Wardy v NSW Trustee and Guardian

[2021] NSWCA 121

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:

Wardy v NSW Trustee and Guardian [2021] NSWCA 121

Hearing dates:

1 March 2021; 2 March 2021

Date of orders:

4 June 2021

Decision date:

04 June 2021

Before:

Macfarlan JA at [1];
Meagher JA at [72];
White JA at [73]

Decision:

(1)   Appeal dismissed with costs.

(2)   The appellant’s notice of motion filed on 2 February 2021 dismissed with costs.

(3)   Leave granted to the respondent to file a notice of cross-appeal in the form provided to the Court.

(4)   Direct the respondent to file and serve its notice of cross-appeal within 14 days of the date of this judgment.

(5)   Allow the cross-appeal.

(6)   Pursuant to the cross-appeal, set aside Declaration (5) made by Slattery J on 29 January 2020.

(7)   Order the respondent to pay the appellant’s costs of the supplementary submissions filed in this Court.

(8)   Otherwise make no order as to costs of the cross-appeal.

Catchwords:

SUCCESSION – appropriate substitute for specific devise – property subject of specific devise sold by administrator to pay debt – need to put specific devisees in materially the same position that they would have been in if the sale had not occurred – how rights of beneficiaries should be adjusted –whether substitution of specific property from residuary real estate appropriate – need for equivalence in value

VALUATION – courts and tribunals – appeals – whether judge erred in discounting value of property for contingencies – acceptance of expert evidence required evaluative conclusions to be made – standard of appellate review analogous to that described in House v The King

SUCCESSION – trusts and trustees – judicial advice, Trustee Act 1925 (NSW), s 63 – whether judicial advice given – parties concurred in primary judge himself determining the issue of what adjustment of the rights of the beneficiaries should be made – broad powers of the Court under UCPR r 54.3

Legislation Cited:

Succession Act 2006 (NSW)

Supreme Court Act 1970 (NSW), sub-ss 75A(7), (8)

Trustee Act 1925 (NSW), s 63

Uniform Civil Procedure Rules 2005 (NSW), r 54.3

Cases Cited:

Akins v National Australia Bank (1994) 34 NSWLR 155

Chaworth v Beech (1799) 4 Ves Jun 555; 31 ER 285

Cherry v Boultbee (1839) 4 My & Cr 442; 41 ER 171

Ewer v Corbett (1723) 2 P Wms 148; 24 ER 676

Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1981) 146 CLR 336; [1981] HCA 4

House v The King (1936) 55 CLR 499; [1936] HCA 40

Joyce v Cam [2004] NSWSC 621

Suttor v Gundowda Pty Ltd (1950) 81 CLR 418; [1950] HCA 35

TTY167 v Republic of Nauru [2018] HCA 61; (2018) 93 ALJR 111

Wardy v Salier [2014] NSWSC 473

White v Redding (2019) 99 NSWLR 605; [2019] NSWCA 152

Texts Cited:

J D Heydon, M J Leeming and P G Turner, Meagher, Gummow & Lehane’s Equity Doctrines and Remedies (5th ed, 2014, LexisNexis Butterworths)

Category:

Principal judgment

Parties:

Mr John Wardy (Appellant)
NSW Trustee and Guardian (Respondent)

Representation:

Counsel:
W G Muddle SC (Appellant)
M K Meek SC / C Coventry (Respondent)

Solicitors:
Paul Marsh & Associates (Appellant)
Glass Goodwin (Respondent)

File Number(s):

2020/62824

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity

Citation:

[2020] NSWSC 18

Date of Decision:

29 January 2020

Before:

Slattery J

File Number(s):

2016/120350

HEADNOTE

[This headnote is not to be read as part of the judgment]

Mr Edmond Wardy (the deceased) died on 19 July 2009. His wife (Hassiba Wardy) and his six children (Messrs John, William and Sam Wardy from his first marriage and Messrs Anthony, Roger and Robert Wardy from his second marriage to Hassiba) survived him. By cl 3(iv) of his last will the deceased left to Hassiba a life estate in a property located on Cleveland Street, Redfern, with her three children to receive the property in remainder. The Cleveland Street property was however sold by the interim administrator to pay a taxation debt of the estate. The rights of the beneficiaries therefore needed to be adjusted to put those affected by the sale of the Cleveland Street property in materially the same position that they would have been in had the sale not occurred. The beneficiaries of the residuary estate were the deceased’s six children.

A contested hearing as to the adjustment to be made occurred before the primary judge. The administrator contended that it was justified in appropriating another property situated on George Street, Redfern (part of the residuary real estate) in substitution for the Cleveland Street property; relief which was not opposed by Hassiba or her children. The appellant, Mr John Wardy (a son of the deceased’s first marriage), however opposed that relief and sought various contrary declarations as to the appropriate substitute property.

The primary judge found that the administrator was “entitled and authorised” to substitute the George Street property for the Cleveland Street property because each had the same “current value”, and made a declaration as to how the burden of the costs of the substitution were to be borne. The appellant then appealed to the Court of Appeal.

The principal issues on appeal were:

(1)   Whether the primary judge erred in finding the George Street property was an appropriate substitute when it was allegedly a “conceptually different type of property” to the Cleveland Street Property;

(2)    Whether the primary judge erred in making or authorising the substitution in the absence of evidence of Hassiba being “ready, willing or able” to pay her declared proportion of the costs of the substitution;

(3)    Whether the primary judge erred in discounting the value of the George Street property by 25% for contingencies;

(4)    Whether the primary judge erred in concluding that the value of the George Street property was diminished by the existence of heritage issues;

(5)    Whether the primary judge erred in declaring the proportions in which the administrative expenses were to be borne by the beneficiaries (and whether leave should be granted to allow the respondent to file a notice of cross-appeal to put this ground).

The Court dismissed the appeal, granted leave to file the notice of cross-appeal and allowed the cross-appeal.

