Valuer-General v Fenton Nominees Pty Ltd [1982] HCA 46; (1982) 150 CLR 160 (20 August 1982)

HIGH COURT OF AUSTRALIA

VALUER-GENERAL v. FENTON NOMINEES PTY. LTD. [1982] HCA 46; (1982) 150 CLR 160

Valuation of Land (S.A.)

High Court of Australia
Mason(1), Murphy(1), Wilson(1), Brennan(1) and Dawson(1) JJ.

CATCHWORDS

Valuation of Land (S.A.) - Unimproved value - Method of valuation - Separate parcels of land acquired, improvements demolished, and supermarket erected on consolidated title - Comparable sales to developers who had acquired separate parcels, demolished improvements and developed consolidated land - Expert evidence - Proper method of treating comparable sales - Whether value to be ascertained by adding purchase price and demolition expenses or by deducting value of improvements from purchase price - Valuation of Land Act 1971 (S.A.), s. 5 "unimproved value".

HEARING

Adelaide, 1982, August 18, 20. 20:8:1982
APPEAL from the Supreme Court of South Australia.

DECISION

August. 20.
THE COURT delivered the following written judgment:-
The issue in this valuation appeal is whether the Full Court of the Supreme by the respondent to the expert evidence called by the appellant and accepted by the primary judge (Wells J.). (at p162)

2. A detailed account of the facts and of the relevant statutory provisions is set out in the judgments in the Supreme Court. For our purposes it is sufficient to say that the appeal relates to a valuation made by the appellant as at 11 June 1979 of a parcel of land known as Lot 1, Compton Street, Mt Gambier, having an area of some 12,000 square metres near the commercial centre of that city, on which was erected a large retail store and associated facilities known as a "Target Store". The land had at an earlier time consisted of separate parcels which were acquired subsequently for commercial redevelopment resulting in the erection of the Target Store and associated facilities, the separate titles being consolidated in a single title. (at p163)

3. The appellant assessed the capital value of the premises at $1,476,000, the annual value at $73,800 and the unimproved value at $600,000. On an appeal to the Land and Valuation Division of the Supreme Court under s. 25(3) of the Valuation of Land Act 1971 (S.A.), as amended ("the Act") against the appellant's assessment of the unimproved value the respondent sought to establish that the unimproved value was $388,246, this being the assessment made by its valuer Mr. Taylor. The respondent failed at first instance but succeeded on appeal to the Full Court, which set aside the valuation of $600,000 and substituted the valuation of $388,246. (at p163)

4. A short account of the expert evidence is essential to an understanding of the different approaches taken by the primary judge and the Full Court. The competing valuations of the parties were based largely, if not exclusively, on sales of parcels of improved land in the commercial area of Mt Gambier in the general vicinity of the respondent's premises. In each of these instances the purchaser had acquired the land for redevelopment, with the intention of demolishing existing buildings as a preliminary to redevelopment by way of setting up retail store or shopping centre developments similar in kind to the development which has taken place on the respondent's premises. In this situation the critical question which confronted the valuers was: How should the prices paid for the improved land be converted so as to reflect an unimproved land value? (at p163)

5. Mr. Quintrell, the valuer who, together with Mr. Fenwick, supported the appellant's valuation, stated that the correct approach was to treat the price for the land, including the improvements, and the cost of demolition and earthworks as together representing the cost to the developer of obtaining unimproved land suitable for redevelopment. King C.J. summarized Mr. Quintrell's evidence in this way:
"Mr. Quintrell's method involved, in relation to each of the three sites, namely Woolworths, Coles and Half-Case, aggregating the prices paid for the properties acquired to assemble the site, adding in the costs of demolishing improvements and of earthworks to restore the site, and dividing the figure thus obtained by the number of square metres. He arrived at a value of $57 per square metre for the Coles site and $44.40 per square metre for the Woolworths site. He treated those figures as the cost to the purchaser, and hence in his opinion the value, of the unimproved land. He considered that the transactions involved in assembling the Coles site and the Woolworths site were the most relevant for his purpose. By an exercise of judgment as to the comparability of the subject land with those two sites, he arrived at the figure of $50 per square metre as the

unimproved value of the subject land.
This method of valuation was based upon the premise that, as Mr. Quintrell put it, 'land in the position of the subject land would be readily saleable at a premium price for the establishment of a supermarket, either for owner-occupation and letting, or as a completed investment proposition'." (at p164)

