting the rent agreed) and percentage turnover basis, deriving a range of $375 - $563 rent per berth pa and 6.95 - 17 percentage turnover, concluding "in general terms they ranged from 7% to 9% of berthing turnover". Mr Dupont adjusted his analysed range of $375 - $563 rent per berth and adopted $500 per berth pa for application to the subject marina being "appropriate, after allowing for size". Mr Dupont applied his adopted rate of $500 per berth per annum to the subject 90 berth marina and derived a rent payable of $45,000 per annum which supports the valuation based on sales and rentals.
Oral evidence of valuers on Mr Dupont's approach
Mr Dupont was cross-examined about his approach to the dry and wet land. In relation to dry land comparable sales, he agreed with counsel that he did not identify explicitly all of the numerous adjustments made for any individual sales to ensure comparability with the property. A number of these were identified in oral evidence including site features, timing of sale/lease, topography, size, location, whether mortgagee sale, inter alia. About 16 adjustments relevant to the sales were identified overall. Mr Dupont did not consider he needed to adjust each individual sale.
In relation to the wet land rents per berth resulting in yields of $45,000 pa he agreed these marinas were leased from the Crown pursuant to s 143 of the CL Act. He considered despite this that these were evidence of market transactions as either party could walk away. He agreed the transactions did not involve competition in the market place. He agreed all the rent reviews, which he had largely undertaken for the Land and Property Management Authority (LPMA), reflected his view of s 143(1). He considered Soldiers Point was most comparable market rent review. He agreed that relevant factors such as time of the rent review, location and whether a breakwater was required were relevant adjustments. He agreed there was no relationship between the rents of wet land identified in table 19.6.2 (method (a) sales and rentals approach) and the average tariff in table 20.3 (method (b), his check method). The construction cost per berth of $27,500 per month was less than the quantity surveyor Mr Collin's estimate ($56,000). He agreed there was no evidence in his report to support $27,500 as this was based on his experience of obtaining quotes from $25,000 to $30,000. In oral evidence Mr Dupont stated that he applied the industry standard identified in Rawlinsons, Australian Construction Handbook, 29th ed (2011) Rawlinsons Publishing. He agreed his check method was sensitive if, for example, construction cost per berth of $31,000 was applied.
Mr Dempsey was critical of method (b), the check method, as being too sensitive to changes and provided no evidence of market value. In reexamination Mr Dupont confirmed that he outlined three methods for valuing the wet land.
Mr Dupont did not agree that the permitted use is the existing development only. The assumed use is as a motel and a marina which is much cheaper to build and will produce an income. He agreed that the lessee would have to assume it could be built at 2010 dollars and that consent would have to be obtained. He agreed that a consent for a marina could be difficult to obtain. He did not agree with the assumption made by Mr Dempsey that the potential lessee would build something that exceeds the income. He did not consider it was highly speculative if the use was permitted under the zoning. Valuers value land all the time on the basis of its zoning and its permitted use based on the likelihood of a development happening. He agreed he had relied on only his experience about whether or not consent for development would be likely to be obtained. He is valuing the underlying value of the land that is capable of development for its permitted use and pretending the improvements do not exist. He agreed the risk would change depending upon the mix of uses to be carried out, comparing a conference centre, resort and marina as these are different markets which can also overlap. The most comparable transaction is the Batemans Bay development. He agreed that the subject site is an unusual property with a very small market which will affect the value. The market has to assume that all the uses are being carried out, not picking and choosing between the uses. There needs to be an adjustment to the comparable sales to take into account that there is less competition in the market for all of the uses compared to just one such as a marina. Mr Dupont took this into account in his valuation by adopting the lowest possible range of commercial land value.
In relation to the Batemans Bay development, Mr Dupont considered this was very similar to the subject property. As a result of planning delays and economic conditions the tenant could not comply with all the conditions of the lease as that required substantial civil and construction. Mr Dempsey considered that no reliance could be placed upon the lease renegotiation at Batemans Bay. He tendered notes of a discussion with an officer of the Lands Department (exhibit H). The Lands Department was anxious for the project to remain viable. The lease was varied in order for this to occur, including to allow deferral of the requirement for building tourist accommodation. The lease negotiation was not an arm's length negotiation between the parties.