Per Macfarlan JA (Meagher and White JJA agreeing):

(1) The authorities speak of the need for an equivalence in “value” between the substituted and substitute properties; there is no requirement that the properties have substantially the same characteristics: [20]. The different income earning potentials of the properties were taken into account in the assessment of value and that was all that was required on the specific facts of this case: [20]-[23].

Joyce v Cam [2004] NSWSC 621, applied. Ewer v Corbett (1723) 2 P Wms 148; 24 ER 676; Chaworth v Beech (1799) 4 Ves Jun 555; 31 ER 285, referred to.

(2) The question of whether the George Street property was an appropriate substitute was separate from other aspects of the administration of the estate such as how the costs of the substitution were to be borne and whether the administrator had the means of recouping those costs from those beneficiaries: [28]. These issues therefore fell outside the ambit of what the primary judge was required to decide: [28]. In any event, the state of the evidence was not such that an inference could readily be drawn that Hassiba could not fund her share of the costs of the substitution: [29].

(3) The primary judge’s acceptance of expert evidence and subsequent application of a discount for contingencies concerned issues requiring evaluative conclusions in relation to the formation of which his Honour had the considerable advantage of seeing and hearing the expert witnesses give their evidence: [42]. The standard of appellate review was therefore analogous to that described in House v The King: [42]. The appellant did not establish significant factual or legal error, nor did he demonstrate that his Honour’s conclusions were unreasonable: [43].

House v The King (1936) 55 CLR 499; [1936] HCA 40, applied. Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1981) 146 CLR 336; [1981] HCA 4; White v Redding (2019) 99 NSWLR 605; [2019] NSWCA 152, referred to.

(4) The primary judge gave persuasive reasons for rejecting one expert’s views on this issue and no arguable basis for this Court taking a different view was identified by the appellant: [50].

(5) The hearing below proceeded on the agreed basis that the costs of the property substitution were to be borne in the percentages stated in the primary judge’s declaration: [59]. However, the respondent was granted leave to file the notice of cross-appeal because the point it sought to raise had merit; was a point of law; and would not unfairly prejudice the appellant: [65]-[68]. The administration expenses should not be borne according to percentages estimated in 2014 by reference to evidence of asset values then applicable, but should be borne in the percentages estimated to be applicable at or about the time of the property substitution or such other date as is found to be relevant: [66].

Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 438; [1950] HCA 35; TTY167 v Republic of Nauru [2018] HCA 61; (2018) 93 ALJR 111, referred to.

Judgment

1. MACFARLAN JA: This is an appeal from a decision of Slattery J in NSW Trustee and Guardian v Wardy [2020] NSWSC 18 relating to the estate of the late Mr Edmond Wardy who died on 19 July 2009. Mr Wardy’s widow Hassiba Wardy and three children from their marriage (Anthony, Roger and Robert) and also three children from his first marriage (John, William and Sam) survived him. Mr John Wardy is the appellant and the respondent is the administrator of the estate.

2. By cl 3(iv) of his last will the deceased left to Hassiba a life estate in a property located on Cleveland Street Redfern (“the Cleveland Street property”), with her children (Anthony, Roger and Robert) to receive the property in remainder. The interim administrator sold that property at auction in November 2012 to pay a substantial taxation debt of the estate.

3. It is common ground between those interested in the estate that the rights of its beneficiaries need to be adjusted to put those affected by the sale of the property (Hassiba and her three children) in materially the same position that they would have been in if the sale had not occurred. That is, part of the deceased’s residuary real estate (to which all six children were entitled equally under the will) and his residuary personal estate (to which Hassiba is entitled) needs to be drawn on to compensate the specific devisees of the Cleveland Street property for its sale. This need was referred to by White J (as his Honour then was) in a judgment given in 2014 in relation to family provision claims against the estate (Wardy v Salier [2014] NSWSC 473 at [34]-[37]). I note that John Wardy subsequently purchased the interests of his brothers William and Sam in the residuary real estate with the result that he is now entitled to half of it.

4. Subsequent to White J’s decision the respondent sought judicial advice under s 63 of the Trustee Act 1925 (NSW) concerning the adjustment to be made. By judgment of 26 October 2017 Slattery J found that the issue was not apt for the giving of judicial advice in a summary manner but instead should be determined after a contested hearing (NSW Trustee and Guardian v Wardy [2017] NSWSC 1466).

5. A contested hearing then occurred, although the relevant relief sought by the administrator’s statement of claim remained:

“A declaration pursuant to section 63 Trustee Act 1925 that the plaintiff is justified in appropriating the Redfern Property to the share of the estate held for Hassiba Wardy as life tenant and in remainder for Robert Wardy, Roger Wardy and Anthony Wardy as tenants in common in equal shares, in substitution for the asset devised to Hassiba Wardy, Robert Wardy, Roger Wardy and Anthony Wardy in Clause 3 (iv) of the will dated 7 November 1992 of Edmond Wadih Wardy.”

6. The reference to the “Redfern property” was to a multilevel building forming part of the residuary real estate and situated on George Street, Redfern (“the George Street property”). In its submissions on appeal, the administrator described this property as follows:

“The George Street property is a multi-level building in an area of Redfern zoned R1 general residential. Reconciliation Park is located on the northern side of the property and there is a large mural on one of the walls of the property. The land size is 1,252 square metres and the building area is 2,990 square metres. At all material times, the improvements on the George Street property (constructed in about the 1920s) have comprised an industrial warehouse, 4 shops on the ground floor facing George Street, approximately 40 residential flats and 1 car parking space.”

7. In the same submissions, the administrator described the Cleveland Street property devised by cl 3(iv) of the deceased’s will as follows:

“The Cleveland Street property is a two storey building located on the corner of Cleveland and Baptist Streets in Redfern and was zoned ‘B2 Local Centre’ as at October 2016. The land size is 809.4 square metres and the net lettable area is 1,396 square metres. The improvements were constructed in or about the 1930s. There are five commercial tenancies on the ground floor and one commercial tenancy on the upper floor. At the time of the sale, two of the tenancies were vacant and the annual net rent was $240,997.”