6. On the other hand, Mr. Taylor, the respondent's valuer, whose approach found favour in the Full Court, urged that in general the proper way to use sales of improved land was to subtract from the overall price of each parcel the value of the improvements on it and to adopt the resulting figure as the unimproved value of each parcel established by the sale. (at p164)

7. The Full Court held that Mr. Quintrell's valuation rested on an erroneous assumption, namely that the aggregate of the prices paid in assembling each site was not influenced by the fact that some, indeed much, of the land was improved, nor by reluctance to sell on the part of the vendors. The Chief Justice, with whom Mohr J. agreed, expressed the view that the value of the buildings would have played a large part in the determination of the asking price, that the vendors were reluctant vendors seeking a premium in order to make it worthwhile for them to sell and that, in consequence, the prices paid by the developers in assembling the sites reflected a special value to the vendors of the individual parcels which made them unreliable as comparable sales. (at p164)

8. The approach to be taken by an appellate court in valuation appeals has been discussed and applied in this Court. It has always been recognized that because the assessment of value involves the exercise of a discretionary judgment an appellate court should not substitute its opinion for that of the court below unless it is shown that the court below has acted on a wrong principle of law or that the valuation was erroneous. See Emerald Quarry Industries Pty. Ltd. v. Commissioner of Highways (S.A.) (1979) 142 CLR 351, at pp 355-356 ; Federal Commissioner of Taxation v. St. Helen's Farm (A.C.T.) Pty. Ltd. [1981] HCA 4; (1981) 146 CLR 336, at p 381 , and the cases there cited. However, we would not wish it to be thought that the outcome of this appeal turns on the application of this principle for it is our opinion that Wells J. was correct in the approach that he took in resolving the conflict of expert evidence. (at p165)

9. The task of the appellant in making its valuation and that of the Supreme Court on appeal was to give effect to the definition of the expression "unimproved value" in s. 5 of the Act, which provides, inter alia:
"'unimproved value' of land means the capital amount that an unencumbered estate of fee simple in the land might reasonably be expected to realize upon sale assuming that any improvements thereon (except, in the case of land not used for primary production, any site improvements), the benefit of which is unexhausted at the time of valuation, had not been made . . ." (at p165)

10. It follows from the terms of this definition that the unimproved value of the respondent's land on 11 June 1979 was to be ascertained by reference to the capital amount that an unencumbered estate in fee might reasonably be expected to realize upon sale, on the assumption that the improvements then existing on the land - the Target Store and associated facilities - had not been made. It is well settled that in establishing what that capital amount might be it is necessary to inquire what the hypothetical purchaser would pay for the land in a notional condition shorn of its improvements and that it is not permissible to arrive at the figure by identifying the value of the site in its improved state and then subtracting the value of the improvements (Toohey's Ltd. v. The Valuer-General (1925) AC 439, at p 443 ). (at p165)

11. According to the evidence of the expert witnesses the highest and best use which the land in its notional state would have had to a potential purchaser on 11 June 1979 was as vacant land suitable for commercial development of the kind already discussed, similar to the actual development which had already taken place on the land. There was at that time a demand in the commercial area of the city for vacant land for development of that kind. So much at least emerges from the circumstance that the Coles site had been assembled in the year before 11 June 1979 and the Woolworths site was assembled in the year after that date. (at p165)

12. It was natural then that the unimproved value of the respondent's land should be assessed by reference to the amount that a hypothetical purchaser intending to develop it in this way would be willing to pay for it. It was natural too that in making this inquiry the appellant would look to the prices which were paid by developers in order to acquire the other commercial sites which had been assembled in the vicinity. (at p166)

13. The importance of these sales is that they tended to establish the price which a developer would be prepared to pay for vacant land suitable for the appropriate development. Although the developers acquired parcels of improved land in assembling their sites they were acquiring improved land in order to convert it into unimproved land as part of a consolidated site which they could then develop. The improvements existing on the land which they acquired had no value to them. Consequently no part of the purchase price reflected a value placed by them on those improvements. (at p166)

