DLFCMS NOMINEES PTY LTD v COMMISSIONER OF HIGHWAYS [2024] SASC 140

Applicant: DLFCMS NOMINEES PTY LTD Counsel: MR I ROBERTSON-CLARK SC WITH MR S URE - Solicitor: COWELL CLARKE Second Applicant: KOZY KIDS MAYLANDS PTY LTD Counsel: MR I ROBERTSON-CLARK SC WITH MR S URE - Solicitor: COWELL CLARKE Respondent: COMMISSIONER OF HIGHWAYS Counsel: MS A DOECKE KC WITH MR T SIMPSON - Solicitor: CROWN SOLICITOR (SA) Hearing Date/s: 07/11/2023, 08/11/2023, 09/11/2023, 05/12/2023 File No/s: CIV-21-010609 B SUPREME COURT OF SOUTH AUSTRALIA (Civil) DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment. The onus remains on any person using material in the judgment to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court in which it was generated. DLFCMS NOMINEES PTY LTD & ANOR v COMMISSIONER OF HIGHWAYS [2024] SASC 140 Judgment of the Honourable Justice Kimber 5 December 2024 REAL PROPERTY - COMPULSORY ACQUISITION OF LAND - COMPENSATION - ASSESSMENT REAL PROPERTY - COMPULSORY ACQUISITION OF LAND - COMPENSATION - ASSESSMENT - MARKET VALUE - CAPITALISATION OF INCOME REAL PROPERTY - COMPULSORY ACQUISITION OF LAND - COMPENSATION - ASSESSMENT - SPECIAL VALUE The first applicant was the registered proprietor of land (the land) which it leased to the second applicant, a childcare business. The land was subject to a ten-year lease with four rights of renewal each for five years. On 16 April 2020, the land was compulsorily acquired by the respondent under s 10 of the Land Acquisition Act 1969 (SA) (the Act). As a result, the business of the second applicant was extinguished. On 16 July 2020, the respondent paid the first applicant interim compensation of $7,535,000 plus interest and disturbance. On 1 December 2020, the respondent paid the second applicant interim compensation of $2,000,000 plus interest in respect of the extinguishment of the second applicant’s business. The applicants referred to this Court the question of their entitlement to compensation pursuant to the Act. The first applicant contends, inter alia, that it should be compensated based on ‘special value’ and that, notwithstanding the lease in place, the land should be valued based on a lease term of 20 years. The respondent contends that compensation should not be based on ‘special value’ and that the land should be valued based on the lease in place. -- 1 of 65 -- The second applicant contends, inter alia, that the business should be valued based on an occupancy rate of 95 per cent and that the compensation should include an amount of $55,000 because of the COVID-19 pandemic. The respondent contends that the valuation should be calculated based on an occupancy rate of 82 per cent and that the amount of $55,000 should not be included. Held, inter alia: 1. The first applicant is not to be compensated based on ‘special value’. 2. The land acquired from the first applicant is to be valued based on the lease in place on the date of the acquisition of the land. 3. The business of the second applicant is to be valued based upon an occupancy rate of 86 per cent. 4. The second applicant is not entitled to the amount of $55,000 sought. 5. The issue of the proper approach to the applicants’ legal costs and disbursements is deferred. Land Acquisition Act 1969 (SA) ss 10, 22B, 25, 25(1), referred to. Arkaba Holdings Ltd v Commissioner of Highways [1970] SASR 94; Boland v Yates Property Corporation Pty Ltd (1999) 74 ALJR 209; [1999] HCA 64; Director of Buildings and Lands v Shun Fung Ironworks [1995] 2 AC 111; Emerald Quarry Industries Pty Ltd v Commissioner of Highways [No 2] (1976) 18 SASR 438; Nelson v Commissioner of Highways (No 2) [2023] SASC 7; Spencer v Commonwealth (1907) 5 CLR 418, applied. Cedars Rapids Manufacturing and Power Company v Lacoste (1914) AC 569; In re Lucas and the Chesterfield Gas and Water Board (1909) 1 KB 16; The Minister v New South Wales Aerated Water & Confectionary Limited (1916) 22 CLR 56, considered. -- 2 of 65 -- DLFCMS NOMINEES PTY LTD & ANOR v COMMISSIONER OF HIGHWAYS [2024] SASC 140 Civil KIMBER J: Introduction.......................................................................................................... 3 Issues ..................................................................................................................... 3 A brief overview of the positions of the parties ................................................. 5 Background .......................................................................................................... 5 The lease ............................................................................................................ 6 The operating model of KKM............................................................................ 7 Ms Heron and Ms Foster – general background ............................................. 8 Ms Heron ........................................................................................................... 8 Ms Foster ........................................................................................................... 9 The design of KKM ............................................................................................ 9 The management of the centre........................................................................ 11 The primary care model .................................................................................. 11 Operation hours of the business ..................................................................... 12 Principles of compensation ............................................................................... 12 The value of the business – introduction ......................................................... 13 The reports ......................................................................................................... 14 Valuation approach – the business ................................................................... 14 Capitalisation rate or earnings multiple - finding .......................................... 15 Daily rate ............................................................................................................ 16 Occupancy rate .................................................................................................. 16 Historical occupancy rates .............................................................................. 16 Purchasers of a business taking into account forecasts .................................. 23 Maximum occupancy ...................................................................................... 25 The expectation of a growth in the occupancy rate by February 2020 ......... 26 Other evidence about occupancy rate .............................................................. 27 Ms Foster ......................................................................................................... 27 Ms Heron ......................................................................................................... 28 The evidence of Mr David Fitch ..................................................................... 30 Staff costs ......................................................................................................... 31 -- 3 of 65 -- [2024] SASC 140 Kimber J 2 Results at IBK and KKGG ............................................................................... 31 The opening of Kozy Kids Golden Grove........................................................ 32 Competition ........................................................................................................ 33 Discussion ........................................................................................................ 34 The revised 2020/2021 budget........................................................................... 36 The waitlists ........................................................................................................ 37 Some observations about the waitlists ............................................................ 38 The eight per cent deduction ........................................................................... 41 The email dated 21 October 2019 ................................................................... 43 End of year ......................................................................................................... 45 Occupancy rate – conclusion ............................................................................ 48 The importance of historical occupancy rates ............................................... 48 JobKeeper ........................................................................................................... 50 JobKeeper – conclusion .................................................................................. 53 Value of the land – duration of the lease........................................................ 53 Should the land be valued on a 20-year lease term? ...................................... 53 Special value ....................................................................................................... 55 The meaning of special value and discussion ................................................ 55 Further discussion .............................................................................................. 57 Aerated Water ..................................................................................................... 59 Consideration ..................................................................................................... 60 The market value of the land – conclusion ...................................................... 62 Orders ................................................................................................................. 62 -- 4 of 65 -- [2024] SASC 140 Kimber J 3 Introduction 1 DLFCMS Nominees Pty Ltd, (the first applicant or the trustee) is a company owned and operated by Mr David Fitch (Mr D Fitch). The first applicant was the registered proprietor of land at 217 Portrush Road, Magill (the land). The first applicant leased the land to the second applicant, Kozy Kids Maylands (KKM or the second applicant). KKM was a childcare business. 2 On 21 November 2019, the Commissioner of Highways (the respondent or the Commissioner) issued to the first and second applicants notices of intention to acquire the land under s 10 of the Land Acquisition Act 1969 (SA) (the Act). The land was ultimately acquired on 16 April 2020. There is no dispute the business of KKM was extinguished as a result of the acquisition of the land. 3 Under s 23C of the Act, the first and second applicants referred to this Court the question of the compensation to which each is entitled pursuant to s 22B of the Act. The claim of the first applicant relates to the land. The claim of the second applicant relates to the business. There is no dispute that the appropriate valuation date for both is 31 October 2019. While KKM continued to trade after that date and receipt of the relevant notice, there is no dispute about the following matters. Firstly, that it was appropriate for the second applicant to notify clients of the pending acquisition. Secondly, that by 21 February 2020, it was no longer commercially viable to operate the business. 4 On 16 July 2020, the Commissioner paid the first applicant interim compensation of $7,535,000 plus interest in respect of the land and disturbance. On 1 December 2020, the Commissioner paid to the second applicant interim compensation of $2,000,000 plus interest in respect of the extinguishment of the business. Issues 5 At the commencement of the trial, the parties identified six issues for determination. Those issues were: First applicant 1. Whether the value of the first applicant’s freehold interest in the land situated at 217 Portrush Road, Magill (Land) is to be determined by reference to the terms of the lease in place at the date of acquisition or on the assumption that the lease between the first and second applicants was for a term of 20 years. a. If the value is to be determined on an assumption of lease terms other than those in place at the date of acquisition, whether the first applicant is entitled to further compensation and, if so, what is the value of that further compensation. -- 5 of 65 -- [2024] SASC 140 Kimber J 4 Second applicant 2. What amount of further compensation is the second applicant entitled to on account of the loss of the value to it of the business extinguished by reason of the compulsory acquisition of the Land. Specifically: a. On what occupancy rate should the business be valued? b. On what daily fee per child should the business be valued? c. On what earnings multiple should value be calculated? 3. To what extent, if any, is the second applicant’s claim for compensation for lost profits between 16 December 2019 and 16 April 2020, being profit the second applicant claims it would have made until the date of the compulsory acquisition if it had not notified its customers on 16 December 2019 of the impending compulsory acquisition of the Land and closure of the business, already included in the compensation for business value, such that further compensation would be double compensation. 4. If the second applicant is entitled to compensation for lost profits, what is the amount of compensation to which the second applicant is entitled for lost profits? Specifically: a. By what methodology should lost profits, if any, be calculated? b. On what occupancy rate should the lost profits, if any, be calculated? c. On what daily fees should the lost profits, if any, be calculated? To what extent, if any, is the lost profit calculation impacted by the subsequent COVID-19 pandemic? 5. The amount of compensation to which the second applicant is entitled for redundancy payments to staff caused by the acquisition. 6. The extent to which a deduction from the second applicant’s compensation claim is to be made on account of the value of chattels formerly used in the business. By the end of the trial, the issues which remained in dispute were 1, 2.a, 2.c, 4.b, and that part of 4.c which raises the impact of the COVID-19 pandemic. 6 As to 2.b and that part of 4.c which relates to the daily fee, there was no dispute that fee should be $121. To the extent necessary, I so find. As to 3, the respondent accepts that the relevant lost profits are compensable. To the extent necessary, I so find. As to 4.a, all experts agree the appropriate methodology is capitalisation of future maintainable earnings. The dispute essentially relates to one input, being occupancy rate (issue 4.b) and the unresolved aspect of 4.c. As to 5, the Commissioner agrees that KKM is entitled to redundancy payments made to staff in the amount of $104,461.81. To the extent necessary, I so find. As to 6, it is agreed that an amount of $9,920 is to be deducted from the compensation claim of the second applicant on account of the value of chattels formerly used in the business. To the extent necessary, I so find. -- 6 of 65 -- [2024] SASC 140 Kimber J 5 7 The first applicant abandoned its claim to a sum of $10,000 over and above the disturbance paid by the respondent. That has the consequence of the further compensation sought by the first applicant, being $650,000. 8 In addition, pursuant to s 33 of the Act, the applicants seek interest calculated from the date of the acquisition of the land. A brief overview of the positions of the parties 9 The first applicant submits that the land should be valued on the basis that the term of the lease granted to KKM was 20 years, notwithstanding that the lease was a 10-year lease with rights of renewal. The first applicant submits that valued on the basis for which it contends, the value of the land should be determined as $8,160,000, being the higher of two expert valuations. The respondent submits the land should be valued on the basis that the lease to KKM was for 10 years, with the relevant rights of renewal. On that basis, the respondent submits the land should be valued at $7,510,000, being the higher of two expert valuations. 10 The primary dispute with respect to the valuation of the business relates to what should be used as the occupancy rate of the childcare centre; that rate then informing the valuation. The second applicant submits that the occupancy rate used should be 95 per cent, a rate which it says would have been achieved by February 2020. The primary submission of the respondent is that the occupancy rate used should be 82 per cent, being the average occupancy in the 52 weeks to 15 December 2019. In the alternative, the respondent submits that the occupancy rate used should be no greater than 86 per cent. Background 11 Mr D Fitch is the principal of DBRB Investments, a group of companies with diverse interests in property and other investments. Mr D Fitch is the sole shareholder and director of the first applicant. Prior to acquisition, the first applicant held the land as trustee of the DLFCMS Property Trust. Mr D Fitch may be described as the driving force behind the establishment of KKM on the land. 12 In about 2005, an investment vehicle part owned by Mr D Fitch owned undeveloped land at Golden Grove. With the help of others, the investment company established a childcare centre on that land. That childcare centre opened in 2007 and was known as Iddy Biddy Kids (IBK). In 2013, G8 Education Ltd (G8), an ASX listed provider of early childhood education, offered to acquire IBK. Mr D Fitch and the equity investors, his brother (Mr Matthew Fitch) and Mr Brian Carr, sold IBK. That sale was completed in about November 2013. At the time of the sale, Ms Joanne Heron (Ms Heron) and Ms Mikaeli Foster (Ms Foster) were working for IBK as the director and assistant director respectively. After the sale, Ms Foster and Ms Heron continued working for G8 at the childcare centre at Golden Grove which was rebranded as Golden Grove World of Learning (GGWOL). -- 7 of 65 -- [2024] SASC 140 Kimber J 6 13 The land was purchased on 7 September 2015 with the intention of building and operating the childcare centre which became KKM. Ms Heron and Ms Foster were involved in the design of KKM. In 2016, KKM was established to operate a childcare centre on the land which would be leased from the trustee. Since the incorporation of KKM, the shareholders and directors have been Mr Brian Carr, Mr Richard Fogarty, Ms Foster, Ms Heron, Mr Bill Papaioannou and Mr D Fitch. All shareholders contributed only nominal capital of $1 per share. An L class share has no right to receive dividends but provides certain voting rights at shareholder meetings. 14 Initially, and in the context of the establishment of KKM, it was the position of both Ms Foster and Ms Heron that they only wanted to work in a childcare centre owned by Mr D Fitch. Mr D Fitch was nonetheless adamant that both women should have equity. Mr D Fitch valued both women, their prior relationship, and their performance at IBK. Mr D Fitch arranged for entities related to him to loan KKM the startup capital without interest. With respect to KKM, Mr D Fitch was nominated as the ‘provider’ for the centre pursuant to the Education and Care Services National Law (SA). 15 The childcare centre operated by KKM on the land opened for business on 13 March 2017. The lease 16 KKM entered a lease for the land with the first applicant. The commencement date of that lease was 1 March 2017. The term was 10 years, expiring on 28 February 2027. There were four rights of renewal, each for a further five years. The starting rent was $450,000 per annum, subject to annual review for CPI and reset to market on each renewal. 17 As earlier set out, the first applicant submits that, notwithstanding the terms of the lease, the value of the land should be calculated on the basis of a lease term of 20 years. 18 The evidence of Mr D Fitch was that, from the perspective of the first applicant, the length of the lease was not critical.1 Mr D Fitch said that a 20-year term was not necessary to obtain bank finance, as none was required to purchase the Maylands land (although the Maylands land was used as security for borrowings for other projects). On the evidence of Mr D Fitch, there was no reason why KKM could not have had entered into a standard 20-year lease, or longer, with market rental reviews timed as they were under the actual lease.2 Under the lease that was entered into, the land was committed to use by KKM for up to 30 years if the options were exercised. 