8. That hearing, occupying five days with supplementary written submissions subsequently lodged, took place before Slattery J. Hassiba and her children did not oppose the granting of the relevant relief sought by the administrator (see [5] above). Its grant was however opposed by Mr John Wardy, the present appellant, who by his amended first cross-claim sought various contrary declarations as to the appropriate substitute for the Cleveland Street property.

9. Despite the form of the declaration sought (see [5] above), it does not appear that the hearing proceeded on the basis that the administrator sought judicial advice under s 63 of the Trustee Act. Instead, the parties concurred in the primary judge himself determining the issue of what adjustment of the rights of the beneficiaries should be made by reason of the sale of the Cleveland Street property. The basis upon which the Court could make such a decision was not articulated but is to be found in r 54.3 of the Uniform Civil Procedure Rules 2005 (NSW) which confers broad powers on the Court to make orders concerning estates without the need for the making of a general administration order.

10. By his judgment of 29 January 2020 the primary judge made declarations relevant to the present appeal to the following effect:

1. That the administrator “is entitled and authorised” to appropriate the George Street property to the benefit of those beneficiaries who would have been entitled to the Cleveland Street property.

2. That each of those properties has “a current value” of $7,300,000.

3. That the burden of the costs of the substitution referred to in (1) should be borne as to 86.5% by the beneficiaries entitled to the residuary real property of the estate and as to 13.5% by the beneficiary entitled to the residuary gift of personalty. (This was Declaration (5) made by his Honour).

11. Mr John Wardy’s appeal to this Court, in the form that it was ultimately advanced, relied upon grounds to the following effect:

1. The primary judge erred in holding that the George Street property should be substituted for the Cleveland Street property because the former was “a conceptually different type of property” as a result of its different income earning potential (Grounds 1, 2 and 3).

2. The primary judge erred in making or authorising the substitution in the absence of evidence that Hassiba was “ready, willing or able” to pay 13.5% of the costs of the substitution, she being the residuary personalty beneficiary and therefore, under his Honour’s orders, liable for that percentage of those costs (Ground 4).

3. The primary judge erred, when considering the value of the George Street property, in discounting by 25% for contingencies the value of that property calculated on the basis that the property could be used for “affordable housing” in accordance with the State Environmental Planning Policy (Affordable Rental Housing) 2009 (NSW) (Grounds 7, 8 and 14).

4. The primary judge erred in concluding that the value of the George Street property was diminished by the existence of heritage issues affecting its potential for redevelopment (Grounds 10 and 14).

12. In the course of the hearing in this Court the administrator sought leave to file a notice of cross-appeal challenging the declaration (Declaration (5)) as to the percentages in which the costs of the substitution of the George Street property for the Cleveland Street property should be borne as between the residual real estate and residual personalty beneficiaries. With the Court’s leave, the parties subsequently supplied written submissions in relation to that application.

13. For the reasons given below the appeal should be dismissed with costs and the administrator’s application for leave to file a notice of cross-appeal should be allowed with the consequent cross-appeal also being allowed.

DETERMINATION OF THE APPEAL

GROUNDS 1, 2, AND 3: SUBSTITUTION OF GEORGE STREET PROPERTY NOT APPROPRIATE BECAUSE OF DIFFERENCE IN INCOME EARNING POTENTIAL

The primary judgment

14. The primary judge made the following observations and findings relevant to this issue:

“[44] The experts have concluded that the George Street property was constructed in about the 1920s. At the time of valuation, and on the evidence thereafter, the improvements on the George Street property are in poor condition and require immediate repairs. They exhibit surface rust and peeling paint, cracks to internal walls, moisture damage under roof eaves, broken and damaged tiles to shopfront facades, moisture damage and possible concrete cancer, leaking box gutters and downpipes, some gutted unoccupied flats, possible non-compliant gas metering fittings and a possible white-ant infestation.

[45] Considerable capital expenditure is required to bring the George Street property up to a lettable standard. An allowance for this has been made in all valuations. Mr Besele [an expert witness called by the administrator] initially estimated an allowance of $346,000, which equates to $200 per square metre for these repairs and capital expenditure. The capital expenditure that all the valuers assumed was required to let the George Street property to its best advantage did not involve any structural improvement.

…

[276] … Mr John Wardy argues that in light of the ‘complete disparity’ of rental yields between the George Street property and the Cleveland Street property that the former should not be substituted for the latter. This submission should not be accepted. The Court's findings above do not show there is a ‘complete disparity’ in rental yields between the Cleveland Street property and the George Street property, whatever that expression is said to encompass.

[277] But more importantly the argument contains a fundamental error of principle concerning the valuations which the Court has now assessed. The capital market value of commercial and industrial properties of the kind the subject of these proceedings are assessed by one methodology on the basis of a capitalisation of maintainable earnings; and by another methodology, the direct comparison method, which also relies upon implicit judgments about maintainable earnings. Rental yields are one component of valuation methodology and the choice of capitalisation rate to be applied to those rental yields is an equally essential factor to derive the market value of a property.

[278] In approving whether the NSW Trustee can proceed with the proposed substitution to put the Hassiba Wardy interests [the interests of Hassiba, Anthony, Roger and Robert Wardy] ‘into the position [they] would have been in if the property the subject of the specific legacy had not in fact been sold’ the Court has used comparative market values of the George Street and Cleveland Street properties. This is a more comprehensive comparator or which includes a judgment about maintainable earnings and capitalisation rate. Merely to point to actual earnings, as distinct from maintainable earnings, is to use an incomplete and inappropriate measure to determine what position the Hassiba Wardy interests would have been in if the Cleveland Street property had not been sold.”