Appellant's submissions on Mr Dupont's evidence
If comparable sales are to be used these must be truly comparable per Maurici v Chief Commissioner of State Revenue [2003] HCA 8; (2003) 212 CLR 111 at [18]. Further a process of reasoning is required where sales differ in substantial ways from a subject site in order to apply these: Leichhardt Municipal Council v Seatainer Terminals Pty Ltd (1981) 48 LGRA 409 at 414. Adjustments made to comparable sales can be explicit and implicit to reflect adjustments for differences. Too much adjustment renders the use of comparables unsafe: Graham Trilby Pty Ltd v Valuer General [2009] NSWLEC 1087.
In relation to the hotel (dry land lease), Mr Dupont identified six sales in table 18.8.3 (exhibit 1) used by him to derive a rate per room of $25,000. Such an approach to valuation should be rejected as this approach requires even greater adjustments than were required in the dry land comparable sales exercise. The hotel comparable sales identified in table 18.7.2 of Mr Dupont's report required 16 different adjustments, 8 being identified in his report and a further 8 identified in cross-examination. Without making an adjustment for each sale the range of comparability cannot be determined. Secondly, a large number of adjustments for each sale were necessary, also unsatisfactory in such a valuation approach. Thirdly, Mr Dupont's reasoning process was unclear. These comparable sales were submitted to be unreliable for these reasons. Further criticism of Mr Dupont's approach was directed at the lease comparables considered by Mr Dupont to derive a rate per room.
Mr Bell provided a statement of evidence (exhibit D) which was not challenged by the Minister or Mr Dupont and the correctness of his valuation was accepted. Mr Bell is critical of an approach to value based solely on a value per room basis. Further criticism made is that there were differences in the facilities provided, the standards of tourist accommodation provided, income mix and the competitiveness of the local market. The most comparable properties were said to be Gan Gan Road which is identified as showing $12,000 per room. It is unknown how this supports a rate of $25,000 per room. The other sale of Cams Wharf shows a raw rate of $41,666. Mr Dupont accepted that if explicit adjustments are to be made an upward adjustment is required for the mortgagee in possession and size comparison. If adjusted for time allowing for a downward reduction of 10 per cent it is hard to see how this lease can achieve a rate much lower than $40,000 per room. It is unclear how it supports $25,000 per room.
The Batemans Bay lease negotiation is not comparable given that a variation to the lease was necessary in order for it to continue to be viable. It is not an arm's length transaction as identified by Mr Dempsey.
In relation to the marina (wet land sales), Mr Dupont uses these to derive a yield of 12.5 per cent in table 20.9 with which there is no disagreement. The value of the wet land by consideration of identified comparable lease transactions is simply not comparable. Table 19.6.2 identifies six transactions but these do not reflect market transactions, being market reviews negotiated between the LPMA and the lessees. Three of the leases were negotiated by Mr Dupont. The remaining three transactions are a small sample and have additional limitations (Coffs Harbour, Marks Point, Port Macquarie). These produce a range of less than $375 up to $489 and $512. These do not support $500 per berth pa.
Mr Dupont applies an income model as a check method of the $45,000 wet land range although he accepts there is no linear relationship between the wet land rates (table 19.6.20) and the average tariff per berth per month (table 20.3).
The evidence of construction cost of $27,500 per berth per month is lacking in his evidence being referred to only in the witness box as being Rawlinsons' rate of $27,500. Additional costs must be added to that figure such as electricals, and boardwalk construction. According to the quantity surveyor Mr Collins the cost of existing marina berths is $56,000. If the cost per berth is $31,416 the result is zero rent. This check method supports the Appellant's approach that in the current market the development is not viable.
As the sales are not comparable, at best they overestimate the rate per square metre of $200, the rate per room of $25,000, the rate per berth ($500 per berth) and underestimate the construction cost per berth of $27,500 per month. The Court doing the best it can as judicial valuer must redetermine the rent and should substitute its own determination in these circumstances, as occurred in the Moneybox case at first instance where the Court adjusted the amount on the basis of the evidence before it. At par 18 of the Appellant's closing written submissions in reply a table identifies the different amounts for rent based on leasehold (1993 costs) of $138,683, and leasehold (2010 costs) of $99,508. The 2010 costs are applicable and there should be a downwards adjustment of rent to reflect a different market for the combined uses of hotel and marina.