1 Affidavit of David Leo Fitch dated 14 April 2022, Exhibit A2 [28] (Joint Tender Book (‘JTB’) vol 1, 555). 2 Ibid [29] (JTB vol 1, 555). -- 8 of 65 -- [2024] SASC 140 Kimber J 7 19 The evidence of Mr D Fitch was that he was completely comfortable with KKM as a tenant as he had substantial control and trusted the other shareholders and directors. He said that whilst KKM was under the ownership of its present group of shareholders and directors, there had been complete flexibility to fix a lease with any term regarded as appropriate.3 The evidence of Mr D Fitch was that even if there had been a breakdown in the relationship between the lessor and the lessee (which he regarded as highly unlikely), or a sale of KKM or its business, on a market review at 10 years, there may have been the ability to substantially increase the annual rental, as the commencing rental was not at the top end of rentals obtainable for a premium facility such as was built on the land.4 20 Mr D Fitch rejected that it was not a given that every shareholder would want to remain in the business with the same structure indefinitely. Mr D Fitch also rejected a suggestion that relationships with other shareholders might break down.5 The operating model of KKM 21 The evidence of Mr D Fitch was that KKM was developed and run as a ‘premium’ childcare offering. Mr D Fitch said that Ms Foster and Ms Heron were confident from the example at IBK that an offering superior to competitors could be offered successfully. Mr D Fitch said that he ‘knew’ this would achieve high occupancy rates and better performance compared to other childcare centres.6 Mr D Fitch said that he, Ms Foster, and Ms Heron considered the high occupancy rates could be achieved by positioning KKM as a premium offering. He was of that view for three reasons.7 22 Firstly, a high-spec fit out would be attractive aesthetically. In the opinion of Mr D Fitch, KKM looked better than its competitors’ centres and a more attractive, comfortable, and functional working environment would enable KKM to attract and retain better staff. Secondly, the land was a generously proportioned site, with ample car parking, and large outdoor recreation areas. It was accessible directly from a main road and in a prominent location. In the opinion of Mr D Fitch, KKM advertised itself. Thirdly, KKM had the right leadership in Ms Foster and Ms Heron to get the childcare centre performing optimally. Mr D Fitch said that in the childcare industry, a business is substantially reliant on good staff, who have good communication skills, who understand childcare, and who are empathetic to the parents’ situation. Mr D Fitch believes that parents need to feel comfortable placing their children in the care of a childcare centre and its staff. Mr D Fitch said that it was hard to find staff of that calibre and that a childcare centre needs its rapport with parents to be excellent. Mr D Fitch said that finding good quality staff, motivating and training them, and integrating them into a team, is a matter of excellent leadership and depends on excellent communication 3 Affidavit of David Leo Fitch dated 14 April 2022, Exhibit A2 [30] (JTB vol 1, 555-556). 4 Ibid [30] (JTB vol 1, 555-556). 5 Transcript (‘T’) 35.31-36.11. 6 Affidavit of David Leo Fitch dated 14 April 2022, Exhibit A2 [32] (JTB vol 1, 556). 7 Ibid [34] (JTB vol 1, 556). -- 9 of 65 -- [2024] SASC 140 Kimber J 8 because there are multiple staff in multiple rooms. Mr D Fitch said that hiring and retaining high quality staff would enable KKM to establish the relationships with families and maintain a continuity of care that is key to parents’ satisfaction. It was the evidence of Mr D Fitch that you get a name quickly with both parents and in the industry, and so it is quite easy to get the pick of the better staff. 23 An aspect of the evidence of Mr D Fitch was that achieving high occupancy is ‘a matter of hard work by centre management. This is especially so when achieving the last 10 per cent’.8 In the view of Mr D Fitch, Ms Foster and Ms Heron are ‘particularly skilled operators at managing [a childcare centre] to ensure occupancy levels are high’.9 Ms Heron and Ms Foster – general background 24 It is convenient at this point to say something about Ms Heron and Ms Foster. Ms Heron and Ms Foster were both employed to share the role of business manager at KKM and were in that role when KKM opened on 13 March 2017. Ms Heron and Ms Foster have considerable experience in childcare, including in the management of childcare centres. Ms Heron 25 Ms Heron has worked in childcare for 40 years. She holds an Advanced Diploma of Children’s Services in Early Childhood from the Australian Institute of Technology and Transfer. 26 Ms Heron began working as nanny in New South Wales as a teenager. After she obtained her professional qualifications, she was employed as a child development officer for Waverley Family Day Care Services in Sydney. In that position, she was responsible for supervising family (i.e. - home based) day care operations and advising family day care workers. As part of her work, Mr Heron attended homes to check that they were fit for purpose, to monitor compliance, and to advise about the conduct of family day care. In around the late 1980’s, Ms Heron worked at various childcare centres in New South Wales, including one in metropolitan Sydney and one in a regional area with a large indigenous population. 27 Ms Heron moved to South Australia in the mid 1990’s. Ms Heron took a position lecturing at Elizabeth Tafe and Croydon Tafe in childcare, toddlers, and babies. Part of her role involved supervising students on their placements in childcare centres. 28 In 1997, Ms Heron took a position as a director of Margaret Ives Children’s Centre in Norwood (Margaret Ives). Ms Heron was in that position for 12 years. At the same time, she was engaged by the body that validated childcare services, then known as the Accreditation Council. Ms Heron would attend childcare 8 Affidavit of David Leo Fitch dated 14 April 2022, Exhibit A2 [45] (JTB vol 1, 557). 9 T31.16-22. -- 10 of 65 -- [2024] SASC 140 Kimber J 9 centres and check and validate their reported performance. Ms Heron was appointed to validate the performance of six centres across Australia. Ms Heron said that position permitted her to observe a range of practices and procedures across different childcare centres. 29 From June 2009 until June 2010, Ms Heron was the centre director at Conyngham Street Community Childcare Centre in South Australia. 30 In June 2010, Ms Heron was appointed as centre director for IBK. As set out earlier, IBK was a childcare centre at Golden Grove owned by Mr D Fitch and other investors. As set out earlier, Ms Foster was the assistant director at IBK. The evidence of Ms Heron was that she and Ms Foster were successful in operating IBK. Ms Heron said that she and Ms Foster felt supported by Mr D Fitch, who respected their expertise and was prepared to back both of them. Ms Heron continued to work at IBK as a director after it was purchased by G8 in June 2013 and renamed GGWOL. 31 Ms Heron resigned from G8 after June 2016. Her evidence was that she had found it difficult to run a childcare centre consistent with her values and practices and Ms Heron felt unsupported by the G8 management structure to which she reported. Ms Heron had contact with Mr D Fitch after she resigned from G8. As a result, Ms Heron learned that Mr D Fitch wanted to open a new childcare centre, although he was unable to do so immediately. For a period, Ms Heron worked as an independent consultant with Ms Foster and consulted to Mr D Fitch about the opening of a new childcare centre. Ms Foster 32 Ms Foster holds a Bachelor of Early Education and has worked in childcare since she graduated in around 2004. Ms Foster first met Ms Heron in about 2004 when both were working at Margaret Ives. Ms Heron was Ms Foster’s supervisor. 33 From about 2007, Ms Foster worked at IBK. Not long after she started there, Ms Heron became the director of that centre. Ms Foster was on maternity leave when IBK was sold to G8. After returning from maternity leave, Ms Foster worked for G8 at IBK and in so doing became familiar with the policies and procedures applied in large corporate childcare groups. After a time, Ms Foster decided she did not want to continue working for G8 and left in January 2016. 34 In about the middle of 2016, Ms Foster started a consulting business aimed at providing serves and advice to childcare centres. Ms Foster was particularly engaged in consulting to Mr D Fitch, who was looking at opportunities to open new centres. Ms Foster said that by that time, Ms Heron was also providing similar services and advice. The design of KKM 35 In about late 2016, Ms Foster learned that Mr D Fitch had found the land at 217 Portrush Road, Maylands and was prepared to develop it for use as a childcare -- 11 of 65 -- [2024] SASC 140 Kimber J 10 centre. It can be accepted that the first applicant then built a purpose-built childcare centre on a prominent site, with features to promote the ability to manage the centre efficiently, and in a fashion that enabled delivery by the second applicant of the primary care model. It can be accepted the land was leased to a lessee within which were directors with substantial experience in childcare. At the time of valuation of the land, there is no dispute that the likely highest and best use of the land was as a childcare centre.10 36 It is necessary to say something more about the development of the land by the first applicant. As the land had existing buildings, there was a need to design a centre that would work with those buildings. Architects were appointed to undertake the design. Ms Foster and Ms Heron worked closely with the architects to design a centre which would meet the needs of the desired childcare centre. What was built required a degree of internal remodelling within the buildings, especially in what was a heritage bungalow. 37 Ms Foster says that she and Ms Heron were able to use their knowledge of the compliance requirements for childcare centres and knowledge of childcare centre operations, to develop a design that would enable a childcare business to run efficiently and comfortably in the available space. Ms Foster said that she and Ms Heron are very familiar with the requirements a childcare centre must meet. For example, a childcare centre must offer a minimum of 3.25m2 unencumbered indoor space per child, and 7m2 outdoor space per child. Ms Foster said that the internal rooms of a childcare centre need to be carefully designed to ensure the centre can obtain a licence for the number of places it is targeting. KKM was ultimately able to accommodate 152 children at any one time. 38 KKM was divided into 10 rooms for the provision of childcare in three age groups, being babies (four rooms), pre-kindergarten (four rooms) and kindergarten (two rooms). The centre segregated outdoor play areas for the different age groups, featuring outdoor deck areas and play equipment. It also included a commercial kitchen, administration offices, a reception area, and a carpark with 51 spaces. 39 Ms Foster said that she and Ms Heron wanted certain design features included because they knew they helped childcare workers perform at their best. Ms Foster said, for example, they know that in a babies’ room, a common problem is that staff need to keep leaving the room to perform task like using a kitchenette to warm food, bottles etc and that could be disruptive to babies and make it hard to provide adequate supervision. The instruction to the architects was to situate the baby rooms in pairs and locate a shared kitchenette space between the two rooms, making the kitchenette accessible directly from each room. The instruction included that the kitchenette was to be open and divided from the rest of the room only by waist-high walls and barn doors. On the evidence of Ms Foster, this design would support continued supervision and improve babies’ wellbeing, because it 10 Report of Ms Parker dated 16 April 2020 [1.5], Exhibit A24 (Expert Witness Report Book (‘EWRB’) vol 2, 1088). -- 12 of 65 -- [2024] SASC 140 Kimber J 11 would avoid the babies’ carers leaving the room. Ms Foster said that it permitted a continuous connection between staff and children. Ms Foster said that the connection between staff with whom the child is familiar is something that children and families care about, especially in babies’ rooms. 40 Ms Foster said that a similar approach was taken to the position of the children’s bathrooms in the baby rooms and pre-kindy rooms. The bathrooms were to be shared between two rooms and accessible from each. The management of the centre 41 Ms Foster and Ms Heron were the business managers of KKM. Reporting to them were a centre director and assistant director. Reporting to the director and assistant director were the team leaders of the four babies’ rooms, four pre-kindergarten rooms and two kindergarten rooms. 42 Ms Foster said that she and Ms Heron roughly divided up the work of business manager. Ms Foster said that she looked after most of the financial aspects of the business and Ms Heron took care of timetabling, staffing and enrolments. Nevertheless, Ms Heron said that both were able to attend to the tasks ordinarily performed by the other. The primary care model 43 Ms Heron and Ms Foster are committed to what is described as the ‘primary care model’. 44 Ms Heron described that model in the following way. When a child takes up a place at a childcare centre, a single staff member is allocated as the primary carer for that child. That primary carer builds a relationship and attachment with the child from that first visit. The primary carer should maintain physical proximity and line of sight to the child, ideally throughout the day and especially early on. After the relationship and attachment is built with the primary carer, a secondary carer can be introduced. Ms Heron said that there is evidence demonstrating that this relationship helps mitigate the stress level of a child in the childcare setting. Ms Heron said that the primary care model has a number of other advantages. Most importantly in her view, it helps the child to be settled and happy in the childcare centre. In the view of Ms Heron, it is commonplace to see a child look for their primary carer and seek reassurance from them when upset. In those situations, eye contact, or a few words, with the primary carer is often sufficient to comfort the child. 45 In the experience of Ms Heron, the primary care model gives comfort to parents. The parent is reassured that there is a primary carer familiar with their child who they can talk to about their child. It is the view of Ms Heron that this also benefits the child. In her view, it is critical that the parent not be stressed when their child is introduced into the childcare environment. In the opinion of Ms Heron, that stress can transfer to the child. -- 13 of 65 -- [2024] SASC 140 Kimber J 12 46 Ms Heron also said that the primary care model also benefits staff. Ms Heron said that childcare centre managers and staff are sometimes resistant to implementing a primary care model because they think it will be too hard. Ms Heron acknowledged that this model requires close attention to staffing. However, in the view of Ms Heron, properly implemented, once relationships are established, a primary care model makes staff members’ lives easier. It also devolves a greater degree of responsibility for decision making about the child to the primary carer. Operation hours of the business 47 KKM offered childcare between 6.30am to 6.30pm. Principles of compensation 48 Section 22B of the Act confers a right to compensation for the divestment of a person’s interest in land when the freehold estate is acquired. It provides: 22B—Entitlement to compensation Subject to this Act, a person is entitled to compensation for the acquisition of land under this Act if— (a) the person's interest in land is divested or diminished by the acquisition; or (b) the enjoyment of the person's interest in land is adversely affected by the acquisition. 49 Section 25 sets out certain principles governing the determination of the amount of compensation. They include the following: 25—Principles of compensation (1) The compensation payable under this Act in respect of the acquisition of land shall be determined according to the following principles: (a) the compensation payable to a claimant shall be such as adequately to compensate him for any loss that he has suffered by reason of the acquisition of the land; and (b) in assessing the amount referred to in paragraph (a) of this section consideration may be given to— (i) the actual value of the subject land; and (ii) the loss occasioned by reason of severance, disturbance or injurious affection; and (c) compensation shall be fixed as at the date of acquisition of the land; … 50 In assessing what an applicant has lost by reason of the acquisition of the land, the Court is to assess what price would be reached by a ‘willing but not anxious seller and a willing but not anxious buyer, bearing in mind all material -- 14 of 65 -- [2024] SASC 140 Kimber J 13 business considerations’.11 The Court is to have regard to the views of both the person in the position of the seller and also the approach of the willing but not anxious buyer. 51 The valuation methodology set out in Spencer v Commonwealth is to be applied:12 … the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, ie, whether there was in fact on that day a willing buyer, but by inquiring ‘What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?’ It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together. The value of the business – introduction 52 As to the value of the business, three experts gave evidence. 53 The second applicant called Mr Peter Holmes. Mr Holmes is a director at KPMG with about 28 years’ experience in forensic accounting. Mr Holmes has been valuing businesses for over 30 years. Mr Holmes had valued about 12 childcare businesses in a period of about two years before giving evidence. Mr Holmes has a Bachelor of Economics, is a fellow of the Chartered Accountants Australia and New Zealand (CAANZ) and a fellow of the Forensics Institute of Australia. Mr Holmes is a member of the Financial Services Institute of South Australia, the Association of Certified Fraud Examiners and the Law Society of South Australia. He has been a member of the CAANZ, Forensic Accounting Special Interest Group since its inception in May 1999 and a member of the CAANZ Business Valuation Special Interest Group since its inception in June 2005. 54 Mr Martin White and Mr Michael Schwarz were called by the respondent. 55 Mr White is a consultant to Morris Forensic, a specialist accounting and valuation practice. He has been practising in the field of business valuations for at about 15 or 20 years. Mr White has a Bachelor of Commerce (Accounting) from Flinders University conferred in 2000 and a Bachelor of Laws and Legal Practice (Honours) from Flinders University conferred in 2001. Mr White has a Graduate Diploma in Chartered Accounting conferred in 2003 and a Graduate Diploma of Investment of Finance, Financial Services Institute of Australia 2000; Business Valuation Specialisation, Kaplan 2014 and Forensic Accounting Specialisation, 11 Emerald Quarry Industries Pty Ltd v Commissioner of Highways [No 2] (1976) 18 SASR 438, 477. 12 (1907) 5 CLR 418, 432 per Griffith CJ. -- 15 of 65 -- [2024] SASC 140 Kimber J 14 Macquarie University, 2018. Mr White accepted that childcare centres were not a speciality of his accounting or forensic accounting practice.13 56 Mr Schwarz is a divisional director of M3 Properties. In that role, Mr Schwarz is responsible for valuation and consulting tasks involving childcare centres and early learning properties for asset and financial reporting, mortgage security, assessments and determinations. Mr Schwarz has a Bachelor of Business (Property) from the University of South Australia. He is a certified practicing valuer, an associate of the Australian Property Institute and an associate member of the Australian Childcare Alliance. Mr Schwarz has very substantial experience in the valuation of childcare centres. Mr Schwarz has been undertaking such work for about a decade. During that time, Mr Schwarz has undertaken approximately 196 valuations, incorporating 118 early childhood centres within South Australia and Victoria.14 The reports 57 Mr Holmes prepared three reports of his own. Those reports are dated 19 August 2020; 13 April 2022 (being a reply to reports of Mr Schwarz); and 3 November 2022 (being a reply to the report of Mr White). 