The appellant’s submissions

15. The appellant submitted for the following reasons that the primary judge should not have approved the substitution of the George Street property for the Cleveland Street property:

“(a) White J's holdings and findings in Wardy v Salie[r]; Wardy v The Estate of the late Edmond Wadih Wardy [2014] NSWSC 473, particularly at [34]-[37];

(b) The fact that the George Street property was a conceptually different type of property – viz, (1) there [was no] residential income component from the Cleveland Street property; (2) the George Street property has the potential income components: (a) residential being 42% and (b) commercial being 58%.

(c) The Cleveland Street property in light of clause 3(iv) of the will ([2020] NSWSC 18, [18]), properly construed, provided ‘approximately 5.6 per cent’ income return; and White J (in [2014] NSWSC 473, [37]) observed ‘and there is no basis for assuming that a like return could not be had from a substitute investment to the same value’; whereas the George Street property:

(i) as at the point in time whilst judgment was reserved ([2020] NSWSC 18 [31], [32]), evidence was put before the Court showing that the George Street property was in a derelict state with squatters and drug users, under the management and supervision of the respondent;

(ii) had little to no income being derived so as to meet the criterion in clause 3(iv) of the will ([2014] NSWSC 473, [37]);

(iii) even before the squatters etc moved into the George Street property, as found by the primary judge ([2020] NSWSC 18, [45]), ‘Considerable capital expenditure is required to bring the George Street property up to a lettable standard’;

(iv) was not [an] appropriate substitute for the Cleveland Street property.” (Some references omitted.)

16. The findings of White J referred to in (a) above were made by his Honour in the course of dealing with family provision claims under the Succession Act 2006 (NSW), for the purposes of which it was necessary for his Honour to consider the nature and value of, and entitlements to, the various assets of the estate. In relation to a substitute for the sold Cleveland Street property, his Honour said (at [37]):

“It will be a matter for the executor to determine what is an appropriate substitute investment having regard to the interests of the life tenant and remaindermen. The pre-tax annual return on the Cleveland Street property over 3.7 years between July 2009 and April [2013] (assuming a stable capital value) was approximately 5.6 per cent, and there is no basis for assuming that a like return could not be had from a substitute investment to the same value.”

The administrator’s submissions

17. In essence the administrator submitted, in reliance on the authorities to which I refer below, that in the circumstances of the present estate the primary judge was justified in identifying an appropriate substitute simply by reference to the respective values of the sold and proposed substitute properties. The administrator submitted that it was unnecessary that the two properties have substantially the same characteristics, for example in income earning potential, or in other respects.

Consideration

18. As the primary judge noted, the hearing before him proceeded on the basis that it was appropriate for him to apply the principles stated by Campbell J in Joyce v Cam [2004] NSWSC 621. The same can be said of the hearing in this Court.

19. In Joyce v Cam, Campbell J said at [49] and [50]:

“It has long been established that if an executor sold property which was the subject of a specific legacy or devise, or kept such property in case it needed to be sold for payment of debts, then the legatee is entitled, by a process of adjustment of the rights of beneficiaries between one another, to be put into the position he would have been in if the property the subject of the specific legacy had not in fact been sold, or kept in case it needed to be sold. In Ewer v Corbett (1723) 2 P Wms 148; 24 ER 676 Sir Joseph Jekyll MR said (at 149 of P Wms; 676 of ER), of a situation where an executor had sold a specifically devised leasehold term:

‘... an executor, where there are debts, may sell a term, and the devisee of the term has no other remedy, but against the executor, to recover the value thereof, if there be sufficient assets for the payment of debts.’

In Chaworth v Beech (1799) 4 Ves Jun 555; 31 ER 285 Sir Richard Arden MR said (at 567 of Ves Jun; 291 of ER):

‘It is no more than the case, that was put in the argument, of a legacy of a horse, which the executor refused to let go, [lest] there should be a deficiency of assets, and having used and worked the horse a considerable time, afterwards offered to return him: the legatee then may insist upon the value.’”

20. There is no suggestion in what Campbell J said that the rights of beneficiaries “to be put into the position [they] would have been in if the property the subject of the specific legacy had not in fact been sold” require a substituted property to have, as the appellant effectively submits it must, substantially the same characteristics as the property sold, or at least not be fundamentally different in character from it. Indeed, both of the authorities cited by Campbell J (Ewer v Corbett and Chaworth v Beech) speak of an equivalence in “value” which is precisely what Slattery J sought to achieve in the present case. The fact that on this basis the properties may have different characteristics such as one having wholly commercial rental income and one having a mixed residential and commercial rental income is therefore of no significance. As Slattery J pointed out, the differing income earning potentials of the properties was taken into account in the assessment of value.

21. There may however be cases in which substitution on the basis of equivalence in value may not fairly adjust the rights of the beneficiaries. For example, the income earning capability of the substitute property may be relevant if the property sold was left by will subject to separate life and remainder interests. Although that is the case here, Hassiba Wardy, who was to be the life tenant of the Cleveland Street property, accepts the substitution of the George Street property, notwithstanding that it does not have the same income earning capacity as the Cleveland Street property and that the substitution prima facie appears to prejudice her interest as life tenant. Her consent to the substitution occurring is not surprising as her three children were entitled under the will to the remainder interests in the Cleveland Street property.

22. Mr John Wardy has no bona fide interest in claiming that Hassiba is prejudiced when she does not assert that to be the case and, to the contrary, she supports the substitution of the George Street property. Mr John Wardy cannot be prejudiced by a non-income earning property being taken from residue and substituted for the income earning property being sold so long as, as the primary judge sought to ensure, the values of the properties are substantially equivalent.

23. In these circumstances, there was no error in the primary judge’s decision on substitution turning on the equivalence in value of the two properties, without any significance being attached to their ability to earn income. As his Honour pointed out, differences in income earning potential were reflected in the valuations. Once substitution of the George Street property is effected, the administrator will have to deal with it according to the wishes of the adult beneficiaries together absolutely entitled to it (that is, Hassiba and her three sons) unless it is required for payment of estate debts or administration expenses.