14. In these circumstances the price which the respondent paid was one element, indeed the largest element, in the cost of acquiring a site consisting of vacant land suitable for development. The other elements were the costs of demolition and of earthworks. It is only by adding these costs that one can establish the price that the developers were prepared to pay for a suitable site with no improvements upon it. It follows that the approach adopted by Mr. Quintrell was correct and that the primary judge was right in accepting his approach. (at p166)

15. The principle enunciated in Toohey's Ltd. v. The Valuer-General (1925) AC 439 does not speak to this situation. It tells us that it is the subject land in its unimproved state that is to be valued. It does not deny that sales of improved property in the vicinity may be relevant material for the purpose of valuing the subject land in its unimproved state when the improved property has been acquired so that its higher potential as vacant land may be realized, the costs of demolition of improvements being an additional element in what the purchaser is prepared to pay in order to acquire vacant land. (at p166)

16. It matters not that, viewed from the standpoint of the vendors of the separate parcels of land, the price which they obtained reflected the value to them of the existing improvements and their reluctance to move to other premises. This in no way derogates from the value which the evidence has in establishing the price which commercial developers were prepared to pay for suitable vacant land similar in kind to the respondent's land in its unimproved state. (at p166)

17. We agree, with respect, with Wells J., who said:
"Speaking generally, where the subject matter of the sales, and the market in which they were concluded, reveal a sufficiently high degree of comparability with the notional sale of the land in question and the market in which it would be the subject of negotiation, the particular circumstances and considerations that induced the respective parties to come together at the several prices agreed upon are regarded as immaterial, unless, in a given case, they are such as plainly to take a sale out of the ordinary run of transactions that together constitute the relevant market. Where the circumstances and considerations have such an effect, valuers are wont to say that the alleged comparable sale must be excluded because it was affected by 'special circumstances'." (at p167)

18. We do not accept the argument that the manner in which the sites were "assembled" by purchasers of separate parcels so as to make up the totality of the relevant commercial sites led to the developers paying a special price. The primary judge was right in rejecting this argument. In this respect it is of paramount importance that the evidence assists in establishing what commercial developers were prepared to pay for the vacant land comprised in the overall sites which they assembled. (at p167)

19. It is for this reason that the primary judge was correct in rejecting the approach taken by Mr. Taylor in placing special emphasis on the prices paid for two parcels of land included in the Woolworths site ("Sale 1" and "Sale 5" - having areas of 6,531 square metres and 5,088 square metres respectively - $37.10 and $44.60 per square metre). The purchaser acquired these parcels as an element in putting together an overall site having an area of 19,150 square metres. The price paid for the two parcels is therefore but an element in the total consideration which the purchaser was willing to outlay in acquiring that total site. Consequently the purchase of the two separate parcels had no independent significance in establishing the price which commercial developers were prepared to pay. We should add that the area of each of the two parcels was substantially less than that of the subject land. This provides a further ground of distinction. (at p167)

20. There remains for consideration an alternative submission made by the respondent that even if Mr. Quintrell's approach be accepted, he was mistaken in its application. The submission, based on evidence given by Mr. Taylor was that, giving special weight to the Woolworths sale, and taking into account the Coles sale and the Half-Case sale, a realistic value of $45 per square metre should be assessed. It was said that special weight should be given to the Woolworths sale because it was the "most comparable" sale. The primary judge had this to say of the submission.
"It might be that if the lodging of an appeal produced what would amount to a venire de novo, I could accord some weight to these submissions. In all the circumstances, however, I am satisfied that the respondent's principal valuers took all those matters, expressly or by necessary implication, into consideration and I can find no flaw in their reasoning. Mr. Jarvis's submissions do not, severally or jointly, demonstrate, to my mind, that they made an error that would warrant my amending the Valuer-General's assessment." (at p168)

21. This passage sufficiently demonstrates that his Honour did not accept the alternative submission and we do not consider in any event that we should now give effect to it in preference to the approach which found favour with the primary judge. (at p168)

22. We would allow the appeal and restore the valuation of $600,000 made by the appellant of the unimproved value of the subject land. (at p168)

ORDER

Appeal allowed with costs.

Order of the Full Court of the Supreme Court of South Australia set aside. In lieu thereof order that appeal to that Court be dismissed with costs.

Restore orders made by Wells J.