58 The report of Mr White is dated 12 August 2022 and comments upon the first and second reports of Mr Holmes. 59 Mr Schwarz prepared three reports of his own with respect to the valuation of the business. Those reports are dated 16 April 2020; 16 November 2020 (in the form of a letter to the Department for Infrastructure and Transport and a review of the first report of Mr Holmes); and 1 March 2022 being an updated valuation with respect to the business. 60 In addition to the above individual reports, there is also a joint report of all three experts.15 Valuation approach – the business 61 There is no dispute that the appropriate valuation approach is an income approach, using the capitalisation of maintainable earnings methodology with earnings before interest, tax and depreciation and amortisation (EBITDA) being the measures of earnings. In evidence which is not disputed, Mr Holmes described the income approach in the following way:16 An income approach has regard to either profit or cash flows and an assessment of what are the future maintainable cash flows or profits of a business in this case. So you determine from the analysis what is referred to as future maintainable earnings or FME and the level 13 T223.17-20. 14 Email dated 15 July 2021 of Mr Schwarz including CV, Exhibit R15. 15 Joint Report of Mr Holmes, Mr Schwarz, and Mr White dated 23 October 2023, Exhibit A13 (‘Joint Report’) (EWRB vol 2, 983). 16 T192.20–34. -- 16 of 65 -- [2024] SASC 140 Kimber J 15 of earnings that you are considering could be profit before tax. It could be earnings before interest or in this case earnings before interest, depreciation and amortisation or colloquially referred to as EBITDA. So once [you] identify that, you then capitalise that assessed level of future maintainable earnings at a capitalisation rate or an earnings multiple. So there are two parts to the assessment. One is the determination of the FME and the other part is determination of the earnings multiple. 62 The object of future maintainable earnings (FME) is to identify the sustainable earnings of the business that are valued into the future, but at a point in time. There is no dispute that the valuation date appropriate in this case is 31 October 2019. 63 The capitalisation rate (or earnings multiple) captures several assessments of risk and growth, but, as explained by Mr Holmes in terms which are not disputed, it is a risk adjusted rate of return on those earnings. It is effectively a capitalisation of the earning stream into perpetuity that is paired back because of risk. The greater the risk, the smaller the multiple.17 64 Mr Holmes described it as:18 […]acknowledged as being a very subjective assessment, particularly in the case of small businesses. But in this case, as set out in my report, there has been some transaction evidence of comparable sales of child care centres that provide some context of the earnings multiple. But essentially it is a relatively subjective assessment. 65 In the opinion of Mr Holmes, the earnings multiple for childcare centres involves a subjective consideration of a number of risk factors. Among those risk factors are occupancy; age cohort; staff ratio requirements; growth prospects; competition and market demand for profitable childcare centres and Government policies regarding subsidies. There is no dispute that observed, market based, transaction multiples are a fair and proper benchmark. Given the subjective nature of the assessment, there is no dispute that it is usual to consider a range of multiples. Capitalisation rate or earnings multiple - finding 66 In the opinion of Mr Holmes, the appropriate capitalisation rate is in the range of 4.1–4.5, with his opinion being that the appropriate rate to be adopted being 4.3. In the opinion of Mr White, the appropriate capitalisation rate is in the range of 4.0–4.4,19 with the appropriate rate to be adopted being 4.3. Mr Schwarz did not provide a range and in his opinion, the appropriate capitalisation rate is 4.0.20 In its closing submissions, the respondent did not dispute that the appropriate capitalisation rate was 4.3. 17 T193.20–194.17. 18 T193.24-30. 19 Report of Mr White dated 12 August 2022 [8.12], Exhibit R14 (EWRB vol 2, 858). 20 Second Report of Mr Schwarz dated 16 November 2020 p 4, Exhibit R17 (EWRB vol 1, 490). -- 17 of 65 -- [2024] SASC 140 Kimber J 16 67 Given the opinions of Mr Holmes and Mr White, I find that the appropriate capitalisation rate is 4.3. Daily rate 68 There was ultimately no dispute that valuation should be calculated on a daily rate of $121 per day. I am satisfied that is the appropriate rate. Occupancy rate 69 The principal difference in the determination of FME is what is to be assumed about the occupancy rate at which to calculate revenue. 70 The second applicant submits that the occupancy rate that should be adopted is 95 per cent. I will set out elsewhere the evidence of those involved in the running of KKM about the occupancy rate and the expectation of an occupancy rate of 95 per cent by February 2020. In short, although that occupancy rate had never been achieved at KKM on a weekly or monthly basis, the second applicant submits that the occupancy rate which had been forecast by it should be accepted. I will return to that forecast. Historical occupancy rates 71 For the moment, I will outline some of the evidence about what occupancy rates had been achieved. 72 As to the occupancy rate of KKM, there was no dispute about the following graph prepared by Mr Holmes setting out the trend and growth in the occupancy rate in the period for the weeks 19 March 2017–19 October 2019:21 73 In terms of the trend to 15 December 2019, having been provided with weekly occupancy data for the period 19 October 2019 to 15 December 2019, Mr Holmes determined that in the week ending 15 December 2019, the occupancy 21 Report of Mr Holmes dated 13 April 2022 [6.1], Exhibit A11 (EWRB vol 1, 515). -- 18 of 65 -- [2024] SASC 140 Kimber J 17 rate was 86 per cent having been 82 per cent in the previous period. Mr Holmes also determined that in the 24-week period from 1 July 2019 to 15 December 2019, the average weekly occupancy rate was 86 per cent having been 78 per cent in the prior period.22 There is no dispute that in the period just mentioned, weekly occupancy had never reached 90 per cent. Mr Holmes set out the weekly occupancy in the period 1 July 2019 to 15 December 2019 in the following way:23 74 Mr Holmes opined that the rolling 12-month average occupancy to November 2019 was as set out in the table and graph below:24 22 Report of Mr Holmes dated 13 April 2022, Exhibit A11 [6.2] (EWRB vol 1, 538). 23 Ibid [6.2.3] (EWRB vol 1, 539). 24 Ibid [6.3.1] (EWRB vol 1, 539-540). -- 19 of 65 -- [2024] SASC 140 Kimber J 18 75 The evidence was that a rolling average (i.e. – the sum of the occupancy over the relevant time period) is ‘generally used’ for trend purposes.25 Mr Holmes opined that if occupancy was trending upwards (i.e. – the beginning period is lower than the ending period), then calculation of the rolling average ‘will always arrive at a lower average occupancy than the rate in the ending period, without regard to the prospects for future maintainable occupancy’.26 There was no dispute that the rolling average determined by Mr Holmes was showing ‘an upward trend’.27 76 Based upon a forecast provided by KKM, Mr Holmes was prepared to value KKM on the assumption of an occupancy of 95 per cent commencing in February 2020. Mr Holmes opined the assumption was reasonable.28 As I have said, I will return later to the forecast upon which that assumption is based as it is an important aspect of determining the value of KKM. Accepting the forecast, Mr Holmes reflected the increase in occupancy through to April 2020 in the following table:29 77 It can be observed that the table assumes no drop in occupancy between December to January and a substantial increase in February 2020 (i.e. - an increase from 86 per cent to 95 per cent, being an increase of about 10 per cent from one month to the next). 25 T245.28-T246.10. 26 Report of Mr Holmes dated 3 November 2022, Exhibit A12 [6.2.4] (EWRB vol 2, 933). 27 T248.9-11. 28 Report of Mr Holmes dated 19 August 2020, Exhibit A9 [4.1.1]-[4.1.2] (EWRB vol 1, 87). 29 Report of Mr Holmes dated 13 April 2022, Exhibit A11 [6.4.1] (EWRB vol 1, 540). -- 20 of 65 -- [2024] SASC 140 Kimber J 19 78 In contrast to Mr Holmes, both Mr White and Mr Schwarz opined that the appropriate occupancy rate that should be used in arriving at a valuation of KKM was 82 per cent. 79 Mr Schwarz based this upon data available to all experts and, in particular, the weekly ‘utilisation reports’ for the period March 2017 to October 2019. In the opinion of Mr Schwarz, that showed an overall average occupancy for the 12 months to October 2019 of 73 per cent. Given that the 2019/2020 budgeted revenue ‘has been based on unaffected terms with an occupancy rate of 82 per cent’, in the opinion of Mr Schwarz, it was appropriate to adopt that occupancy rate.30 Mr Schwarz accepted that the rolling average from 1 July 2019 to 15 December 2019 was as calculated by Mr Holmes.31 80 Mr White opined that the average occupancy in the 52 weeks to 15 December 2019 was 82 per cent, which reflected weekly occupancy averages as set out below. As can be seen, in the period just mentioned, weekly occupancy had not ever exceeded 88 per cent, an occupancy reached for the first time in early September 2019: 81 Mr White compared the daily occupancy from February 2019 to mid-December 2019 and opined: growth was being achieved in the early part of 2019 (compared to the equivalent months in 2018); the level of growth reduced over the course of the year to September; and occupancy reduced slightly in October to December (compared to the equivalent months in 2018). 82 In the opinion of Mr White, the above can be set out in the following table: 30 Report of Mr Schwarz dated 16 April 2020, Exhibit R16 p 28 (EWRB vol 1, 33). 31 T253.22-28. -- 21 of 65 -- [2024] SASC 140 Kimber J 20 83 In the opinion of Mr White, the above table indicates that there had been ‘minimal improvement or a reduction in occupancy compared to 2018’ and that ‘is indicative of growth stagnation’ at KKM.32 84 As will be set out elsewhere, the evidence of the second applicant is that, in the early part of 2019, occupancy rates at KKM were affected by a business decision to focus on KKGG. Mr White accepted that he had not considered whether the historical occupancy may have been impacted by a deliberate decision to allocate staff to KKGG and said that, if that had occurred, it would possibly inform his opinion about stagnation.33 An aspect of the evidence of Mr White was the following:34 Q You understood, though, by reading Ms Heron and Ms Foster's affidavits that a conscious decision had been made to transition staff from Maylands to Golden Grove. A I believe I read something to that effect, yes. Q You understood that happened in November 2018. A I have no recollection of that date. Q You do know this though, that there's a relationship between the number of staff and the number of children who can be in attendance at the child care centre. A Yes, I understand that. Q So there are statutory ratios or regulated ratios for the number of staff to students, depending on their age. A Yes, I believe that's the case. Q And, therefore, if you moved staff and made a business decision to move staff from one centre to the other centre with a view to kickstarting the other centre, that might 32 Report of Mr White dated 12 August 2022, Exhibit R14 [6.4.10] (EWRB vol 2, 832). 33 T223.31-T224.30. 34 T223.31–T224.38. -- 22 of 65 -- [2024] SASC 140 Kimber J 21 have an impact upon the occupancy at, in this case Kozy Kids Maylands at the time this was occurring. A I expect it would only have an impact if it left you below the statutory requirements such that you had to say no to additional. Q And you had no understanding at least at the time you completed your report that, in fact, Kozy Kids Maylands was saying no to enrolments for that very reason. A My understanding was from the affidavits that the staff numbers was actually sufficient, purportedly, to take the occupancy to 95% and stay within the ratio, so I wasn't aware of that being an issue. Q If you had been aware that there had been a deliberate business decision and that had the consequence that enrolments at Kozy Kids Maylands were kept static but the business at Kozy Kids Golden Grove was being kickstarted in that way, it would have given you pause about the conclusion that you made about stagnation because there's an explanation for the numbers. A Possibly. I haven't analysed the numbers to the extent that I'd need to offer an opinion on that. 85 As to the evidence relied upon by the second applicant about it having techniques for maintaining and increasing occupancy (a key aspect of why the second applicant submits that an occupancy rate of 95% by February 2020 is the appropriate assumption), Mr White said that he preferred to look at ‘the historical occupancy rates that were actually achieved and make a judgment based on that’.35 When it was suggested that he had ignored techniques to build occupancy other than new enrolments, Mr White said:36 Well, I think my assumption is that the techniques to building enrolments had applied throughout the life of this business, such that there wasn't anything new to offer at this point in time. 86 I agree the assumption of Mr White reflected in the evidence immediately above is appropriate. It is also important. Subject to a business decision relating to KKGG in the early months of 2019, the techniques employed at KKM to build enrolments had applied throughout. There was no new approach that had only been recently introduced, nor was there any new approach that was about to be introduced. It is also not the case that there was some external factor which would exist in February 2020 that had not previously existed and which might have contributed to increased enrolments. 87 Mr White also said that to calculate the impact of any focus upon KKGG early in 2019, he would have to work out how many enrolments were turned away ‘such that one could work out what the occupancy might have been in the absence of that practice’. Mr White said ‘I am not aware of any data in respect of that’.37 35 T223.27-30. 36 T228.7–13. 37 T239.23-24. -- 23 of 65 -- [2024] SASC 140 Kimber J 22 Consistent with that evidence of Mr White, there is no data about how many enrolments were turned away. As will be seen, the evidence about this was only general. Consistent with the absence of data and the generality of the evidence, Mr White was not asked to assume how many enrolments had been turned away as the result of a decision to concentrate on KKGG. 88 In the opinion of Mr White, the data with respect to occupancy rates does not support the assumption made by Mr Holmes and sought to be established by the second applicant (i.e. – an occupancy rate of 95 per cent from February 2020). In the opinion of Mr White, there is ‘strong support’ for an assumption of 82 per cent average occupancy. Mr White said that he had noted:38 average occupancy in the 52 weeks ended 15 December 2019 was 82%; year on year growth in occupancy reduced over the course of 2019 such that occupancy reduced year on year in October to December 2019 (indicating, in his view, that growth had stagnated); and a new centre with capacity for 110 children opened in or about February 2020 on the same road in the adjacent suburb that would have likely reduced the ability of the second applicant to increase occupancy in the short term. 89 Later I will turn to a forecast prepared by the second applicant which is a key aspect of its evidence said to establish that an occupancy rate of 95 per cent by February 2020 would have been achieved. As set out above, what appears in that forecast has been accepted by Mr Holmes. Nevertheless, it is convenient to set out here some aspects of the evidence of Mr White about the forecast. 90 As will be seen, that forecast draws upon enrolments in December 2019; adds new enrolments in January and February 2020 based upon what KKM describes as waitlists; and then applies an attrition rate of eight per cent to arrive at the enrolments forecasted in February 2020 (i.e. – 95 per cent). As for the suggestion that the attrition rate of 8 per cent relied upon by the second applicant was appropriate, Mr White’s evidence was that, in his view, it was unclear what that was predicated upon; that it appeared arbitrary; and, on his analysis, it appeared too low.39 Mr White also doubted that the waitlists were a reliable source of future enrolments. 91 As for the suggestion that occupancy was trending upwards in 2019, Mr White said that it was impacted by seasonality. He said that ‘it builds up over the course the of the year, and then falls away around the start of the year and then builds again’.40 As will be seen, a fall around the start of the year is consistent with other evidence. In my view, this is also consistent with the occupancy data earlier set out. The table ‘Kozy Kids – Occupancy by Day, Week’ is consistent with occupancy being at its lowest at the beginning of each year, but then increasing throughout the year. That same table is consistent with the growth being greater throughout 2017 and 2018 than in 2019. This is not to ignore that the growth in 38 Report of Mr White dated 12 August 2022, Exhibit R14 [6.2] (EWRB vol 2, 834). 39 Report of Mr White dated 12 August 2022, Exhibit R14 [6.6.5] (EWRB vol 2, 837); T232.9-14. 40 T234.2-12. -- 24 of 65 -- [2024] SASC 140 Kimber J 23 2017 is from nil. Although one must be cautious as it is data with respect to only a single year and about a different childcare centre, the drop in occupancy towards the beginning of the year with growth throughout the year, is broadly consistent with the occupancy data with respect to KKGG between January to December 2020.41 92 Mr White accepted that the occupancy of KKM was 86 per cent at the time of the notice of acquisition. Nevertheless, Mr White maintained that 82 per cent was the appropriate figure as it was an average. Mr White said:42 But if you look at what my average of 82% really means, it's talking about starting at a lower percentage than that and building to a higher percentage over the course of the year. 93 Mr White was aware of the opinions expressed about the expectations of increasing occupancy rates to 95 per cent but said that:43 I preferred to look at the historical occupancy rates that were actually achieved and make a judgment based on that. Purchasers of a business taking into account forecasts 94 As has been mentioned, a key aspect of the evidence relied upon by the second applicant to establish an occupancy rate of 95 per cent by February 2020 is a budget forecast. Consistent with the data set out earlier, the second applicant does not suggest that an occupancy rate of 95 per cent had ever been achieved at KKM. 95 Nevertheless, Mr Holmes opined that purchasers did not only determine value based upon historical data. Mr Holmes opined that where a business has an increasing trend in factors affecting earnings, greater weight is usually applied to the forecast. Mr Holmes opined that adopting historic earnings is usually adopted when there is no forecast available, there is not the capacity to grow the business and/or no growth is likely.44 Mr Holmes gave the following evidence about the appropriateness of looking at forecasts:45 Q … you express the view that 'The ultimate price determined in a transaction in my experience is usually a matter of negotiation and involves hurdles if a purchaser is concerned about growth and forecast earnings.' A Yes. Q So a purchaser will look at a forecast and then form their own view about whether that's a reliable basis for them to determine the price they are prepared to pay for the business. 41 Report of Mr Holmes dated 3 November 2022, Exhibit A12 [6.3]. 42 T236.25-28. 43 T223.28–30. 44 Joint Report dated 23 October 2022, Exhibit A13 [2.2] (EWRB vol 2, 989-990). 