24. I add that I do not consider White J’s 2014 decision in Wardy v Salier (see [3] and [16] above) to be of assistance to Mr John Wardy’s appeal. His Honour’s reference to the substitute property having an income earning capacity similar to that of the sold property was understandable in light of the terms of the will dividing the interests in the sold property between a life tenancy and remainder. As I have indicated, it would prima facie be unfair to a life tenant to deprive him or her of the income entitlement to which a life tenancy gave rise. As events transpired this however ceased to be a consideration in the present case because the life tenant, Hassiba, was content for the substitution to be made on the basis of the similar values of the sold and substituted property. Effectively therefore, she and her three sons, who were together entitled under the will to the whole of the interests in the sold property, were presumably content to have themselves treated as a family unit. This simplified the administrator’s, and therefore primary judge’s, task in determining the appropriateness of substitution. It enabled regard simply to be had to the respective values of the properties.

25. Grounds 1, 2 and 3 should accordingly be rejected.

GROUND 4: ABSENCE OF EVIDENCE OF HASSIBA’S WILLINGNESS AND ABILITY TO PAY HER SHARE OF THE COSTS OF THE SUBSTITUTION

26. At first instance the appellant contended that substitution of the George Street property was inappropriate in the absence of evidence “led by either Hassiba or any of her children as to their respective financial positions”. The primary judge rejected that argument, stating that “[t]he Court does not have to go into the kind of analysis of the position of individual residuary beneficiaries that Mr John Wardy suggests here”.

27. On appeal, the appellant submitted, to the same effect, that the substitution of the George Street property was inappropriate “as no evidence was led at the trial in relation to Hassiba Wardy being ready, willing or able to pay or contribute 13.5%” of the costs of effecting the substitution. As at first instance, he did not provide any significant elaboration of that argument or reference to any authority to support it.

28. The administrator’s response on appeal was in my view correct, that is, that “[t]he question for determination by the trial judge related to the substitution of a property for a specific gift in the will that was sold to meet the estate’s debts; not the distribution of the estate”. The question of whether the George Street property was an appropriate substitute for the Cleveland Street property was separate from other aspects of the administration of the estate such as how the costs of the substitution were to be borne as between the residuary beneficiaries and whether the administrator had the means of recouping those costs from those beneficiaries. The rights of the specific devisees of the Cleveland Street property to have an appropriate substitution made from, or by drawing on, the residue of the estate were not dependent on resolution of these further questions. As the primary judge effectively concluded, those issues fell outside the ambit of the proceedings before him. This was so despite his making of Declaration (5) which was made in the circumstances described in [56] to [59] below.

29. In any event, the state of the evidence was not such that an inference, requiring rebuttal by Hassiba, could readily be drawn that Hassiba could not fund her share of the costs of the substitution. For one matter, she was entitled under the will to the former matrimonial home (a property in Kensington in Sydney). As well, the residuary personalty, to which she was entitled absolutely, appeared to include a debt in excess of $1 million plus interest owed by Linevale Pty Limited which the administrator said, through the evidence of its solicitors, would be “part used to fund” Hassiba’s contribution to the cost of the property substitution. Obligations of Hassiba to bear part of the property substitution costs could be set off against these entitlements (see generally the principle in Cherry v Boultbee (1839) 4 My & Cr 442; 41 ER 171 discussed in J D Heydon, M J Leeming and P G Turner, Meagher, Gummow & Lehane’s Equity Doctrines and Remedies (5th ed, 2014, LexisNexis Butterworths) at [39-110]). As the primary judge indicated, these matters, and certainly the detail of them, were however outside the ambit of what he was required to address in the proceedings.

30. By notice of motion returnable at the hearing in this Court the appellant sought leave to rely upon fresh evidence on the issue with which Ground 4 is concerned. In essence that evidence comprised documentary evidence tendered to indicate that the appellant has had difficulty obtaining from the administrator information as to the estate accounts and that such information as has been supplied supports the appellant’s contention that Hassiba will be, or at least may be, unable to pay her share of the costs of the property substitution. The appellant’s application for such leave should in my view be rejected.

31. To the extent that the evidence concerns matters occurring before the conclusion of the hearing at first instance (which seems to be largely the case), no “special grounds” for admission of the evidence have been established (s 75A(7) and (8) of the Supreme Court Act 1970 (NSW)). Ordinarily to establish special grounds it must be shown inter alia that the new evidence was not previously obtainable by reasonable diligence (Akins v National Australia Bank (1994) 34 NSWLR 155 at 160). That is not the case here because the appellant could have pressed at first instance for orders for production of documents by the administrator if he were able to persuade the primary judge of their materiality. Whilst the evidence may also to some extent relate to matters occurring after the conclusion of the hearing at first instance, for example as to expenses subsequently incurred by the estate, the application to tender that evidence should be rejected because it has not been shown that any such matter is of any particular significance going beyond that which the appellant contends that the evidence in the former category had. Its materiality has not therefore been demonstrated.

32. Ground 4 should accordingly be rejected.

GROUNDS 7, 8 AND 14: WHETHER THE 25% DISCOUNT FROM THE AFFORDABLE HOUSING VALUE WAS JUSTIFIED

33. This issue arises out of evidence, accepted by the primary judge, of Mr John Price, one of the administrator’s valuers, valuing the George Street property as a redevelopment site for affordable housing at $7,200,000. Mr Price arrived at this figure after making a 25% discount to reflect the time, costs and risks in obtaining approval to redevelop the site as affordable housing. The appellant contended at first instance, and contends on appeal, that no, or only a minimal, discount should have been made.

34. The “affordable housing” reference is to the State Environmental Planning Policy (Affordable Rental Housing) 2009 (NSW) (“the SEPP”) which provides for bonus floor space ratios (“FSRs”) and other advantages to developers where a proposed development includes “affordable housing” as defined by the SEPP.

The primary judgment

35. At first instance the administrator relied on valuation reports of Mr Price and Mr Ronil Besele whom his Honour heard cross examined at some length. The appellant’s expert, Mr Allan Teale, also provided reports and participated in a joint evidence session with Mr Price and Mr Besele.