Minister's submissions on Mr Dupont's evidence
The Minister submitted that the evidence of Mr Dupont provided a clear basis for his expert opinion and, in particular:
(i) He adopted a conservative value at virtually the lowest end of the scale for such commercial parcels in the region.
(ii) Values below that ascertained by Mr Dupont would have led into the region of value for industrial land, and the property, one would imagine, was clearly more valuable than an industrial site.
(iii) Mr Dupont's approach to the process of adjustment is a conventional approach and is a legitimate means of expressing an expert opinion on the issue of value.
(iv) Mr Dupont did not retract his opinion in any substantial regard. He has made several concessions in the process of giving his expert opinion, both in the joint conference and in Court, but those concessions do not ultimately affect the opinion that the market rent determined by the Minister was at least the market rent for the land, although possibly lower than the market rent.
(v) Mr Dempsey has provided no alternative evidence of comparable value.
(vi) While the opinions of Mr Dupont could be rejected if the Court considered that he was an unsatisfactory witness (a submission the Minister would obviously reject), the nature of the evidence is not such that one could simply take Mr Dupont's evidence and substitute another value.
(vii) In any event the Court ought not to substitute any lower value than that adopted by Mr Dupont, given his general evidence as to the conservative approach that he took and his conclusion that the values he has finally adopted put the unimproved market rental at almost the bottom end of the range.
The evidence either establishes the Minister's determination was correct, or if Mr Dupont's evidence is rejected, would leave the Court without any evidence suggesting that there had been any error by the Minister. On either assumption, the appeal should be dismissed.
Consideration
The Court has rejected the approach of the valuer Mr Dempsey. Because of the assumptions underpinning his approach Mr Dempsey did not consider there were any comparable sales. The only other valuation evidence available is that of Mr Dupont who adopted a comparable tourism use approach but his evidence is heavily criticised by the Appellant. Applying this approach Mr Dupont arrived at a higher amount of rent payable per annum ($140,000 applying 1993 reclamation costs of $46,317) than the rent of $136,400 redetermined by the Minister. The Minister does not ask for the higher amount of rent to be imposed, simply that the Minister's redetermination be affirmed. The amount of rent according to the Appellant should be $99,508 if 2010 reclamation costs of $85,492 are applied. The amount of market rent is not a precisely definable single figure so that no single figure is the correct answer. The Appellant submits that if Mr Dupont's evidence is accepted a lower amount of rent should be determined doing the best the Court can in considering Mr Dupont's evidence. In cross-examination, Mr Dupont agreed that the property is unusual with a small market, which will also affect value.
It is well established that if comparable sales or transactions are available the direct comparison of these is a conventional method of valuation. A Hyam, The Law Affecting the Valuation of Land in Australia, 4th ed (2009) Federation Press identifies this as the most widely accepted method of determining market value of land (and by analogy market rent), citing at p 190 Redeam Pty Ltd v South Australian Land Commission (1977) 40 LGRA 151 at 156. While all comparable sales evidence may be considered relevant and so cannot be disregarded, the level of relevance of different comparable sales to the property may vary leading to the valuer attributing differing weight to different comparable sales. In Brewarrana Pty Ltd v Commissioner of Highways (1973) 6 SASR 541 at 551, Wells J observed:
... there is no hard and fast rule by the application of which a valuer may, whatever the circumstances, draw the line that clearly separates the sales that are comparable from those that are not.
The range of tourism use sites identified by Mr Dupont must be acceptable at a broad level, the first step of selecting comparable properties. The Appellant relied on SeatainerTerminals to criticise Mr Dupont's approach as failing to identify truly comparable sales. The same criticism was made in relation to Mr Dupont's tourist use approach. While it is entirely correct to identify the importance of selecting comparable sales that have as much comparability as possible to the property it is obvious that each case will depend on its own circumstances. This property is not so unusual as to be almost unique, unlike the property being valued in Seatainer Terminals.