45 T202.16–T203.32. -- 25 of 65 -- [2024] SASC 140 Kimber J 24 A Yes. Q If the forecast involves growth the purchaser will have to make an assessment as to whether they want to factor that in to the future maintainable earnings or whether they're going to exclude that for the purposes of the price they're willing to pay. A Yes. Q I suggest to you that purchasers are going to be very careful when they're considering forecast profits which are not based on historical performance. A Well, I disagree. Purchasers as vendors also consider all manner of things including stable management, growth forecast, industry factors, government subsidies, the whole landscape that underpins FME and risk. So again we're talking a difference between value as compared to an ultimate price that might be put on the table so to speak which evolves over a period of due diligence by the purchaser; but ultimately, yes, they'll have regard to both historic and the forecast, but ultimately they're buying a future cashflow. So what's their risk assessment of that future cashflow that's what they're trying to find out. Q When they're pricing in future forecast profits they're going to be thinking about the way that they would be running the business aren't they. A Possibly if there are transactions of course where the incumbent management is transferred, so you've got less risk because the people who previously run the business are still there. So some purchasers of course are investor purchasers and not management purchasers. Q If there's to be a change in management the extent to which the profits are reliant on management input is going to be something the purchaser is taking into account. A Depends on whether they've got their own management. Q Purchasers are likely to come in with a view about how they might run it. A Yes. Q And how they think they can make money. A Yes. Q A purchaser is unlikely to be willing to pay for the work that they have to do to achieve profits in the future. A I disagree. 96 For his part, Mr Schwarz did not contend that a purchaser would only consider historical data. His evidence was that historical data was the first thing that would be considered and that if future growth was taken into account, there may be some adjustment elsewhere. Mr Schwarz also opined that if a business is viewed as providing a growth opportunity, purchasers are reluctant, and unlikely, to pay the vendor the full value, or anything near the full value of this growth. In the opinion of Mr Schwarz, the forecast growth is yet to be realised and will require -- 26 of 65 -- [2024] SASC 140 Kimber J 25 the skill of the purchaser to achieve growth forecast by the vendor.46 An aspect of the evidence of Mr Schwarz was the following:47 … And so I look at the historical - I look at how a purchaser would view this property if they were to buy it and all advice to me is that purchasers would look at, firstly, historical trade. Basically what they want to do is like what Mr Holmes said, they look at fair market earnings going forward from a purchase point of view and what they would do is look at, firstly, historical data and how that business has been trading, ideally over three years and they put significant weight on historical data. Feedback to me is that that's primary in a lot of cases the only thing that they would consider, now I think they would probably consider other things as well, in terms of working out whether that fair market earning is sustainable over the long-term and part of that is to do with the demographics, the supply and demand, where that business is in terms of its life cycle and they would look at okay, what is a sustainable fair market earnings for that business? Going through all that process, looking at the budgets and the historical data and my understanding of the centre and the size of the centre is a significant factor. A likely purchaser would consider what their budget is, is a reasonable sustainable fair market earnings. 97 Mr Schwarz also said:48 Regarding whether a purchaser would pay for future earnings or future growth, my experience and feedback from that is no, they tend not to want to pay anymore. What they may consider is if they view a business that does have growth, and as I said before, if they look at a sustainable maintainable earnings going forward, which is above what is currently being achieved by business and they think that there is potential for that to get there and that's a reasonable amount, whatever that may be, one way of calculating that, which I would do, is adopt the sustainable maintainable earnings which might be higher than the actuals but make an adjustment to the capitalised value that comes from that for the present value of the loss of income until you reach that maintainable earnings. So a purchaser would factor in say well - and take this case as an example hypothetically that maybe 95% is considered achievable and ... but we're only at 82 now. A purchaser may capitalise the income at the 95% but what they would do, and the way I would calculate it is make an adjustment to that capitalised amount for the present value of the loss of income until you get to that and you make a call. It might take 12 months, it might take two years, and so during that period you won't be operating at that level; there will be a loss of income stage to get to there, and then the present value of that loss of income would come off the capitalised value. So you make a capital adjustment deduction from that amount. That's one way that a purchaser may look at it if they think that it's reasonable to get to that growth. 98 For his part, Mr White agreed that a purchaser is unlikely to be willing to pay for the work they have to do to achieve profits in the future.49 Maximum occupancy 99 Under its licence, KKM was able to provide a day care to 152 children each day. That maximum occupancy represents the number of paid childcare places that could physically attend KKM on any given day. However, that number does not represent the maximum number of places that could be paid for on a single 46 Joint Report dated 23 October 2023, Exhibit A13 [2.2] (EWRB vol 2, 989-990). 47 T290.27-T291.13. 48 T301.5-35. 49 T300.5-22. -- 27 of 65 -- [2024] SASC 140 Kimber J 26 day. It was possible to have booked occupancy exceeding 152 (i.e. – greater than 100 per cent occupancy). In that event, more than 152 places would be paid for on a single day. This is because day care places must be paid for even when a child booked is absent. The expectation of a growth in the occupancy rate by February 2020 100 The evidence of Ms Foster was that KKM expected its occupancy rate to rise throughout the 2019-20 financial year, with the expectation that it would reach 95 per cent by February 2020. Ms Foster said that KKM was confident of achieving higher than average occupancy rates because of its operating methods and experience. Ms Foster said that she and Ms Heron had years of previous experience managing IBK at a high occupancy level. 101 It was the evidence of Ms Foster and Ms Heron that KKM had advantages which KKM was confident would drive its occupancy rate well above that of the average childcare centre. Namely: 1. As touched on earlier, the building was designed by she and Ms Heron to maximise its effectiveness; was new and attractive; and was located in a highly prominent location with easy vehicle access into and out of the site; 2. KKM intensively managed room numbers and booked places to above ‘ratio’ levels. This was done by managing room places by individual transitioning from one room to another and having flexible age ranges within rooms. Ms Foster and Ms Heron had the support of the owners to use their discretion to intensively manage or staffing to ensure compliance; 3. Ms Foster and Ms Heron used the primary care philosophy which, on their evidence, encourages carer continuity for the child and builds confidence with parents, making them more likely to pick up extra days and to recommend the centre to other prospective clients; 4. The opening hours were long (6.30am to 6.30pm) and KKM catered to all pre-school age groups (whereas some centres do not take babies). 102 Later, I will set out some of the evidence with respect to the above factors. For the moment, it can be observed that all of the above had been in place since KKM opened. These were all matters that had, subject to the business decision with respect to KKGG, been in place throughout the life of KKM. Any business decision with respect to KKGG was not a consideration in the period 1 July 2019 to 15 December 2019. As set out above, in the period 1 July 2019 to 15 December 2019, the average weekly occupancy had reached 86 per cent, significantly below 95 per cent. In short, in the time that KKM had been open it had not grown its occupancy to 95 per cent. The submission of the second applicant is that it has established KKM would have done so by February 2020, -- 28 of 65 -- [2024] SASC 140 Kimber J 27 bearing in mind that the occupancy had only reached 86 per cent in the period just mentioned. Other evidence about occupancy rate 103 As set out above, Mr Holmes was prepared to accept a budget forecast prepared by KKM which set out an occupancy in February 2020. The witness who prepared the forecast occupancy of KKM was Ms Foster, but her evidence must be viewed in light of all the evidence, including the evidence of Ms Heron and Mr D Fitch. Ms Foster 104 As set out earlier, KKM was able to provide daycare to 152 children at a time each day, but it was possible to have more than 152 children attend on a single day. 105 Ms Foster gave evidence that it was expected the occupancy rate would rise throughout the 2019/2020 financial year and reach 95 per cent by February 2020. That projection was said to be based upon ‘our operating methods and experience’. In particular, ‘years of previous experience managing Iddy Biddy Kids at a high occupancy level’. On the evidence of Ms Foster, KKM had advantages which would drive the occupancy rate well above that of the average childcare centre. Her evidence included the following:50 The building was designed by [Ms Heron] and me to maximise its effectiveness, it was new and attractive, and was located in a highly prominent location with easy vehicle access and egress. We intensely managed room numbers and booked places to above “ratio levels”. We managed room places by individual transitioning and flexible age ranges within rooms. We had the support of the owners to use our discretion to intensively manage out staffing to ensure compliance. We used a primary caring philosophy which encourages carer continuity for the child and builds confidence with parents, making them more likely to pick up extra days and to recommend the centre. Our opening hours were long (6:30am to 6:30pm) and we catered to all pre-school age groups (whereas some centres do not take babies). 106 As above, Ms Foster also relied upon the performance at IBK where she said that high occupancy rates were achieved and sometimes exceeded 100 per cent occupancy. The evidence of Ms Foster also included that KKGG achieved, or exceeded, a 95 per cent occupancy rate in the latter half of 2020.51 Ms Foster also gave evidence that in November 2023, KKGG had achieved an occupancy of over 100 per cent on two days a week.52 50 Affidavit of Mikaeli Kelda Foster dated 13 April 2022, Exhibit A5 [59.1]–[59.4] (JTB vol 1, 43). 51 Affidavit of Mikaeli Kelda Foster dated 13 April 2022, Exhibit A5 Annexure MKF12 (JTB vol 1, 464). 52 T146.31-37. -- 29 of 65 -- [2024] SASC 140 Kimber J 28 107 The evidence about occupancy rates at IBK and KKGG can be accepted. Nevertheless, the techniques for maximising occupancy which were employed at IBK and KKGG had been employed at KKM. What the second applicant seeks to establish is that the occupancy which should be assumed in February 2020 is 95 per cent after a weekly average occupancy that did not exceed 87 per cent in December 2019 and after an average weekly occupancy of 86 per cent in the six months up to 15 December 2019. I consider that it is one thing to point to evidence of occupancy rates of 95 per cent and above 100 per cent being achieved elsewhere, but it is another thing to say that such rates say much at all about the reliability of an expectation of growth to 95 per cent in February 2020 at KKM from an average occupancy of 86 per cent in the last six months of 2019. I will later make some additional observations about occupancy rates at IBK and KKGG. 108 As to the primary care model, Ms Foster accepted that it was a model that was becoming ‘more common’, but how it was implemented and what was considered to amount to such a model is very different from one centre to another’.53 Ms Heron 109 Consistent with other evidence, the evidence of Ms Heron included that although KKM was listed to provide childcare for 152 children each day, that did not mean there could not be more than that number of children on a given day. She explained that a fee is paid by parents (and a Government subsidy received) on days the child is to attend the centre but does not do so. She explained this included days when a child who is booked is absent due to a public holiday; illness, appointment; some other holiday; or other reason. In light of the issue of public holidays, she explained that occupancy on Mondays is always the lowest. It can be noted that is reflected in the data with respect to historical occupancy rates set out earlier. 110 Ms Heron said that the number of children present is invariably lower than the number of children booked. She explained this presents an opportunity to ‘over book’ without exceeding the 152 places for which KKM was licenced. It was the evidence of Ms Heron that:54 This presents the opportunity for a well-run child care centre to “overbook” its rooms. It is possible for a centre to do so without exceeding the number of children permitted under its licence. Miki and I always abide by the regulations and we are quite clear that it is in the best interests of the business to do so. To run a centre at higher occupancy levels requires careful attention to the staff-child ratios, which cannot ever be allowed to fall below mandated levels, however it is quite possible to do so provided that sufficient staffing levels are maintained, and staff and child numbers in each room are continuously managed with care. 53 T104.27-30. 54 Affidavit of Joanne Ella Heron dated 13 April 2022, Exhibit A4 [46] (JTB vol 1, 9). -- 30 of 65 -- [2024] SASC 140 Kimber J 29 111 Ms Heron’s evidence was that she and Ms Foster used a number of techniques to maximise occupancy rates, not just at KKM but at IBK and at KKGG. In evidence similar to that of Ms Foster, Ms Heron identified those techniques in the following way:55 The first is to run a successful centre which satisfied the parents. This drives demand for places. A very important driver of new business for any child care centre is word of mouth. Parents’ choices about child care centres are highly likely to be affected by positive (or negative) reports from their peers. At Kozy Kids Maylands, our other advantages were: • The centre’s visibility – its prominent location. This was also an important driver of new business. • The centre’s appearance – the centre was attractive and we were careful to maintains its appearance. Indeed, about the beginning of 2019, before we received notice of the compulsory acquisition, I had a discussion with David in which I said we might need to think about repainting; David agreed. At about the same time we were also planning to resurface some of the floors. Photographs of the centre taken at around the time of its opening are exhibited hereto and marked “JEH-1”. • The maturing and experience of the centre’s directors, their compassion and welcoming disposition. • The consistency of staff in the rooms. The primary care model feeds directly into occupancy, because parents tend to be satisfied with the level of care their child is receiving. It increases children’s happiness and comfort at the centre. This directly impacts on families. They recommend the centre. Sometimes parents pick up extra days at work because they are so comfortable with their care their children are receiving. Once we had families in the door they rarely left the centre. The second technique is to operate with flexible start dates and flexible transitioning of children between rooms. When children start at the centre, they come for visits (orientation) which generally last an hour. These visits did not count towards staff rations, and they were not funded places. The first visit might be with the parent present in the room, then there might be a number of visits where the parent departs for a while, and comes back. Under a primary care model, the primary carer would be allocated to a child at the first visit. G8 applied pressure to have the child start from a fixed start date, and having a child enrolled in a paid place as early as possible. I like to use a case-by-case approach which allows for as many orientation visits as are required to ensure the child is reasonably settled, even if that means pushing back the paid place by a week or two. This flexibility and care for each child’s needs produces better outcomes in the long run. When transitioning a child from one room to the next, I apply the same, flexible case-by-case approach. I continually shuffle the schedule of children’s transitions between rooms. We transition a child on an individual case by case basis. 55 Ibid [48]–[56] (JTB vol 1, 10-11). -- 31 of 65 -- [2024] SASC 140 Kimber J 30 By maintaining the fluidity of our transition schedules, and flexibility in our orientation visits, we were more likely to be able to accommodate families requests to pick up additional days, or to enrol new children from our waiting list, or take up “walk in:” enrolments. We could take a flexible look at which children were ready to transition, to create space and accommodate others. This is hard work, because it requires constant juggling, and most centres don’t do it. In my experience, most other centres transition children between rooms in large groups, on a rigid timetable. The third technique is to actively manage casual bookings. It often happens that parents want to pick up extra days, because of their work commitments. Families would often ask us about casual places, and sometimes we would know in advance that there would be places (for example, because a child was going away on holidays), and sometimes places would arise at late notice (for example, when a child was called in sick). When we heard from a parent that their child wasn’t coming in, we would telephone families on the casual booking sheet. I actively managed the casual booking sheet and I was always looking to accommodate them. Finally, where many centres seek to manage staff hours to minimise costs, we generally staff the rooms at levels that permit full occupancy. We carefully manage our lunch breaks roster to ensure staff ratios are met at all times. Each day we formulate our lunch roster, but we also adjust it in real time over the course of a day. Form time to time Miki and I, and the centre directors and assistance directors we oversee, step into a room ourselves ensure staff ratios are met. We also engage administrative staff who are qualified in child care and can fill in if required. 112 Ms Heron’s evidence was that sometimes vacancies were filled at the last minute.56 113 Ms Heron said that utilising the techniques above, she had been able to achieve occupancy rates above those of other childcare centres and sometimes up to 105 per cent. I have already made some observations about the significance of occupancy rates at IBK and KKGG. I will say something more about that later. As observed more than once already, on the evidence, the techniques for maximising occupancy had been employed at KKM. The evidence of Mr David Fitch 114 It was the evidence of Mr D Fitch that he believed that positioning KKM as a ‘premium’ offering would lead to high occupancy rates, and better performance than ‘an average childcare centre’.57 Mr D Fitch considered there were three reasons that ‘high occupancy rates’ would be achieved:58 First, a high-spec fitout would be attractive aesthetically. Kozy Kids Maylands looked better than its competitors’ centres. Additionally, a more attractive, comfortable and functional working environment would enable us to attract and retain better staff. 56 T67.17-34. 57 Affidavit of David Leo Fitch dated 14 April 2022, Exhibit A2 [32] (JTB vol 1, 556). 