36. His Honour reached the following conclusions on the discount issue that is the subject of the present grounds of appeal:

“[141] For the reasons which follow, the Court finds Mr Price's reasoning persuasive on this issue. An appropriate starting point for analysis is Mr Price's own words, explaining the basis of his approach to valuing the George Street property for affordable housing at $10.6 million before applying his discount. Mr Price said that in reaching this valuation he assumed the obtaining of conditional development approval consistent with the comparable Abercrombie Street, Darlington sale. He went on to explain that in contrast to the Abercrombie Street property, the George Street property,

‘... without development consent, requires considerable resources to develop the application, professional fees, and related costs which we estimated at $500,000, which brought the value to $10.1 million. Within that then we have to anticipate a typical time period to gain the consent. There are considerable professionals involved from surveyors, architects, consultants and the like including heritage, Aboriginal study, historical sites and the like. Over that time we have to then state that we have a typical discount rate to cover risk, profit, and that would then give us our residual value, so within that 25 per cent that will take one and a half years to satisfy all of that.’

‘So when a developer goes to buy a site he may see it and say that is 10.6 million dollars approved but I am not going to pay 10.6 because I still have to take out the costs to get to that value. So he will work backwards to the raw value he is prepared to pay to ensure he is still, after 18 months work, has a profit for his risk.’

[142] Thus Mr Price really applied a 25 per cent discount to represent the inherent uncertainty, inbuilt delay and associated costs in realising that highest and best use for the George Street property. He believes that these significant factors will only be overcome or incurred with an appropriate financial incentive in the expected profitability of the development and so the discount that he applies to provide that incentive is 25%.

[143] Mr Price particularly emphasised the uncertainty associated with achieving all the development approval conditions being sought by an applicant to achieve the full value for the posited affordable housing project here. He explained the particular uncertainty associated with projects on the site of boarding houses such as the George Street property, is an inability to achieve the precise site design proposed; as he said ‘you may only achieve 50 per cent of that.’ And he explained that there are ‘plenty of examples in council areas, with boarding houses where they have not achieved’ the required design ratios that mesh well with car parking, site access, and lighting. So, as Mr Price put it ‘potential does not lead to value’.”

37. His Honour then referred to the opposing views of Mr Teale and gave a number of reasons to the following effect for accepting Mr Price’s evidence rather than that of Mr Teale.

38. First, his Honour considered as follows that Mr Price’s relevant experience was much the greater:

“Relative Experience. The Court prefers Mr Price's experience. Notwithstanding that the Court rejects the sharpest of the criticisms advanced by the NSW Trustee about Mr Teale's professional background and independence, … the Court obtained the clear impression that Mr Price had more practical hands-on experience with applications under the SEPP than did Mr Teale. The more academic approach of Mr Teale appeared to the Court to show lower practical appreciation of the kind of problems that Mr Price had actually encountered in development applications under the SEPP. As Mr Price said, ‘A theory is different to what is in practice.’ Mr Price was able to cite his deep experience in building under the SEPP since 2003. And he assisted with other groups in developing the current version of the SEPP in 2009.”

39. Secondly, his Honour addressed the views that Mr Price and Mr Teale respectively expressed regarding the likelihood of delay in obtaining development approval under the SEPP. The experts considered this issue particularly in relation to what had occurred concerning a nearby site, in Abercrombie Street, Darlington, for the development of which SEPP approval had been obtained. His Honour considered that what occurred concerning that site supported Mr Price’s views that delay was likely in relation to the subject site.

40. Thirdly, his Honour found Mr Price’s views about uncertainties in obtaining the benefit of the SEPP persuasive. His Honour considered that evidence of Mr Besele provided some support for Mr Price’s views.

39. Fourthly, his Honour stated that he did not share Mr Teale’s confidence that no heritage issue would arise in relation to redevelopment of the George Street property, particularly due to the mural on the northern external wall (see [48] below).

Consideration

42. On appeal, the appellant contended that no, or no significant, discount should have been made, in essence because obtaining SEPP approval would be “a fait accompli” and would take considerably less time to obtain than Mr Price opined. These submissions however concerned issues requiring evaluative conclusions of his Honour in relation to the formation of which his Honour had the considerable advantage over this Court of seeing and hearing the expert witnesses give their explanations for the views that they took. Whilst his Honour’s conclusions were not discretionary decisions, their evaluative nature required the standard of appellate review analogous to that described in House v The King (1936) 55 CLR 499 at 505; [1936] HCA 40 to be applied (see Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1981) 146 CLR 336 at 381; [1981] HCA 4 and White v Redding (2019) 99 NSWLR 605; [2019] NSWCA 152 at [61] and [87]-[88]).

43. Thus it was necessary for the appellant to demonstrate to this Court that the primary judge had “in some way mistaken the facts or the legal principles to be applied or otherwise demonstrated error, which may be discernible only on the basis that the result is outside a reasonable range” (ibid at [61]). The appellant was not able to do this. In particular, he did not establish any significant factual or legal error, or demonstrate that his Honour’s conclusions were unreasonable. It is sufficient in this regard to refer only to the following specific points arising out of the appellant’s submissions.

44. First, Mr Price, who was found to have had far greater relevant experience than Mr Teale, explained, that (as summarised by the administrator):

“site design and other planning considerations (e.g. car parking, site access, lighting) or the fact that during planning characteristics are traded might mean that the bonus floor space ratio is not achieved or that the conditions in the consent might mean that the development is not viable. Further, Mr Price explained that the 25% discount also reflected the fact that a developer would need to spend considerable time and money in applying for development consent, such that the value of the property needed to be discounted for this work and the associated risk.”

45. Secondly, the conclusions to be drawn from what occurred in relation to two nearby properties sold for redevelopment as affordable housing (the one in Abercrombie Street referred to above and another in Marsden Street, Camperdown) were very much a matter of subjective opinion. Mr Price’s opinions appear to be reasonable and were in any event not the sole basis of his views on the need for the discount.