The second step in valuation requires the adjust of comparable properties in relation to the subject property. Biscoe J described the second step in Holcim (Australia) Pty Ltd v Valuer-General [2009] NSWLEC 225 at [31]:
Accepted valuation practice permits sale adjustments for differences, such as in location, area and time to enable valuers to have comparable values which, following adjustment, account for the various differences with the subject property. Such adjustments are generally based on a reasoning process drawing on the skill and experience of the valuer and are undertaken to derive an opinion of value through a deductive process. Because properties are rarely identical, [explicit and/or implicit] adjustments for differences are obviously necessary but caution is required through making as few adjustments as possible, in a consistent manner, to ensure the reliability of the comparable sale when related to the subject property. Too many adjustments potentially render the comparable sale unsafe to rely upon. Caution is therefore required where large adjustments are to be made. Reflecting the significant roles of skill, experience and personal assessment in the adjustment process, the scope for differences in the quantum and direction of adjustment between valuers can be considerable.
See also Tomago Aluminium Company Pty Limited v Valuer General [2010] NSWLEC 4 at [44] (per Pepper J who cited the above passage with approval) and Graham Trilby at [36].
In Brewarrana at 551, Wells J observed:
It is, in my view, all a matter of degree: some adjustment is always necessary; too much adjustment will render it unsafe to use a sale, subject to such a degree of adjustment, for the purpose of the reasoning process in the comparable sales method.
As identified in Brewarrana the issue in relation to comparable sales is the weight which should be attributed to them for application to the subject property (the third step in such a valuation process). A transparent process of explicit adjustment leading to an explicable assessment of value is preferred to an opaque process of implicit adjustment leading to an assertion of value (Jessica Investments Pty Ltd v Valuer General [2008] NSWLEC 1375 at 6).
Hotel (dry land) - tourism use
Mr Dupont has undertaken an implicit adjustment approach in relation to his comparison of tourism use properties for dry land given the lack of explicit adjustment identified in his report and his oral evidence. He has not set out in his written report a clear three step process which enables scrutiny of the facts and assumptions relied upon by him in reaching his conclusions. I agree with the Appellant's counsel's submission that Mr Dupont started with individual transactions of potentially low comparability. Analysis of his selection of comparable sales and adjustments is difficult in the absence of explicit reasoning. A large number of adjustments were apparently required in light of his written and oral evidence particularly in cross-examination by the Applicant's counsel. The valid criticisms of Mr Dupont's evidence are highlighted in the Appellant's submissions above at par 100 - 101 and I do not need to repeat them here. Pepper J in Tomago stated at [45]:
... it is necessary to make explicit adjustments for differences so that the adjustment process is sufficiently logical. An implicit process comprising a single adjustment, rather than separately itemised and reasoned adjustments, risks rejection for want of transparency.
It is important to identify at this point the obligations imposed on expert witnesses giving opinion evidence to a court of the statutory requirements imposed on them. Part 31 of the Uniform Civil Procedure Rules 2005 (the UCPR) applies in Class 3 proceedings as it is not excluded in Sch 1 column 4. Rule 31.23(1) requires an expert to comply with the expert witness code of conduct in Sch 7 "Expert witness code of conduct" (the Code). Clause 5(1)(b) of the Code requires that an expert's report include "the facts, and assumptions of fact, on which the opinions in the report are based ..." Clause 5(1)(c) of the Code requires that an expert report identify the reasons for each opinion expressed. UCPR r 31.27(1) repeats cl 5(1) of the Code. The importance of identifying assumptions and facts relied on by experts was identified in the Court of Appeal in the context of s 56 and s 79 of the Evidence Act 1995 (providing for the tender of expert opinion evidence) by Heydon JA (as he then was) in Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705 at [85] confirmed recently in the High Court in Dasreef Pty Ltd v Hawchar [2011] HCA 21; (2011) 243 CLR 588 at [37] per French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ. Makita at [85] states:
In short, if evidence tendered as expert opinion evidence is to be admissible, it must be agreed or demonstrated that there is a field of "specialised knowledge"; there must be an identified aspect of that field in which the witness demonstrates that by reason of specified training, study or experience, the witness has become an expert; the opinion proffered must be "wholly or substantially based on the witness's expert knowledge"; so far as the opinion is based on facts "observed" by the expert, they must be identified and admissibly proved by the expert, and so far as the opinion is based on "assumed" or "accepted" facts, they must be identified and proved in some other way; it must be established that the facts on which the opinion is based form a proper foundation for it; and the opinion of an expert requires demonstration or examination of the scientific or other intellectual basis of the conclusions reached: that is, the expert's evidence must explain how the field of "specialised knowledge" in which the witness is expert by reason of "training, study or experience", and on which the opinion is "wholly or substantially based", applies to the facts assumed or observed so as to produce the opinion propounded. If all these matters are not made explicit, it is not possible to be sure whether the opinion is based wholly or substantially on the expert's specialised knowledge. If the court cannot be sure of that, the evidence is strictly speaking not admissible, and, so far as it is admissible, of diminished weight. ...