58 Ibid [34]-[36] (JTB vol 1, 556). -- 32 of 65 -- [2024] SASC 140 Kimber J 31 Secondly, the Maylands land was a generously proportioned site, with ample car parking, large outdoor recreation areas. It was accessible directly from a main road. It was prominent – it advertised itself. Thirdly, we had the right leadership in [Ms Foster and Ms Heron] to get a childcare centre performing optimally. In the childcare industry, your business is substantially reliant on good staff, who have good communication skills, who understand childcare, and who are empathetic to the parents’ situation. Parents need to feel comfortable placing their children in your care. It is hard to find staff of that calibre. You need your rapport with parents to be excellent. 115 As set out earlier, it was the evidence of Mr D Fitch that achieving ‘high occupancy is a matter of hard work by centre management [and] is especially so when achieving the last 10 per cent’.59 116 The evidence of Mr D Fitch was that, as at October 2019, he expected growth in occupancy to reach 95 per cent.60 Mr D Fitch rejected that an occupancy of 95 per cent by 1 February 2020 was unrealistic.61 Staff costs 117 As to staff costs, being the most significant cost component of KKM, Ms Foster said that its philosophy was that it would over-staff the centre. Ms Foster said this was done as quality care was key to families’ satisfaction levels and as it was families’ satisfaction that would drive occupancy levels. Ms Foster said that she and Ms Heron would pre-emptively over-staff so that they could be ready to provide a primary carer for any new enrolments straight away. In this way, the availability of staff did not inhibit the ability to accept children and the growth of the occupancy rate. Results at IBK and KKGG 118 As set out above, the second applicant lead evidence suggesting that the likelihood of the predicted occupancy rate of 95 per cent by February 2020 was to be considered in light of past performance at IBK and the performance at KKGG. 119 Ms Foster said that she and Ms Heron had consistently achieved high occupancy rates and sometimes met or exceeded 100 per cent occupancy at IBK. This may be accepted, but the significance of that evidence must be considered in light of at least the following matters. While the management was the same, IBK was a different centre in a different area and the evidence related to no later than 2016. Further, when IBK was established the area in which it opened was underserved by childcare centres.62 For reasons to be given, it would not be an appropriate characterisation of the area within which KKM was operating and from which children were drawn to say that it was ‘underserved’. 59 Ibid, [45] (JTB vol 1, 557); T31.11-15. 60 T42.25-30 61 T43.11-17. 62 Affidavit of David Leo Fitch dated 14 April 2022 [5] (JTB vol 1, 552); T27.28-38. -- 33 of 65 -- [2024] SASC 140 Kimber J 32 120 Ms Foster said that she and Ms Heron had also equalled, or exceeded, a 95 per cent occupancy rate at KKGG in the latter half of 2020. That evidence is supported by the data with respect to the historical monthly occupancy of KKGG from January 2020 to December 2020. Nevertheless, in my view, of significance is the period over which growth from about 87 per cent (broadly equivalent to the 86 per cent at KKM) to 95 per cent (the assumed growth at KKM for which the second applicant contends) was achieved. It was not over a period as short as one or two months.63 To the contrary, it had been achieved over about eight months. An aspect of the position of the second applicant about the significance of the occupancy rate achieved at KKGG was that it operated in an area where competition was high.64 As will be seen, the competition to KKM was of a broadly similar nature (i.e. – relatively high). The opening of Kozy Kids Golden Grove 121 As set out above, it is the position of the second applicant that its growth was impeded for a time due to a decision to focus upon another childcare centre, KKGG. It is the position of the second applicant that this is an important matter to be considered in evaluating whether KKM should be valued on the basis of a 95 per cent occupancy by February 2020. 122 In November 2018, a company with the same group of shareholders as KKM (including Ms Foster and Ms Heron), opened KKGG, a new 104-place childcare services in a purpose-built centre at Golden Grove. The land at Golden Grove was owned by Mr D Fitch. 123 Ms Foster said that she and Ms Heron worked simultaneously for both KKM and KKGG. The employment of Ms Heron was formally transferred to KKGG, and she was paid by that entity. Nevertheless, Ms Foster said that she and Ms Heron continued to work together as the business managers of both centres. Ms Foster said this was done as a matter of administrative convenience and avoided the payment of their respective wages being divided equally between the two centres. 124 Ms Foster said that, during the start-up phase of KKGG, a plateau in the occupancy rate at KKM was experienced. Ms Foster said that this was because they had transitioned five staff members from KKM to KKGG, to ensure that KKGG as the newer centre got off to a good start. Ms Foster said that this was a decision that was in place for ‘approximately three to four months at the start of 2019’. Ms Foster said that most of these staff were in leadership positions and were working either four days a week or full time. 65 Ms Foster said that in early 2019, the decision was made to take ‘less [children] than we normally would until 63 Report of Mr Holmes dated 3 November 2022, Exhibit A12 [6.3.2] (EWRB vol 2, 933). 64 T155.8-31. 65 Affidavit of Mikaeli Kelda Foster dated 13 April 2022, Exhibit A5 [69] (JTB vol 1, 45). -- 34 of 65 -- [2024] SASC 140 Kimber J 33 we had established primary carers for those rooms where we could allocate children’.66 125 Notwithstanding the potential significance to the occupation rate contended for at KKM of the decisions to focus upon KKGG and to minimise the new enrolment applications accepted at KKM, no specific detail was given in evidence of the number of applications not accepted. While Ms Foster said that KKM had been turning down occupancy, it was not suggested that there was any record of the numbers turned away and no estimate of those numbers was given in evidence. 126 In my view, the absence of evidence about those matters is relevant to the evaluation of what weight can be given to the above decision in evaluating the likelihood of an occupancy rate of 95 per cent by February 2020. I have found it difficult to evaluate in any meaningful way the real impact, if any, of that business decision. In evidence that I accept, as Mr White observed, whether that decision might have impacted upon his opinion about growth having stagnated depended ‘upon the degree [to] which enrolments were turned away’.67 As I have observed, there was no evidence involving any data which permits of any confident estimate about how many were turned away. 127 The significance of the evidence about the focus upon KKGG for approximately three or four months in early 2019 is even further diminished by the fact that, assuming that business decision with respect to KKGG did have an impact in the early part of 2019, there is no dispute it was not a consideration by about the middle of 2019. 128 For these reasons, I am unable to attach any meaningful significance to the evidence about enrolments at KKM being impacted by the opening of KKGG in my assessment of whether the valuation should be based upon an occupancy rate of 95 per cent in February 2020. Competition 129 There is no dispute that KKM was not the only childcare centre available within areas from which KKM drew enrolments. Any dispute relates to the extent of that competition. 130 As part of her valuation of the land, Ms Parker (nee Rofe) prepared a valuation and compensation report dated 16 April 2020. That report identified 20 competing long daycare centres within a five-minute drive time catchment area. In addition, Ms Parker also identified two newly proposed long daycare centres within the catchment are identified by her. The catchment area analysis conducted by Ms Parker reveals a ‘relatively low representation of 0–4-year olds’ in a catchment area of a five-minute drive time. Nevertheless, Ms Parker opined that her demographic analysis should be considered ‘reasonably positive’ for the land 66 T174.34-T175.10. 67 T225.1-6. -- 35 of 65 -- [2024] SASC 140 Kimber J 34 occupied by KKM.68 In the opinion of Ms Parker, and based only upon the existing centres, the ‘level of competition for [KKM] is relatively high’.69 In the opinion of Ms Parker, that competition would be only marginally enhanced if the two additional centres proceeded. Using the same five-minute drive time as a catchment area, Mr Schwarz opined that the catchment area was ‘well supplied with long daycare centres’. Mr Schwarz opined that certain statistics indicated that the area in which KKM operated was ‘substantially over supplied’.70 131 The evidence of Ms Foster was that ‘most’ of those enrolled in KKM live locally, within what she estimated was a broader catchment area than that relied upon by Ms Parker and Mr Schwarz. Ms Foster estimated that the appropriate catchment area was within 10 or 15 minutes of KKM.71 Ms Heron gave evidence to similar effect.72 For his part, Mr D Fitch rejected that enrolments would come from a catchment area as limited as within a five-minute drive time.73 132 Ms Foster agreed that as a long daycare centre, KKM competed with other forms of childcare such as early learning centres, family daycare and in the case of older children, preschools.74 Ms Foster accepted that there was a ‘certain large volume of centres and early learning centres and… long daycare centres’ within what she regarded as the catchment area. As a result of searches conducted in February 2022, Ms Foster researched what she regarded as ‘comparable childcare services in the vicinity of [KKM].75 Ms Foster dismissed that the ‘certain large volume’ of centres presented a competitive environment for KKM. Ms Foster said that there were quite a number that were available that a lot of people would not choose to attend.76 Ms Foster accepted nonetheless that there was a high level of competition to KKM.77 133 The above evidence contrasts with that of Ms Heron. Ms Heron rejected that competition was high,78 and only accepted a characterisation of ‘somewhat high’79 when confronted with a list of relevant childcare centres. Discussion 134 It may be accepted, consistent with the evidence of Ms Heron, Ms Foster and Mr D Fitch, that the catchment area of KKM was larger than a five-minute drive time as used by Ms Parker and Mr Schwarz in their reports. KKM was situated on two main roads and on an intersection which provided access to the city. In 68 Report of Ms Parker dated 16 April 2020, Exhibit A24 p 8 (EWRB vol 2, 1093). 69 Ibid p 11 (EWRB vol 2, 1096). 70 Report of Mr Schwarz dated 21 January 2020, Exhibit R26 p 18 (EWRB vol 2, 1029). 71 T119.21-24. 72 T70.13-26; T192.7-26. 73 T45.5-14. 74 T120.18-32. 75 Affidavit of Mikaeli Kelda Foster dated 13 April 2022, Exhibit A5 [87] (JTB vol 1, 48). 76 T121.1-11. 77 T140.7-11. 78 T71.19-23. 79 T75.23-26. -- 36 of 65 -- [2024] SASC 140 Kimber J 35 addition, the provision of long hours made it potentially attractive to parents generally, including those who needed care due to employment obligations, working in the city or in other areas served by the two relevant main roads. Nevertheless, the expansion of the catchment zone, while providing for a larger cohort of potential caregivers wanting childcare, must also, to some degree, increase the choices for those caregivers. 135 In my view, the evidence of Ms Heron about which childcare centres were true competitors to KKM was unduly narrow. As set out above, there were 20 existing childcare centres listed in the report of Ms Parker. Ms Heron was only prepared to identify four of those as ‘real competitors’.80 Ms Heron described a ‘real competitor’ as a centre with a good reputation that has a family coming back for generations.81 Assuming that KKM may have had a good reputation, it had not been established long enough to lay claim to the second characteristic just outlined. At best, that was an aspiration. 136 Importantly, in my view, Ms Heron’s evidence of a ‘real competitor’ illustrates that she was not considering childcare centres which might have had an offering broadly equivalent to that of KKM. In an answer which I am satisfied reflects an unduly narrow view of the level of competition faced by KKM, and which impacts upon the confidence I have in her evidence about the ability of KKM to grow its occupancy rate to 95 per cent by February 2020, Ms Heron said that a ‘real competitor would be someone that provides more than what we can provide’.82 I cannot accept that evidence. It suggests that a childcare centre offering a product broadly similar to that of KKM is not a competitor. At the very least, in my view, a ‘real competitor’ to KKM was a childcare centre providing a broadly similar offering to KKM. 137 I am satisfied that there were more real competitors to KKM than Ms Heron was prepared to concede. 138 The evidence is consistent with KKM having been developed for a particular clientele that might be attracted by specific features which were a focus of KKM. Primarily, but not necessarily exclusively, a newly developed centre with a fresh fit out, offering lengthy opening hours and the primary care model. Its physical location was also an advantage. KKM was on a prominent site and on the intersection of two substantial roads. It can be accepted that these were things of which KKM was proud; was able to offer; and which KKM thought distinguished it from some others in the market. At the same time, Ms Foster accepted that the level of competition was high. 139 In all of the circumstances, I am not satisfied that it is open to make any precise findings about which childcare centres were truly competing with KKM, other than that I am satisfied that it was more childcare centres than Ms Heron was 80 T92.33–93.3. 81 T93.16-24. 82 T94.2-9. -- 37 of 65 -- [2024] SASC 140 Kimber J 36 prepared to concede. Further, while I do not dismiss the evidence of Ms Foster, Ms Heron and Mr D Fitch about their experience of what caregivers valued in a childcare centre and their evidence of having adopted approaches designed to be attractive (before the acquisition of the land, they were, after all, interested in maximising occupancy for their own financial gain as well as, at least in the cases of Ms Foster and Ms Heron, because of a commitment to the primary care model), I consider that the most reliable evidence about the level of competition posed to KKM is that of the experts. The experts based their opinions upon examination of statistical information, albeit relating to a five-minute drive time. The most favourable expert opinion for the second applicant was that of Ms Parker. I accept that the level of competition was, as opined by Ms Parker, ‘relatively high’.83 Expanding the catchment area beyond a five-minute drive time does not change my view about that. Again, it is not possible to identify the true competition with precision. Nonetheless, as a matter of logic, as the catchment area expands, so does the number of childcare centres. The revised 2020/2021 budget 140 Consistent with the evidence of the experts, a key factor in evaluating value is the historical occupancy rates and, at least in the opinion of Mr Holmes, the forecast of growth. I have earlier set out the historical occupancy rates. I turn to the evidence of the revised 2020/2021 budget (i.e. – the forecast). 141 In about October 2019, Ms Foster prepared a budget for the 2020/2021 financial year. On about 7 April 2020, that budget was revised to include a ‘business as usual budget’ for the 2020/2021 financial year. On 20 April 2020, that budget was then further revised due to an error (the revised 2020/2021 budget). Ms Foster described the 2020/2021 budget as including the actual trading performance of KKM for the five months ending November 2019. Ms Foster said that it had been prepared for the purpose of the proceedings.84 Ms Foster said that it also served as a ‘profit and loss’ forecast from 1 December 2019 onwards, in that it included forecasted/budgeted amounts for 1 December 2019 to 30 June 2020 and for the whole of the year ending 30 June 2021. It was the revised 2020/2021 budget that was used by Mr Holmes in arriving at his valuation. 142 Within the revised 2020/2021 budget is a table setting out an occupancy projection of 95 per cent for the February 2020 budget. That table (as amended during the evidence of Ms Foster) is set out below.85 As may be obvious, it takes as the starting point the total occupancy as at the week ending 15 December 2019. Then added are the expected enrolments in January and February 2020 derived from waitlists maintained by KKM. The total enrolment figure thereby arrived at is then reduced by eight per cent to account for school leavers and possible 83 Report of Ms Parker dated 16 April 2020, Exhibit A24 p 11 (EWRB vol 2, 1096). 84 T163.25-30. 85 Affidavit of Mikaeli Kelda Foster dated 13 April 2022, Exhibit A5 Annexure MKF-7 (JTB vol 1, 414); Amendments to this table were made by Ms Foster in the course of her evidence; T144.30-T142.1. -- 38 of 65 -- [2024] SASC 140 Kimber J 37 cancellations. The table as amended during the evidence of Ms Foster is set out as follows: Occupancy projection for February 2020 Budget Mon Tue Wed Thur Fri Total Occupancy Occupancy as at WE 15/12/19 111 138 140 142 126 644 86% Total extra Waitlist places Jan 14 8 9 9 9 49 6% Total extra Waitlist places Feb 13 12 21 16 11 73 10% TOTAL BY FEBRUARY 2020 138 158 170 167 146 767 103% Deduct 8% occupancy (school leavers and possible cancellations) 143 As set out within the above table, the reliability of the revised 2020/2021 budget as part of the evidence said to justify a valuation on the basis of an occupancy of 95 per cent by February 2020 depends upon the reliability of the waitlists as a source of enrolments in January 2020 and February 2020 and the reliability of the eight per cent reduction. The waitlists 144 I am not satisfied that the waitlists can be treated as a reliable contributor to the occupancy rate contended for by the second applicant. My reasons follow. 145 Within the revised 2020/2021 budget are waitlists for January and February 2020.86 The waitlists were maintained by KKM based upon enquiries. 146 I set out that waitlists as they appear in the above budget as both assume some importance.87 86 T142.17-24. 87 Affidavit of Mikaeli Keldi Foster dated 13 April 2022, Exhibit A5 Annexure MKF-7 (JTB vol 1, 414- 415). For the purposes of this judgment, surnames of children have been removed. -- 39 of 65 -- [2024] SASC 140 Kimber J 38 147 As above, waitlists were relied upon to populate the table extracted earlier. On the evidence, they are a key aspect of the data that informs the predicted occupancy of 95 per cent. At least in part, an occupancy of 95 per cent which appears in the table above, depends upon the waitlists providing a reliable picture of the children who will attend in January and February 2020. Some observations about the waitlists 148 In my view, the waitlists provide, at best, an imprecise guide. This is so for at least the following reasons. 149 A starting point is that the waitlists are not a list of those who have committed to taking a place. Ms Foster’s evidence was that the waitlist was not a list of children who were committed to attending.88 Ms Heron described the waitlists as lists used by KKM to identify those who would be called and offered a place.89 As Ms Heron accepted, the waitlists were a record of those who had ‘expressed an interest’.90 Ms Heron said that the practice at KKM was to contact families ‘Probably, November sometime’91 to offer a place. Due to the notification from the respondent, that did not occur. 88 T114.29-31. 89 T76.32–T77.5. 90 T81.24-27. 91 T82.26-30. -- 40 of 65 -- [2024] SASC 140 Kimber J 39 150 As might be obvious, the waitlists set out the date of the enquiry about a place; the start date requested for the child; the days sought; the child’s date of birth, and, in some instances, additional notes relevant to the enquiry. 