46. Thirdly, the appellant submitted that it was unreasonable for Mr Price to allow for an 18 month period to obtain SEPP approval when the George Street property would in that period “have the benefit of continuing rental income”. This was however substantially inconsistent with the appellant’s reliance in relation to other aspects of the appeal on the fact, demonstrated by the evidence, that the income from the George Street property was very low due to the property’s condition and other factors (see for example the appellant’s argument quoted at [15] above in para (c)).

47. In these circumstances, grounds 7, 8, and, so far as it relates to these grounds, 14 should be rejected.

GROUNDS 10 AND 14: WHETHER THE PRIMARY JUDGE ERRED IN CONCLUDING THAT THERE WERE HERITAGE ISSUES IN RELATION TO THE GEORGE STREET PROPERTY

48. These grounds of appeal relate to a factor that Mr Price took into account in concluding that it was appropriate to make a 25% discount when assessing the value of the George Street property on the basis that it would be redeveloped and used for affordable housing. Mr Price referred to a mural on the northern external wall of the George Street property as one of the factors giving rise to “uncertainties” in connection with the obtaining of development approval (compare [41] above).

49. The primary judge described that mural, and expressed conclusions on the issue, as follows:

“[158] The George Street property has a mural on its northern external wall facing onto and providing a colourful backdrop for ‘Reconciliation Park’. The mural in part commemorates the high number of first nations people residing in Redfern since the 19th century. This is commonly said to be as a result of their unusually high rates of employment in the early years of the Eveleigh Railway Workshops. Mr Price was of the view that this background history implied that the mural was likely to carry with it some heritage uncertainty for any redevelopment of the George Street property.

[159] Mr Teale is an aboriginal man. In the Court's view he is able to speak with particular authority about this subject. Mr Teale points out that the mural is neither listed nor protected nor declared as a heritage item. But he did agree that the mural had ‘some repute’ in the local community, including the local aboriginal community. But Mr Teale said that he was confident that ‘there will be no issue with the mural.’

[160] Despite Mr Teale's heritage, the Court does not share Mr Teale's confidence that no heritage issue will arise about the mural. The fact that it faces onto a public park and is well known locally, and that it symbolises important local history and efforts at reconciliation with Australia's first nations peoples, suggests more than a slight possibility that a heritage issue may be raised about the mural upon any application for redevelopment of the George Street property. The Court does not accept that heritage issues about the mural could be so readily discounted, as Mr Teale suggests.”

50. On appeal the appellant relied on the statement in a report of Mr Besele that “[t]he subject property is not listed as a Heritage Item”. The absence of such a listing however does not of itself contradict Mr Price’s view that heritage questions could adversely affect the obtaining of SEPP approval in a timely fashion. The primary judge gave persuasive reasons for rejecting Mr Teale’s views on this issue and no arguable basis for this Court taking a different view on the issue was identified by the appellant. Ground 10 (and Ground 14 to the extent that it relates to Ground 10) should accordingly be rejected.

APPLICATION FOR LEAVE TO FILE CROSS-APPEAL

51. In the course of the hearing in this Court the administrator sought the Court’s leave to file a notice of cross-appeal challenging Declaration (5) of the orders made at first instance. That Declaration, which I have summarised in [10(3)] above, is in the following terms:

“(5) Declare that as between the two gifts of residue provided for in clause 3(v) and clause 4 of the testator’s will (as adjusted under orders of White J in Proceedings 2010/226874; 2010/233072 and 2010/237742 – see [2014] NSWSC [473]), the burden of the said administrative expense is to be allocated as to 86.5% against the residuary gift of realty in clause 3(v) and as to 13.5% against the residuary gift of personalty in clause 4.”

52. The “administrative expense” referred to was identified in the orders as the cost of the appropriation of the George Street property in substitution for the Cleveland Street property (see [5] and [10] above), as well as the cost of providing compensation to Hassiba for a loss of rental income in the period between the sale of the latter and the appropriation of the former.

53. The ground of appeal stated in the draft notice of cross-appeal is as follows:

“The trial judge erred in holding (at J[285]) that the expense of providing a substitute gift for the Cleveland Street property is to be borne as to 86.5% by the residuary real estate beneficiaries and as to 13.5% by the residuary personal property beneficiaries.”

54. As the appellant opposed the grant of such leave, the parties were directed to lodge short written submissions on the issue subsequent to the hearing.

55. As background to the resolution of the issue, it should be noted that White J, in the judgment of 30 April 2014 referred to in [3] above, stated:

“[52] I therefore proceed on the basis that the value of the residuary estate (realty and personalty) is $9,657,363 ($7,614,363 + $743,000 + $1,300,000). Realty forms 86.5 per cent of the total residuary estate and personalty forms 13.5 per cent of the total residuary estate.

…

[60] I conclude that the administrator or the executor has paid or is liable to pay income tax in respect of the unpaid tax liability of the deceased of $2,093,587 ($500,000 + $1,089,271 + $504,316). This liability is to be borne by the residuary real and personal estate in the estimated proportions of 86.5 per cent and 13.5 per cent.”

56. The pleadings before Slattery J did not raise any issue concerning the proportions in which the relevant costs should be borne by the residuary real and personal estates. Indeed, in the administrator’s Outline of Submissions dated 30 November 2018 provided by its counsel to Slattery J, it was stated at [64]:

“Importantly, on the consideration of what property should be substituted for the Cleveland Street property:

(a) Hassiba is required to contribute 13.5% towards the same; or alternatively, have a property substituted at a value of the sold Cleveland Street property, less 13.5%: see Supplementary CB, pages 944-951;

(b) Has[s]iba's children are required to contribute one-half of 86.5% as residuary real property beneficiaries towards the acquisition of a substitute property: see Supplementary CB, pages 944-951.” (Footnotes omitted.)