Heydon J in Dasreef (in dissent on other issues) identified the need to have strict admissibility requirements for expert evidence. While Mr Dupont's report has been admitted into evidence, Heydon J's comments underscore the importance of experts identifying their reasoning process. His Honour states:
[58] The tendency of experts to dominate proceedings creates numerous other perils for the integrity of the trial process. One is that experts, who ex hypothesi know much more about their fields of expertise than judges and juries do, and who know of that vast disparity, will take over the conduct of cases and exert excessive influence over their outcomes. Another is that experts, no doubt contemptuous, often justifiably, of the ignorance of the lawyers, will appoint themselves as advocates for the party calling them. Another is that experts render their evidence less than useful by giving it in a form conventional in their discipline but not conforming to the rules of evidence. Another is the tendency of experts to drift into giving the courts reasons why they should accept or reject the evidence of lay witnesses on matters of primary fact.
[59] Finally, and very importantly, there is increasing concern about the risk of injustice that may flow from unsatisfactory expert evidence. The stricter the admissibility requirements for s 79 tenders, the greater the chance that evidence carrying that danger will be excluded. (footnotes omitted)
I consider these remarks are equally relevant to the integrity of the court process in Class 3 proceedings where expert evidence is of high importance, is often complex, and when not in conformity with the Code is rendered less useful and in this case of no utility.
I have not inspected either the subject property or the tourism use sites relied on by Mr Dupont and therefore must rely entirely upon his written and oral evidence concerning the analysis, adjustment and application of the comparable sites. Having regard to the site area of the hotel at the subject property of 10,600 sqm, in my opinion Mr Dupont submitted no demonstrably relevant comparable sales on a tourism use basis. The comparable sales at Lot 7 Rafferty's Resort, Cams Wharf and 16 Crooked River Road, Gerroa could be considered to be indirectly relevant comparable sales. Having regard to site area, I consider the remaining comparable sales on a tourism use basis relied on by Mr Dupont to be of such limited relevance that they provide little assistance to me and I have not considered them further. I note that Lot 7 Rafferty's Resort, Cams Wharf and 16 Crooked River Road, Gerroa were analysed by Mr Dupont to indicate a range of $41,666 - $243,333 unimproved rate per room. I note that Mr Dupont's adjusted rate range of $23,817 - $41,666 unimproved rate per room is not supported by the unadjusted range of $41,666 - $243,333 unimproved rate for those tourism use comparable sales. Consequently, I do not consider that Mr Dupont has adequately identified how his alternative use approach provides a satisfactory basis upon which to draw conclusions regarding the value of the hotel site. How Mr Dupont applied his adopted rate of $25,000 per room to the property is unclear from his evidence.
I consider the absence of an explicit process of analysis by Mr Dupont exposing the reasoning and logic adopted significantly limits the usefulness of his expressed opinion of value of the hotel. The Appellant's counsel's cross-examination highlighted the large number of necessary adjustments and the failure to identify these in Mr Dupont's report. Applying the obligations of expert witnesses referred to in par 116 - 117 above, as the facts and assumptions made by Mr Dupont in his report are not explicit nor were they sufficiently elucidated in oral evidence, I consider this part of his report and conclusions therein should not be given any weight.