151 Ms Heron said that she expected those children from existing families or children who had previously attended would have taken a position once offered. Ms Heron said:92 Q You now don't know whether these families would have accepted an offer to enrol. A A lot of them say 'Existing families' so I'd say they would have taken it up. So the first two say 'Existing family', 'Existing family previously attended'. So I'd say, yes they would have taken it up. Q So save those ones that you've identified as 'Existing families' - HIS HONOUR Q I think you also identified 'Previously attended' didn't you. A Yes. The top ones 'Previously attended, returning to care'. Q So that I understand that three children noted 'Previously attended and existing family'. Your expectation would have been that they would have accepted an enrolment, if it had been offered. A Yes, correct. 152 The evidence ‘A lot of them say “Existing families”’ cannot be accepted. The waitlists for January and February 2020 record that only five children were connected to existing families (i.e. – ‘existing family’ or a sibling of another child), or were children who had previously attended. 153 The wait list records 15 names of children for January, and the days about which they have enquired. As set out above, it is from that list that the numbers from each day are then derived and placed into the table. For example, every child who has expressed an interest in Monday is included within the table, and so on. 154 This was done notwithstanding that among those listed in January waitlist were four children with no start date other than ‘Jan 2020’ and ‘End Jan 2020’; a child who had expressed an interest in the week commencing 27 January; a child who had expressed an interest in the week commencing 30 January; and one enquiry relating to a child who was yet to be born with a due date of June 2019 and a start date in September 2020 (i.e. – the child had not started). 155 The approach reflected in the table of assuming that each child listed in the two waitlists will take a place, and do so in a way consistent with the interest expressed at an earlier time, was adopted despite some enquiry dates being a very substantial time before any position might be taken up. For example, in the 92 T81.34–T82.13. -- 41 of 65 -- [2024] SASC 140 Kimber J 40 January waitlist, three of the children made enquiries in 2018, and seven before 13 June 2019. There is no evidence of any follow up after the date of the enquiry to check whether there still existed a desire to enrol the child and, if so, whether that enrolment was still intended to be for the same number of days as indicated at the time of the enquiry. As a matter of common sense, there is a risk that circumstances had changed, including that a family might have made an enquiry at other childcare centres within the area served by KKM. Ms Heron said that start dates which had passed likely reflected that families might have delayed starts without a note recording that having been entered. In evidence that undermines the waitlists being treated as a reliable source to predict enrolments in January and February 2020, Ms Heron described the start dates listed as ‘only possible start dates’.93 156 The risk of a child not taking up a position consistent with the enquiry is revealed by the waitlists. The waitlists set out that some start dates had passed without the child having taken up a place. As above, the January list includes a child who made an enquiry to start on 3 September 2019 but cannot have enrolled. The February waitlist has 30 names. Eight of the 30 of which are said to be enquiries lost following the closure notice. That should be accepted. In the February waitlist, 11 of the 22 remaining enquiries had been made before 30 June 2019.94 There is no suggestion of any follow up since that enquiry. One child was listed to start ‘asap’ with an unknown date of birth. That child cannot have enrolled ‘asap’ as they still appeared on the waitlist. Another child is listed without a start date but with a note that he attended in 2019 but had gone overseas. Six children are listed with starting dates in 2019. Given they appear on the waitlist, they cannot have enrolled.95 157 For the above reasons, I cannot accept that the waitlists are a reliable guide for establishing the extent of new enrolments in January and February 2020. They provide some guide, but not one that I am satisfied is particularly reliable. 158 At least some of the concerns that I have about the waitlists as a reliable guide to future enrolments were shared by Mr White whom, on the evidence, examined the waitlists with some care. Mr White gave the following evidence, which I accept:96 … In the first instance I had some concerns as to whether it is a true wait list versus, perhaps, just a list of inquiries and, hence, the extent to which the names on this list might convert to enrolment. There are also some issues in terms of some of the start dates for people on this inquiry list were prior to the valuation date we're dealing with, so if they were, in fact, to start one would have thought they'd be no longer on a wait list but they 93 T81.6-7. 94 This includes an enquiry listed as 8 May 2020 which I have assumed should be 8 May 2019. 95 This excludes a child with a start date of 1 February 2019 but an enquiry date of 17 July 2019 (i.e. – a start date before an enquiry date) which may suggest a typographical error which I will not hold against the second applicant. 96 T238.29-239.2. -- 42 of 65 -- [2024] SASC 140 Kimber J 41 would be enrolled. The fact that they're not enrolled suggested to me that perhaps they are no longer waiting to be a future enrolment of this place. 159 The matters discussed above impact upon the 95 per cent occupancy rate predicted within the revised budget. The eight per cent deduction 160 I turn to the eight per cent deduction within the table for the revised budget. It is a deduction to reflect children going to school and enrolments not taken up. 161 Ms Foster gave the following evidence about how the figure of eight per cent was arrived at:97 Q So, I understand from your approach you like to be very accurate. Where did you get 8% from. A So, previous experience. So, looking at typically how many children go off. I also looked at the children who were going to school, their specific birth dates. Looked at how many children that would have. Look at typically the fact of okay, if all of those children went to school, how many places would that mean and then deducting from that because they won't all go to school. And then working then an approximation. Q And you've not put any of that workings in here, have you. A No, it comes from experience. Q And you have available the birth dates of every child in the centre, and you know by around October whether they're going to go to school or not. A Yes, our Kidsoft, our program, I don't have to remember their birth dates. I just look back into our Kidsoft program, that will tell me their dates of birth. Q So, you could have demonstrated how you got 8%, couldn't you. A Yes, I did not realise I would have to go to such detail. I have work spreadsheets for that exact example. ... did one, I think last week, just to make sure that what I'm saying actually is accurate. And I entered into - obviously if every single child went to school which we know is not the case, imagining the worse case scenario. That's how I like to run. I looked at the children who were currently enrolled and their extra waitlist because as I mentioned in my affidavit that we prefer the enrolled children to have first preference. They haven't been counted into this. This is more worst-case thesis. If they had their days booked and then I even put in what we could factor in for children's days and things like that to make sure that 95 was substantiated. Again, it came out to over 100%, and then when I went 'Well, if we can attain that therefore the 95% is certainly conservative'. 97 T147.29–T148.28. -- 43 of 65 -- [2024] SASC 140 Kimber J 42 162 When asked about the proportions within the eight per cent that were children going to school and those on the waitlist not taking up an opportunity to attend KKM, Ms Foster said:98 A The lower of the number would be the school leavers because we're only talking typically a handful of the children. So you know, say about half the children that might be able to go to school may not, that some might go later in the year because of midyear intakes, some go to private ones. So it was allowing more for newer families that either might change their mind or sometimes might put off by a couple months. 163 The evidence of Ms Foster was that there were 257 places per week of children in kindy rooms (i.e. – those rooms with children approaching school age). As above, Ms Foster said that in her opinion, only a handful were to start school.99 Ms Foster said some of the children in kindy rooms were as young as three years of age. Ms Foster said:100 Q And can you say how many days those handful of children - how many places those handful of children were taking. A I wouldn't remember off the top of my head that's [why] I use spreadsheets. I'm a bit terrible with those things, but we have children that range from three years old in that room which is why it's not - a lot of centres have it where it's just four and up. That's not us. It ranges from three which is why it's not such a large proportion because it's more just the older between three and when they're ready - well, we can take them up to six. So it's a three-year age range that we can fit them in. Q So the three year olds are not going off to school next year. A Correct. Q Four year olds depending on the date of their birth they would be eligible to start school. A Correct, and if they were going to a public school and were going then, yes. Q Five year olds have to go to school. A No. If they're going to a private school they can go later in the year. We had to give an example there was a particular child which we were hoping would go at that mark but unfortunately we were told they would stay longer. The child was a bit more difficult. So it definitely absolutely they don't always go at five, no. Q But you've not provided us with any of your analysis about who was going when. A No. If you had asked I'd be quite happy to provide it. Obviously we don't know who is going exactly when. Parents can tell us, just give us two weeks' notice if they so choose. We do typically, you know, October/November timeframe start sort of asking families to start sending them in so we can get a picture of exactly who's 98 T149.31–38. 99 T151.13-18. 100 T151.19–T152.20. -- 44 of 65 -- [2024] SASC 140 Kimber J 43 going, but until the two weeks before they can not tell us if they so choose. Hence why I had the estimation and can't give you exact figures. 164 No evidence was given which provided any more detail of the children likely to leave due to reaching school (e.g. – the precise ages of the children in the kindy rooms) nor of the number of days any such child attended (i.e. – the impact upon the occupancy rate of a child leaving to attend school is a product not just of the departure of the child but also the number of days they attended). Consistent with the evidence set out above, at least in part, it is a figure based upon experience. 165 Notwithstanding that the figure of eight per cent was not supported by more specific data, I accept it as broadly accurate but only in so far as the contribution of school leavers to that figure is concerned. Ms Foster struck me as a witness with considerable experience in managing and predicting enrolments. I proceed on the basis that the estimate with respect to school leavers may be broadly accurate, albeit not precise and not supported by evidence beyond that to which I have referred. I say this bearing in mind that the evidence is that the children approaching school age is only a portion of those taking places (i.e. – 257 of 644 in the week ending 15 December 2019). 166 Nevertheless, as set out earlier, while that component of the eight per cent that relates to school leavers may be broadly accurate, consistent with what is earlier set out, I am not of the same view about the proportion that relates to enrolments not taken up. Anticipated enrolments come from the waitlists. For the reasons given, I am not satisfied the waitlists are a reliable indicator of new enrolments. This suggests that, for that reason alone, the eight per cent reduction cannot be treated as a reliable figure and, importantly, I am satisfied that the appropriate reduction may be greater than that for which the second applicant contends. I cannot quantify to what degree because the evidence does not satisfy me that I should regard the waitlists as a reliable source of enrolments. The email dated 21 October 2019 167 The evidence about occupancy rates, and the revised 2021 budget, must be considered in the context of an email that Ms Foster sent to Mr D Fitch on 21 October 2019.101 The respondent submits the email is not consistent with an expectation that enrolments would reach 95 per cent by February 2020. 168 On 21 October 2019, Mr D Fitch sent an email to Ms Foster and others seeking information ‘ASAP’ about KKM. The information sought by Mr D Fitch included, but was not limited to, trading performance and the budget for the 2020 financial year. Ms Foster responded by email later the same day. 169 As to trading performance, Ms Foster responded:102 101 Emails dated 21 October 2019, Exhibit R3. 102 Emails dated 21 October 2019, Exhibit R3. -- 45 of 65 -- [2024] SASC 140 Kimber J 44 Please see attached snapshots for occupancy levels at six months, 12 months, 18 months and current. These timeframes were deliberate to avoid the end of year drop in occupancy for Christmas closure and children going off to school. Note the 18 month occupancy level and current occupancy level is the same so therefore implies occupancy has been maintained. Also attached is breakdown week by week since opening where you can see maximum occupancy reached is 89%. Thus, showing maintaining at 86% is probably our best bet. (emphasis added) 170 As to budget for the 2020 financial year, Ms Foster responded:103 Please see attached budget with only $5 increase included (we can send through original if preferred). Can also delete differing occupancies until only 95% occupancy is reflected. 171 In evidence, Ms Foster denied that at the time the email was sent her belief was that the best bet for the future occupancy of KKM was 86 per cent. Ms Foster said the email did not take into account expectations for the future. Ms Foster said that the email did not contemplate February 2020. She said:104 A. Not into 2020. You know, maintaining occupancy 86% as at for October, December, January, as reflected in my budget, but obviously then in 2020 you would then increase. Because this is talking about first year and second year, and obviously we were into - close to being into our third year, so this is stating that, basically, as at - focussing October, even though we were informed in December, those are the times that reflect about the percentage, so the occupancy, talking about 86%, is an accurate figure for that time period, as opposed to picking out particular weeks, because the occupancy was fluctuating. Because this hasn't referred to the third year in that question. 172 Ms Foster said that in the email, she was only referring to maintaining 86 per cent in relation to November 2019 to January 2020.105 173 There are reasons to consider that the email undermines the evidence of Ms Foster about having a genuine expectation that enrolments would reach 95 per cent by February 2020. The email is consistent with Ms Foster being prepared to omit data to present the operation of KKM not just in the best light, but in a light inconsistent with that which might be revealed by all data. Ms Foster was prepared to provide figures which ‘implies occupancy has been maintained’ (emphasis added). Read in the context of the balance of the email, the use of the word ‘implies’ is suggestive of a preparedness to knowingly create a misleading impression. Ms Foster did not assert in the email that occupancy of 86 per cent had been maintained. To the contrary, she adopted an approach which would imply that. The email is consistent with Ms Foster being prepared to delete some data to result in a specific figure (i.e. – 95 per cent). That is the very figure later included in the revised budget and for which the second applicant contends. 103 Ibid. 104 T172.32–T173.6. 105 T173.15-23. -- 46 of 65 -- [2024] SASC 140 Kimber J 45 174 Nevertheless, I am unable to conclude that Ms Foster misled me about the meaning of the email when she said it only related to November 2019 to January 2020. That evidence is consistent with the content of the email. 175 However, the email is significant in another way. Accepting the evidence of Ms Foster about what she was conveying in the email, on 21 October 2019, I am satisfied that an occupancy of 86 per cent was the most favourable outcome she expected in January 2020. Even if that occupancy is accepted, to achieve occupancy of 95 per cent by February requires a jump from 86 per cent in a single month. A jump of that degree, in such a short space of time, is not consistent with the historical data at KKM. Such an increase had never been achieved in such a limited period. It is also not consistent with the pace of growth at KKGG utilising the same strategies for maximising enrolments. It is to be remembered that the second applicant calls into aid KKGG in seeking to establish that a 95 per cent occupancy at KKM is appropriate. As to KKM, in the period of 1 July 2019 to 15 December 2019, the average weekly occupancy rate had only increased from 85 per cent to 86 per cent and had never reached 89 per cent.106 As to KKGG, as set out earlier, in 2020, it had taken about eight months to increase occupancy from 87 per cent to 96 per cent.107 176 In my view, given the above, even assuming occupancy would have been at 86 per cent in January 2020, the assumption of an increase to 95 per cent is unrealistic. This is so without considering that there is a reason to doubt that an occupancy of about 86 per cent would have been maintained in January 2020. End of year 177 As set out earlier, an enrolment of 95 per cent in February 2020 is predicated upon an assumption that the enrolments in January 2020 would be 86 per cent, with that same figure having been achieved in December 2019. On the evidence, there is reason to doubt that an occupancy of 86 per cent would have been maintained in January 2020. 178 There was evidence that enrolments at childcare centres were ordinarily lower at the beginning of the year than at the end. I accept such evidence. So much is obvious from the email of Ms Foster on 21 October 2019 which makes reference to the ‘end of the year drop in occupancy for Christmas closure and children going off to school’.108 The email is consistent with other evidence. 179 Mr D Fitch said it was ‘a general accepted principle’ that occupancy drops off in January.109 106 Report of Mr Holmes dated 13 April 2022, Exhibit A11 [6.2] (EWRB vol 1, 538-539). 107 Report of Mr White dated 3 November 2022, Exhibit A12 [6.3.2] (EWRB vol 2, 933). 108 Emails dated 21 October 2019, Exhibit R3. 109 T42.36-43.5. -- 47 of 65 -- [2024] SASC 140 Kimber J 46 180 Ms Foster said that occupancy is ‘generally lower’ in around December and January each year.110 Ms Foster gave the following evidence:111 Q. Now, you would acknowledge and you have acknowledged in your affidavit that occupancy is lower in a childcare centre in December and January of each year. A. Yes. Q. And that's because of school leavers. A. Correct. Q. There's also a potential of people choosing to go to a separate preschool, leaving the service. A. Yeah, I guess so. Q. Typically the occupancy within Kozy Kids Maylands through January it fell to a base at the beginning of February and then it increased throughout the remainder of the year. A. Typically because - most people who are preschools didn't tend to go to other preschools, so it wasn't much of a difference and the December/January ones were only if the children who would typically go at usually it's like 26 January end of January for school, they might choose to go out a bit earlier because they're going on holidays and things like that, so you do see sort of around the December/January you drop a little bit but, because usually it's already set for new children to start, it's usually within a two-week range that the numbers typically can drop and rise. Depending on each individual family, some can start right on, some could be like later in that week, it just depends on the individual family. Q. What week are you referring to when you say 'that week'. A. The week that the school children have gone to school which leaves the vacancy to actually sometimes move people that you might not have been able to transition before that spot is empty. So quite often there might be the day that the child is not there is filled by the next one. Q. So as you've said it really depends on families arrangements and some families might start their children at the beginning of the school term. A. Yes. Q. And many families choose to pick up childcare - sorry, to commence childcare throughout the year. A. We find January/February is the biggest preference, it's usually at the beginning of January that they start trying to get in because they get past Christmas, that's our biggest intake, but yes, we have a waitlist for every month. 