57. The footnotes to this paragraph identified the references to the “Supplementary CB” as being to a letter from Mr John Wardy’s solicitors dated 9 December 2016 described in the footnotes as “articulating this position, citing passages of White J’s judgment in [2014] NSWSC 473”. The letter stated expressly that the effect of White J’s judgment was that “debts and liabilities” of the estate were to be borne as to 13.5% by the residuary personal estate and 86.5% by the residuary real estate.

58. Moreover, the administrator’s Further Written Submissions dated 7 January 2019 stated at [7]:

“[Mr John Wardy’s] written submissions correctly acknowledge at paragraph 40 that the expense of providing the substitute gift is to be borne as to 86.5% by the residuary real estate beneficiaries and as to 13.5% by the residuary personal property beneficiary.”

59. In these circumstances it is apparent that the hearing below proceeded on the agreed basis that the costs of the property substitution were to be borne in the percentages stated in Declaration (5) made by Slattery J. The parties did not further explain on appeal how that declaration came to be made but it can be readily inferred from what the parties did identify that it was made without opposition, and indeed with the at least implicit assent of both parties.

60. With different representation on appeal to that which it had at first instance, the administrator now seeks to challenge Declaration (5). It does not contend that this Court should make a different declaration. Rather, it submits that there should be no declaration made as to the relevant percentages because the appropriate percentages will change over time depending upon the likely fluctuating relative values of the residuary personal and real estates. It submits that the relevant percentages should be determined when the substitution of the George Street property for the Cleveland Street property is made and it points to the fact that it is common knowledge that real estate values, at least, have changed significantly since April 2014 when White J’s judgment was delivered.

61. I add that I do not read White J’s judgment, which was the genesis of the parties’ agreed position as to percentages at first instance, as indicating that the percentages he identified would necessarily be applicable for all purposes and for all time. Rather, his Honour stated the percentages applicable at the time of his judgment as they appeared from the evidence. He did so to identify the nature and value of the assets and liabilities of the estate for the limited purpose of determining the family provision claims that were before him.

62. In this Court the appellant opposed the grant of leave to file the cross-appeal and, if leave were granted, the allowance of the cross-appeal. He relied in particular on the absence of any explanation for the administrator’s delay in challenging Declaration (5), the administrator’s acceptance at first instance of the position reflected by the declaration and an asserted absence of exceptional circumstances which would warrant a grant of leave to make the challenge for the first time on appeal.

63. The appellant also argued that “it cannot be said that had the [administrator] taken the reverse position below (ie that which it now seeks to take) that [that] would not have altered the course of the trial”. In that regard he asserted that legacies have in the past been paid to Hassiba and Mr John Wardy’s brothers (William and Sam) on the assumption that the relevant proportions for payment of administration expenses were as stated in Declaration (5).

64. That different percentages to those of 13.5% and 86.5% might, depending on the value of the assets of the estate, be applicable in the future when the George Street property is substituted for the Cleveland Street property, or at some other time found to be relevant, does not however mean that the percentages used when the legacies were paid were incorrect at the time of their payment. Their correctness would depend upon the then prevailing value of the assets in the residuary estates. This argument of the appellant does not therefore in my view identify any prejudice to the appellant that would flow from setting aside Declaration (5).

65. For the following reasons, I consider that the administrator should be granted leave to file the notice of cross-appeal and that the cross-appeal should be allowed, with the consequence that Declaration (5) should be set aside.

66. First, the point that the administrator seeks to raise has merit in that the administration expenses should not be borne according to percentages estimated in 2014 by reference to evidence of asset values then applicable. Rather, they should be borne in the percentages estimated to be applicable at or about the time of the property substitution or such other date as is found to be relevant. The parties apparently, and in my view erroneously, understood White J’s judgment to say something different.

67. Secondly, the point that the administrator seeks to raise on appeal is one of law. Appropriately, the administrator does not seek a declaration stating differing percentages. Rather, it seeks no more than the Court’s affirmation of the principle that the percentages should be those estimated by the administrator as at the date considered by the administrator, or if necessary by a court, to be that relevant for the purposes of the substitution that has been authorised. Identification of that date has not thus far been the subject of argument.

68. Thirdly, for the reasons stated above, I do not consider that the appellant has demonstrated that he might be unfairly prejudiced by this Court allowing the point to be raised.

69. To allow the point to be taken in these circumstances is consistent with the principles stated in the oft-cited High Court decision in Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 438; [1950] HCA 35 (see also TTY167 v Republic of Nauru [2018] HCA 61; (2018) 93 ALJR 111 at [21]) where the Court sanctioned the raising for the first time on appeal of points of law whose determination could not have been affected by the calling of additional evidence at first instance.

70. So far as costs of the application for leave are concerned, I consider that in light of the lateness with which the administrator raised the point and sought leave to cross-appeal, it should pay the costs of the written submissions lodged by the parties subsequent to the hearing in this Court, as the principal subject of those submissions was the proposed cross-appeal. There should not otherwise be any order for costs of the cross-appeal as no significant time was occupied during the oral hearing in relation to the proposed cross-appeal, and no part of the preparation for the appeal related to it because it had not then been foreshadowed.

ORDERS

71. For the reasons given above, I propose the following orders:

1. Appeal dismissed with costs.

2. The appellant’s notice of motion filed on 2 February 2021 dismissed with costs.

3. Leave granted to the respondent to file a notice of cross-appeal in the form provided to the Court.

4. Direct the respondent to file and serve its notice of cross-appeal within 14 days of the date of this judgment.

5. Allow the cross-appeal.

6. Pursuant to the cross-appeal, set aside Declaration (5) made by Slattery J on 29 January 2020.

7. Order the respondent to pay the appellant’s costs of the supplementary submissions filed in this Court.

8. Otherwise make no order as to costs of the cross-appeal.

72. MEAGHER JA: I agree with Macfarlan JA.

73. WHITE JA: I agree with Macfarlan JA.

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Decision last updated: 04 June 2021