Marina (wet land) valuation
The Appellant's counsel was also critical of Mr Dupont's analysis of comparable sales of marina sites in general as highlighted in cross-examination and by Mr Dempsey because these were said not to be market transactions, including the Bateman's Bay lease which was submitted by Mr Dupont to be most comparable. I consider as did Mr Dupont in cross-examination that the property is unusual and that there are not a large number of potentially comparable sites. The Crown is likely to be a lessor for many or all of these. While some criticism may be warranted on this basis, particularly of the Batemans Bay transaction, some allowance in identifying comparable sales may also have to be made for these unusual circumstances.
Further and more pertinent criticism in this matter can be made in relation to the five possible variables identified in Mr Dupont's complex approach to the marina rent, all of which must require adjustment. These are rate per berth per month of $770, vacancies of 15 per cent, expenses of 45 per cent and return of 12.5 per cent and costs per berth of $27,500. The Appellant accepted that Mr Dupont had gone to some effort to attempt to demonstrate why these numbers were appropriate for the first to fourth factors but not the last concerning the cost per berth. I consider more could and should have been done to identify how these variables were arrived at in his written report which should disclose the basis for his reasoning and the assumptions underpinning it.
A clearly articulated logical reasoning process which affords transparency and demonstrates an appropriate level of support for each of the key assumptions made was lacking in Mr Dupont's report and was not cured in oral evidence. It was difficult to get a handle on the approach to the marina valuation Mr Dupont ultimately adopted. While this has been summarised above at par 84 - 93 to the best of the Court's ability precisely how the various parts of the analysis was undertaken was not immediately clear in Mr Dupont's written report. For each of the four variables identified in table 20.9 of monthly tariff, outgoings, vacancy rate and construction cost per berth as inputs into the valuation methodology to determine the wet land rental, the report should have far better identified the underlying assumptions, the evidence in support of and the process for derivation of each variable. Where there are a number of variables the cumulative effect of possible errors is magnified giving rise to lack of confidence in the outcome.
For example, as the Appellant's counsel identified, a change in the cost of construction could render the rent as zero. Mr Dupont adopted $27,500 as the construction cost per berth based on Rawlinson, that source being identified only in oral evidence, not in his report. The Appellant criticised this approach in light of the evidence of the quantity surveyor Mr Collins whose costing of $56,000 is given for berths if built now at the current marina. Mr Dupont adopted the higher end of the range of costs in Rawlinson which are designed to show the typical cost for generic marina berths. Had Mr Collins' figure or another sum greater than $27,000 been adopted there was a consequential reduction in the rent calculated. The rent reduction was substantial depending on the construction cost adopted.
The obligations placed on an expert to articulate his or her reasoning are identified above in par 116 - 117. Mr Dupont should have done more to identify the steps in his reasoning to enable the Court to assess his opinion evidence. I also do not consider I should give the section of his report on the valuation of the marina any weight.
I am not rejecting the valuation approach of Mr Dupont in general. I accept that there are challenges to the determination of market rent of a less common property such as the subject in light of the principles identified in s 143(1) of the CL Act. The Court must however be able to understand the valuation approach taken in sufficient detail to conclude for itself what the appropriate determination is in order to properly discharge its functions under s 142(6) of the CL Act. My finding should not be seen as a criticism of Mr Dupont's professional expertise or longstanding valuation experience.
In relation to the issues raised by the parties, issue 4 must be answered that the transactions identified are not capable of adjustment by me. I have not therefore considered whether 1993 or 2010 reclamation costs ought apply. An amount of rent is not identified by me (issue 5).
Conclusion
I have rejected the valuation approach of the Appellant's valuer. I have not given any weight to the valuation evidence of the Minister's valuer. In these circumstances the appeal should be dismissed given the wide powers of the Court on appeal, as discussed above in par 14 - 15, which includes power to affirm the Minister's redetermination of rent. The Court is not in a position to substitute its own opinion were it so minded. The Minister's redetermination of $136,400 pa is affirmed and the Appellant's appeal is dismissed. Costs should be reserved.
Orders
The Court makes the following orders:
1. The appeal is dismissed.
2. The Minister's redetermination of rent of $136,400 pa is affirmed pursuant to s 142(6) of the Crown Lands Act 1989.
3. The exhibits are to be returned.
4.Costs are reserved.
Decision last updated: 12 April 2012
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