110 Affidavit of Mikaeli Kelda Foster dated 13 April 2022, Exhibit A5 [64] (JTB vol 1, 44). 111 T140.12–T141.19. -- 48 of 65 -- [2024] SASC 140 Kimber J 47 181 In my view, the evidence of Ms Heron was not as clear about the impact of school leavers upon occupancy in January. The evidence of Ms Heron included the following:112 Q It's the nature of childcare, isn't it, that the centre has a lower occupancy in December and January of every year. A. Yes. Q. Because your school-leavers are out the door and you've got new people coming in - A. Yes and no. Q. Can you explain that 'Yes and no'. A. Yes, the trend is that there's a lot lower occupancy December-January, but lately it hasn't; families are leaving their children in at Golden Grove, and noticed the trend they're leaving them in right until the last date of going off to school. Q. Yes. A. Because they've got the break at home, and some families can't find care for the children. HIS HONOUR Q. What are the factors in your view which affect different enrolments in December and January, if any. A. Parents don't - usually want to go back to work until their older sibling has started at school, so they don't enrol the next one. And also, like I said, they can't find care for them for six weeks because they work, so they leave them in care. And then they like to start when the children go back, they all of a sudden realise that it's hard work to have a toddler at home when your older one's gone off to school, so they enrol the next one in. 182 As I have observed, the evidence of Ms Heron might be viewed as being different to the evidence of Mr D Fitch and different to what Ms Foster said in her email dated 21 October 2019. The evidence of Ms Heron might also be a little different to the evidence of Ms Foster. To the extent that the evidence of Ms Heron might not correspond in every respect with other evidence about a reduction in enrolment at the end of the year, I prefer evidence given by Ms Foster in evidence (i.e. – that occupancy is at least ‘generally’ lower in December and January). It can also be noted that Ms Heron said ‘the trend is that there’s a lot lower occupancy in December – January’. To the extent that Ms Heron sought to suggest the existence of a different trend ‘lately’, even assuming that to be so, that is not evidence that has any significant weight in evaluating the period in question. Further, that occupancy was generally lower in December – January is evidence is consistent with the email on 21 October 2019. In my view, it is unlikely that Ms Foster would have sought to mislead Mr D Fitch. A reduction in enrolments 112 T84.29–T85.18. -- 49 of 65 -- [2024] SASC 140 Kimber J 48 at the end of the year also fits with the evidence of Mr D Fitch who is, at least from the perspective of an investor, experienced in childcare centres. Occupancy rate – conclusion The importance of historical occupancy rates 183 Earlier I set out key aspects of the evidence of the three experts about the importance to purchasers of historical data and the preparedness of purchasers to pay for growth. Mr Holmes and Mr Schwarz have more experience with the sale of childcare businesses than Mr White. To the extent their evidence differs from that of Mr White about the preparedness of purchasers to pay for growth, I prefer the evidence of Mr Holmes and Mr Schwarz. This is not to suggest that Mr White was not an impressive witness. He was. As above, I have accepted key aspects of his evidence. Among other things, I was impressed with his analysis of the historical occupancy rates and the waitlists. 184 The evidence of Mr Holmes and Mr Schwarz on this issue had significant differences, but leads me to conclude that payment for expectations of growth can occur. Nevertheless, it is important to recognise that Mr Holmes opined that the purchaser would consider the risk of the growth forecast being achieved. Further, as Mr Holmes opined, if a purchaser is concerned about growth and forecast earnings, they may insist upon hurdles as part of the purchase price.113 I am not satisfied that it is appropriate to take into account evidence about the ability to incorporate hurdles in a valuation pursuant to the Act. 185 In my view, the risk of a growth forecast being achieved must be informed, at least in part, by how robust the relevant forecast is. For the reasons set out above, consideration of the forecast within the revised budget leads me to conclude that it is not a reliable indicator. It is also important to recognise that Mr Schwarz said that purchasers are unlikely to pay for the full value of the projected growth. Mr Schwarz has considerable experience in the valuation and sale of childcare centres. Given his experience, I accept that evidence. Whilst I do not reject that purchasers can be prepared to pay for growth in some circumstances, I am not satisfied that would have occurred in this case based upon the forecast. 186 The second applicant seeks to establish an occupancy rate of 95 per cent by 1 February 2020, notwithstanding the following: the average weekly occupancy in the 24 week period from 1 July 2019 to 15 December 2019 was 86 per cent; the average weekly occupancies in the weeks ending in December 2019 were 86 and 87 per cent; in the 52 weeks to 15 December 2019, the average occupancy had been 82 per cent and the highest weekly occupancy had been 88 per cent; the 12-month rolling average occupancy to 15 December 2019 was 83 per cent; there is traditionally a drop off in enrolments over Christmas and at least part of January due to school leavers; KKM was operating in an area of ‘relatively high’ 113 T202.16-21. -- 50 of 65 -- [2024] SASC 140 Kimber J 49 competition; and departures were to be filled from the waitlists which, for the reasons set out above, are an imperfect guide to the number of new enrolments. 187 In addition, it is to be remembered that what is sought to be established is an occupancy of 95 per cent by February 2020 when in the email dated 21 October 2019, Ms Foster anticipated an occupancy of 86 per cent for January. Even accepting that occupancy in January 2020, what the second applicant seeks to establish is that there would have been an increase from 86 per cent in December 2019 to 95 per cent in February 2020, notwithstanding an increase of that degree had not been achieved in 2019 by the same, no doubt skilled, management, applying the same techniques to maximise occupancy. The occupancy rate urged by the second applicant is significantly above the historical occupancy rate in the period 1 July 2019 to 15 December 2019. That was calculated by Mr Holmes as 86 per cent. In my view, it is significant that each of the matters emphasised by the second applicant said to contribute to high occupancy rates (i.e. – the premium nature of the offering; extended opening hours; the primary care model; the location; and the skills of management and staff) had been factors which had not ever achieved an occupancy rate of 95 per cent. Even if the three or four months at the beginning of 2019 were ignored because of a business decision with respect to KKGG, in the 24-week period up to 15 December 2019, the average weekly occupancy had been 86 per cent. 188 In all the circumstances, even assuming an occupancy in January 2020 of 86 per cent, I am not satisfied that it would have risen to 95 per cent in the next month. I am satisfied that the best evidence of the appropriate occupancy rate for the valuation of KKM is that derived from historical data. The historical data provides the most reliable indication of the success of the specific offering provided by KKM. Even assuming some impact during the relatively short period of concentration on KKGG, as observed many times, the historical occupancy rates were achieved when all of the matters emphasised by the second applicant were in place. In my view, that historical data provides the best guide of the view of the market of the offering of KKM and the result of the skills of its managers in maximising occupancy. 189 The second applicant has not established that KKM should be valued on an assumption of an occupancy rate of 95 per cent by 1 February 2020. I am not satisfied that assumption has been established on the balance of probabilities. 190 At the same time, the average weekly occupancy rate had reached 88 per cent in the week ending 3 November 2019 and was still at 86 per cent in the week ending 15 December 2019. As mentioned, in the 24-week period up to 15 December 2019, the average weekly occupancy had been 86 per cent. I accept that KKM was a childcare centre likely to be attractive to caregivers given the nature of its offering, its location and the leadership of Ms Heron and Ms Foster. I accept that they had methods for seeking to maximise occupancy rates, but that evidence must also be viewed in light of an absence of any substantial increase in -- 51 of 65 -- [2024] SASC 140 Kimber J 50 the rolling average over the second half of 2019 when any business decision relating to KKGG was not, on the evidence, impacting upon enrolments. 191 Accepting that Ms Heron and Ms Foster were skilled managers, including skilled in maximising occupancy, and despite my reservations about the reliability of the forecast, I am satisfied that the occupancy rate should be greater than the average occupancy in the 52 weeks to 15 December 2019 (i.e. – greater than 82 per cent). I am satisfied that in February 2020 it would have been maintained at what it had been in the 24-week period to 15 December 2019. 192 On the balance of probabilities, I find that the occupancy rate used to value the business should be 86 per cent. As above, that figure had been achieved over 24 weeks before 15 December 2019. I recognise that figure corresponds to what Ms Foster told Mr D Fitch on 21 October 2019 and can be understood to be her opinion of what was the ‘best bet’ given the occupancy rates achieved to date. Given the way Ms Foster expressed herself, I have expressly considered whether 86 per cent might be a conclusion not established on the balance of probabilities. Nevertheless, I am satisfied that figure is appropriate. While occupancy likely would have reduced over the Christmas period, KKM had demonstrated an ability to attract enrolments since opening; KKM had maintained an average weekly occupancy rate of at least between 84 per cent and 88 per cent between the week ending 12 May 2019 and the week ending 17 November 2019; and the average weekly occupancy was still 86 per cent in the week ending 15 December 2019. 193 In the circumstances, I am satisfied that the prudent businessperson would be prepared to pay for an occupancy rate of 86 per cent. I am satisfied that the occupancy rate that should be assumed is 86 per cent. JobKeeper 194 In determining the correct amount of lost profits, a dispute exists as to whether an amount of $55,000 should be included on the basis that KKM would have qualified for the JobKeeper allowance had it been trading in March or April 2020. If it is to be brought to account, the value of that allowance is agreed at $55,000. 195 Mr Holmes allowed that sum as revenue. In contrast, Mr White contends that the budget does not forecast a 30 per cent reduction in turnover and, accordingly, KKM would not have been entitled to that allowance. 196 Tendered by consent was Exhibit A1, an Australian Government document headed ‘Factsheet – Economic response to the Coronavirus - JobKeeper Payment – Frequently Asked Questions’.114 Within that document, the JobKeeper program is described, in part, as follows: 114 Exhibit A1 (JTB vol 2, 853). -- 52 of 65 -- [2024] SASC 140 Kimber J 51 The JobKeeper Payment is a payment made to eligible businesses and not-for-profits affected by the Coronavirus to support them in retaining employees. Eligible businesses that elect to participate will receive a payment of $1,500 per fortnight per eligible employee to support the people they employed as at 1 March 2020 who are retained in employment. Businesses must have paid their employees before they are entitled to receive the JobKeeper payment. Where an employee’s total remuneration is less than $1,500 per fortnight (before tax), or has been stood down, the employer must provide the employee at least $1,500 per fortnight (before tax). Where an employee earns more than $1,500 per fortnight, employers can use the payment to subsidise the employee’s wages. 197 The same document sets out that the JobKeeper payment will be available from 30 March 2020. The document then sets out, relevantly, that:115 Employers (including not-for-profits) will be eligible for the subsidy if: • their business has an aggregated turnover of less than $1 billion (for income tax purposes) and estimate their GST turnover has fallen or will likely fall by 30 per cent or more… (footnote omitted) 198 Importantly, in the submission of the second applicant, to be eligible for the payment, there was no obligation to establish that turnover had actually fallen. 199 Mr Holmes accepted that he was not an expert in interpreting the relevant rules, but said that, prima facie, KKM would have qualified for the payment and that the amount was payable from 1 March 2020 and as the relevant period is 1 March 2020 to 16 April 2020.116 200 Ms Foster gave the following evidence about JobKeeper:117 The Relief Package also had effect that as at April 2020, most if not all childcare centres had an expectation that their revenue would fall by approximately 50 per cent. This was the case for Kozy Kids Golden Grove and it would also have been the case for KKM. However, the profit impact of the fee reduction was also affected by JobKeeper. I was involved in preparing an application for Kozy Kids Golden Grove to establish its eligibility for JobKeeper. Kozy Kids Golden Grove was eligible for JobKeeper and received JobKeeper payments. 201 The evidence of Ms Foster was, in effect, that had KKM still been operating, it would have qualified because, like KKGG and other childcare centres, a reduction in turnover of about 50 per cent would have been expected.118 That 115 Ibid. 116 Report of Mr Holmes dated 3 November 2022, Exhibit A12 [15.3] (EWRB vol 2, 959). 117 Witness Statement of Mikaeli Keldi Foster dated 31 October 2023, Exhibit A6, [18]–[19]. 118 Witness Statement of Mikaeli Keldi Foster dated 31 October 2023, Exhibit A6, [18]. -- 53 of 65 -- [2024] SASC 140 Kimber J 52 evidence was not disputed. The second applicant submits that the evidence of Ms Foster is only consistent with a finding that KKM would have received the amount of $55,000 and that it should be brought to account and allowed for as revenue as done by Mr Holmes. 202 The difference between the parties arises, in part, because of the evidence of Mr White. In the opinion of Mr White, KKM was not eligible for JobKeeper as it was his understanding the payment was only available if a reduction of turnover of at least 30 per cent was demonstrated. In his opinion, the budgets relied upon did not reflect a reduction in turnover.119 I am not able to accept the evidence of Mr White as to the ineligibility of KKM to JobKeeper on that basis. The evidence is consistent with an expectation of the necessary decrease in revenue being sufficient. The evidence is that was the expectation of most childcare centres. I am unable to reject that evidence. 203 The respondent’s primary submission is that any possible loss of funding as a consequence of the COVID-19 pandemic is too remote and for that reason non-compensable. It is submitted that the purpose of the JobKeeper payment was to support eligible businesses in retaining employees and that by 30 March 2020 (i.e. - when the JobKeeper payments commenced), the relevant employees had already been made redundant at KKM. Those redundancies being as a consequence of the business being ceased because of the acquisition. The respondent submits that the effect of the position of the second applicant is that it is entitled to be compensated for government funding which it may possibly have been able to apply for and which, if received, would not have been clawed back. The respondent submits that the Court should not speculate as to the steps that could have been taken if the business was not ceased as a result of the acquisition of the land. 204 The respondent further submits that the valuation of the business proceeded on the basis that the COVID-19 pandemic was ignored.120 In the submission of the respondent, that benefitted the second applicant because, at the date of the acquisition, the market for childcare centres was potentially significantly affected and may have had the effect of deflating value as at the date of acquisition. The respondent submits that it is inconsistent to give the benefit to the second applicant in ignoring the effect of the COVID-19 pandemic in valuation, but then including government funding arising from the pandemic as a compensable loss arising as a consequence of the acquisition. 119 Report of Mr White dated 12 August 2022, Exhibit R14 [15.4] (EWRB vol 2, 879). 120 See for example Report of Mr White dated 12 August 2022, Exhibit R14, [5.4.9] (EWRB vol 2, 825); the Report of Mr Holmes dated 19 August 2020, Exhibit A9, [2.3.1]. -- 54 of 65 -- [2024] SASC 140 Kimber J 53 JobKeeper – conclusion 205 The compensation to which the second applicant is entitled is to that which adequately compensates it ‘for any loss [it] has suffered by reason of acquisition of the land’.121 The loss must be causally connected and not too remote.122 206 The second applicant has not established on the balance of probabilities that the amount of $55,000 should be included in lost profits. That amount is too remote when the valuation date is 31 October 2019, and the payment was for employees. By 1 March 2020, the employees of KKM had been made redundant. Exhibit A1 is consistent with payments being made for the purpose of retaining staff. By the date that JobKeeper payments commenced, staff were not being retained. Value of the land – duration of the lease 207 As set our earlier, the first applicant seeks an order that the value of the land be determined as being $8,160,000 plus interest and costs. 208 The valuation sought by the first applicant is based upon a valuation undertaken by Ms Parker. That valuation is on the assumption that the initial term of the lease is 20 years, not 10 years. On the assumption of a 20-year initial lease term, Ms Parker opines that the value of the land is that sought by the first applicant. On the basis of a 10-year lease with the rights of renewal set out in the lease, Ms Parker opines the value of the land is $7,500,000 exclusive of GST. Mr Schwarz is the other expert to have valued the land. On the basis of the initial lease of 10 years with the rights of renewal set out in the lease, Mr Schwarz opines the value of the land is $7,510,000 exclusive of GST. In a joint report and on the assumption of a 20-year initial lease term, Mr Schwarz valued the land at $7,825,000 exclusive of GST. Should the land be valued on a 20-year lease term? 209 Before turning to whether it is necessary to consider the different valuations given by Ms Parker and Mr Schwarz as to the value of the land on the assumption of a 20-year lease term, it is necessary to consider whether the first applicant has established that the land should be valued on that basis given that the lease was not for 20 years. 210 The first applicant submits that, viewed objectively, the second applicant would exercise at least two rights of renewal for five years each. The first applicant submits that it had built a ‘high-spec, purpose-built centre for a tenant it knew intimately’. The first applicant submits it has established on the balance of probabilities that the second applicant was ‘almost certain to exercise at least two of its four rights of renewal’. 121 Land Acquisition Act 1969 (SA), s 25(1)(a). 122 Director of Buildings and Lands v Shun Fung Ironworks [1995] 2 AC 111, 137–138. -- 55 of 65 -- [2024] SASC 140 Kimber J 54 211 The first applicant submits that there is no dispute that the risk posed by lease expiry is a factor to be taken into account in fixing a capitalisation rate, and therefore in arriving at the appropriate valuation.123 As was explained by Ms Parker in evidence which can be accepted, assumption of a 20-year lease increases the value of the land as there is less risk. The longer the lease term, ‘the less risky the [purchase] may be deemed to be’.124 The evidence of Mr Schwarz was to the same effect.125 The first applicant submits the following matters should satisfy me that it was ‘almost certain’ that the lease would be renewed twice: (1) The land had been improved by a purpose-built fit-out to meet specific needs of the tenant, KKM; (2) The land contained improvements designed specifically by directors of KKM to facilitate work practices and to attract and retain better staff; (3) The land had been improved by the substantial investment of the first applicant; (4) The land was located at the intersection of two arterial roads with a high visual, aesthetically appealing profile that enabled convenient drop-offs and pick-ups, suiting it for its use for childcare; (5) The tenant KKM had the business practices, know-how and capability to achieve high occupancy rates. The tenant had successfully managed high occupancy rates in a geographic location with a large number of competitors and had sufficient confidence in its methods to open a new centre at Golden Grove (KKGG) where there were competitors near to it; (6) The business of the tenant KKM had an expectation of continued growth of its occupancy rates; (7) The sector of long day care childcare engaged in by the tenant KKM was in a growth phase and the incumbent Government was making funding changes to promote greater workforce participation, especially by females, thereby further increasing demand; (8) The nature of the business conducted by the tenant KKM was ‘inelastically static’. Other than via regulatory reform, there was little prospect of ‘disruption’ of the business model of the tenant given the demographics of its parent base. 123 Written Submissions of the Applicants dated 28 November 2023, FDN 54 [5]. 124 T313.7-14. 125 T338.10-T339.15. -- 56 of 65 -- [2024] SASC 140 Kimber J 55 212 Allied to the above, the first applicant submits that there is an element of ‘special value’ which is peculiar to it which would not exist in the case of the ‘abstract hypothetical purchaser’. Special value 213 It is appropriate to first consider the appeal of the first applicant to ‘special value’. The first applicant submits that there is a requirement that compensation be assessed on the basis of ‘value to the owner’ and that is embodied in ‘special value’. The respondent submits that the appeal of the applicant to ‘special value’ should not be permitted, as it was not pleaded. I reject that submission. While ‘special value’ was not pleaded, it was raised in the written opening of the first applicant provided before trial. There is no suggestion that the respondent has been prejudiced by the appeal to ‘special value’. The meaning of special value and discussion 214 There is no dispute that compensation for ‘special value’ is permissible pursuant to s 25 of the Act. It is necessary to consider the meaning of special value. 215 In Arkaba Holdings Ltd v Commissioner of Highways,126 Bray CJ said of ‘special value’:127 It is, of course, well established that it is the value to the owner which must be paid, even if that value exceeds the market value. The additional element is commonly called “special value to the owner”. But this special value must in my view arise from some attribute of the land, some use made or to be made of it or advantage derived or to be derived from it, which is peculiar to the claimant and would not exist in the case of the abstract hypothetical purchaser. Would a prudent man in the position of the claimant have been willing to give more for this land than the market value rather than fail to obtain it or regain it if he had been momentarily deprived of it? A typical case of special value is whether land is peculiarly adapted to a particular kind of use made or intended to be made of it by the claimant, e.g. a doctor’s consulting rooms, or agricultural land worked in conjunction with a neighbouring residence or farm buildings. (footnote omitted) 216 In Boland v Yates Property Corporation Pty Ltd,128 Gleeson CJ (with whom Gaudron J relevantly agreed) said:129 It was established in Pastoral Finance Association Ltd v The Minister, which has been followed in many subsequent cases, that in some circumstances land may have a special value to the owner which exceeds the market value. If, in a given case, it is contended that such special value exists, that also raises an issue for factual judgment… … 126 [1970] SASR 94. 127 Ibid 100. 128 (1999) 74 ALJR 209; [1999] HCA 64. 129 Ibid [80]; [82]; [83]. -- 57 of 65 -- [2024] SASC 140 Kimber J 56 The idea that an item of property may have a value to one person which exceeds the price it would bring if sold to a third party in an open market is not peculiar to this area of discourse. It is also reflected in insurance law and practice, where a distinction is sometimes drawn between the market value of property and its value to an insured. … Market value, or the amount that would be realised from a sale in a market where the price is agreed by freely contracting parties, provides a measure of value from the perspective, not only of the particular purchaser and vendor, but also of others in the market who are not parties to the particular transaction. Special value to the owner directs attention to the perspective of the vendor. What is insisted upon is that, leaving to one side any claim for damages founded upon the relevant statutory provisions, what is in question is the value of the land or other resumed or acquired asset, not the fixing of compensation for all loss resulting from the resumption or acquisition. (footnote omitted) 217 In the same case, Callinan J described special value as follows:130 The special value of land is its value to the owner over and above its market value. It arises in circumstances in which there is a conjunction of some special factor relating to the land and a capacity on the part of the owner exclusively or perhaps almost exclusively to exploit it. … There will in practice be few cases in which a property does have a special value for a particular owner. Obviously neither sentiment nor a long attachment to it will suffice. The special quality must be a quality that has an economic significance to the owner. A possible case would be one in which, for example, a blacksmith operates a forge in the vicinity of a racetrack on land zoned for residential purposes as a protected non-conforming use, the right to which might be lost on a transfer of ownership or an interruption of the protected use. Such a property will have a special value for its blacksmith owner, and perhaps another blacksmith who might be able to comply with the relevant requirements to enable him to continue the use but to no one else. (footnotes omitted) 218 Special value comprises the excess (if any) of the economic value to the owner over the market value. It is, in other words, the additional economic advantage the owner obtains from ownership that is not reflected in the market value. In Nelson v Commissioner of Highways (No 2) (Nelson),131 Blue J described it as ‘the amount that a prudent purchaser in the position of the owner would be willing to pay to obtain the relevant interest in the land rather than fail to obtain it in excess of its market value’.132 219 The first applicant has not established that he should be compensated on any basis other than market value. I am not satisfied that the matters identified by the first applicant should be characterised as ‘some attribute of the land, some use made or to be made of it, or advantage derived or to be derived from it, which is peculiar to the claimant and would not exist in the case of the abstract hypothetical purchaser’133 or as ‘some special factor relating to the land and a capacity on the 130 (1999) 74 ALJR 209; [1999], [292]. 131 [2023] SASC 7. 132 Ibid [405]. 133 Arkaba Holdings Ltd v Commissioner of Highways [1970] SASR 94, 100. -- 58 of 65 -- [2024] SASC 140 Kimber J 57 part of [the first applicant] exclusively or perhaps almost exclusively to exploit it’.134 220 Those matters relied upon by the first applicant which relate to the location of the land and the improvements that had been made are matters that a new owner would be in a position to exploit. The balance of the matters relate to the business practices of KKM and the childcare industry more broadly. As to the former, I am not satisfied that the prudent purchaser would not be able to exploit those practices. It is not suggested that others in the childcare industry did not have knowledge of, or ability to implement, the primary care model. It may be accepted that Ms Foster and Ms Heron had skill in seeking to maximise occupancy rates and in otherwise managing a childcare centre. Nevertheless, on the evidence, I am not satisfied that they were skills unique to those managing KKM. The remaining matters relate to the industry as a whole and would be as much in place after purchase as before. 221 For the above reasons, the land should only be valued on the basis of market value. 222 Further, and separately, I am satisfied that the valuations that have been done have taken into account many of the matters said by the first applicant to amount to special value. For example, Ms Parker had regard to the buildings having been refurbished; being located at the intersection of Portrush and Magill Roads; the land being ‘ideally suited to its current childcare use, and that this is the likely highest and best use as at the date of valuation’; assumed that ‘no significant capital expenditure was required’; and that the lease covenant was considered sound.135 Matters of substantially the same nature were also taken into account by Mr Schwarz, including, but not limited to, the site providing a high level of exposure to traffic; the property being substantially refurbished in 2017; and that the highest and best use of the land was as a childcare centre (and office accommodation).136 Further discussion 223 The failure of the appeal of the first applicant to special value does not mean that it is not necessary to consider whether the first applicant has established that the land should be valued on the assumption that the term of the lease was 20 years. Putting aside the question of special value, the first applicant submits that the adequate compensation demanded by s 25(1)(a) of the Act permits consideration of the likelihood of the lease being renewed twice and therefore being treated, for valuation purposes, as if it was a 20-year lease. The first applicant submits that it has established that it was almost certain that at least those renewals which would have had the effect of a 20-year lease would have been taken up. 134 Boland v Yates Property Corporation Ltd (1999) ALJR 269; [1999] HCA 64, [292]. 135 Report of Ms Parker (nee Rofe) dated 16 April 2020, Exhibit A24 [1.5]; [8.5]; [9.3] (EWRB vol 2, 1088; 1105; 1107). 136 Report of Mr Schwarz dated 21 January 2020, Exhibit R26 pp 5; 8; 10 (EWRB vol 2, 1016; 1018; 1021). -- 59 of 65 -- [2024] SASC 140 Kimber J 58 224 As set out earlier, the applicant submits that, as a matter of valuation principle, the risk posed by lease expiry is a factor to be taken into account.137 The first applicant also directs attention to the following undisputed aspect of the evidence of Mr Schwarz, which I accept:138 Q. So, holding all other factors constant, would you accept that the fact that a tenant is in premises that are designed specifically for that tenant makes renewal more likely. A. Yes. Q. Would you accept, holding all other things constant, that if premises are configured to optimize the tenant’s operations, that makes renewal more likely. A. Yes. Q. Again on the same basis, do you accept that if premises are fit out to a high standard, that makes renewal more likely. A. Yes. 225 The first applicant also submits that 20-year leases were not uncommon in the childcare sector. For the purposes of his report, Mr Schwarz identified seven childcare centres sold in 2018 and 2019 with 20-year leases.139 For the purposes of her report, Ms Parker identified three childcare centres sold with 20-year leases.140 The first applicant submitted that this indicated that such businesses can be expected to stay in operation for longer than 10 years. 226 The first applicant accepts that resort cannot be made to the subjective intent of the parties to the lease, but submits its contention about a valuation on the basis of a 20-year lease does not involve resort to that subjective intent. The first applicant describes the assumption of a 20-year lease because of at least two renewals as an ‘objective fact’ which is relevant to the valuation principle in Spencer v Commonwealth.141 That is, the first applicant submits, it is relevant to the point at which the desirous purchaser and willing but not anxious vendor would come together. The first applicant submits that what it submitted to be the ‘near certainty’ of two renewals is part of the value to the owner in that assessment. 227 The respondent submits that valuation on this basis is inconsistent with the approach of the High Court in The Minister v New South Wales Aerated Water & Confectionary Limited (Aerated Water).142 The respondent submits that compensation is to be calculated based upon the 10-year lease and the residual term. The respondent submits that it would be an error to take into account the expectation of renewals, notwithstanding the related nature of the landlord (the first applicant) and lessee (the second applicant). The respondent submits that 137 T313.7-14; T338.4-20. 138 T343.20-32. 139 Report of Mr Schwarz dated 21 January 2020, Exhibit R26 pp 28-31 (EWRB vol 2, 1039-1042). 140 Report of Ms Parker (nee Rofe) dated 16 April 2020, Exhibit A24 pp 30-33 (EWRB vol 2, 1115-1118). 141 (1907) 5 CLR 418. 142 (1916) 22 CLR 56. -- 60 of 65 -- [2024] SASC 140 Kimber J 59 compensation is payable for the interest in the land without regard to how the first applicant could have contracted, but did not. Aerated Water 228 In Aerated Water, the plaintiffs were a company which had carried on the business of cordial manufacture for many years at Newcastle. The plaintiffs did so on land held under successive leases from the freeholder, Mr Redman. The land was resumed by the Government of New South Wales whereupon the interest of the plaintiffs in the land became extinguished and converted into a claim for compensation. The amount of compensation fell to be determined by a jury which, pursuant to the Public Works Act 1900, was to assess the compensation according to what it found to be the ‘value of the interest’ at the time of publication (or notification) of the land being resumed. The lease at the date of that publication was for a term of seven years and three months. The lease had two years to run at the date of the publication and there were no rights of renewal. 229 The plaintiff company and Mr Redman were related with Mr Redman holding 4,237 of the 4,707 shares issued by the company. The plaintiffs claimed compensation on the basis that, in the circumstances, it was highly probable that Mr Redman would grant it a new lease at the expiration of the existing lease. At trial, the Minster (the defendant) objected to evidence showing the fact and nature of the interest of the lessor in the plaintiff company. The trial Judge admitted the evidence and left it to the jury as a material element in the estimation of value. The trial Judge directed the jury that it was a question for them whether they were to regard the plaintiff ‘as having a substantial interest based on their expectancy that the lease would be extended or renewed’. The jury were directed that it was to assess the interest of the plaintiff as persons having a leasehold title for two years and such expectancy of contingency as it may find to be a reasonable thing to take into account in the circumstances of the case. 230 The Minister appealed. The High Court held that the evidence of the lessor’s relationship to the company was irrelevant and that the evidence about that relationship was inadmissible. 231 Griffith CJ illustrated the position by two examples relating to the subjective personalities of the parties to a lease and which might weigh in favour of an existing lease being renewed. Griffith CJ held that such matters could not be brought into account:143 I venture to illustrate this position by two concrete instances. The present lessee of land may be a highly desirable tenant whose occupancy of the premises adds to the general reputation of the locality, so that it is extremely unlikely that he will be called upon to vacate the premises at the expiration of his lease. Or the lessor may be a person of amiable character, who has an extreme dislike to disturbing a tenant. Both these considerations relate to personal matters, depending in the one case on the personality of the tenant and in the other on the personality of the landlord. Neither of them is a matter "depending upon 143 (1916) 22 CLR 56, 63–64. -- 61 of 65 -- [2024] SASC 140 Kimber J 60 the nature and circumstances " of the land itself. Neither of them, therefore, can be taken into consideration in estimating the value of the term. 232 Barton J held that the considerations to be admitted in assessing the value of the property taken are not susceptible of any narrow and literal enumeration but cautioned against any measure of value other than market value. Barton J held that the position was that once market value was obtained, it was not appropriate to add to that an estimate of other considerations. Barton J held:144 I grant that a probable purchaser of an unexpired term such as existed in the present case might well have in mind, in reckoning what price he ought to offer, the question whether he was likely to be allowed to occupy the land for a time no longer than the residue of the lease. But it is one thing to say that such a consideration may operate upon the calculations of a more or less sanguine bidder and another thing to admit them as factors of separate and specific valuation. 233 Barton J further held:145 The owners are entitled to that which a prudent man in their position would have been willing to give for the interest sooner than fail to obtain it. I agree that the jury should take into consideration every element of value which an average man desiring to buy the property and to use it for the same or similar purposes would himself reasonably take into consideration in fixing the price he would offer. 234 Isaacs J held that the relationship between the company and Mr Redman was a personal matter not to be taken into account. Isaacs J held:146 We are all agreed that it is impossible to sustain the direction in so far as the jury were instructed to include Redman’s shareholding interest in the company as a factor in determining the company’s chance of getting a renewal. … Now, should Redman's shareholding interest in the Company have been considered? It is plain that such interest, though it might or might not impel him to grant a further lease to the Company, is a personal matter, and therefore, as we all concur, is not, to be considered as influencing the value of the interest actually taken. But as the law says nothing affirmatively about excluding personal matters, the exclusion must be due to some negative consideration. The exclusion must be because, being personal, it necessarily is not inherent in or bound up with the interest taken so as to run with it in the hands of a purchaser for the Company. (footnotes omitted) Consideration 235 Aerated Water was not a case involving the valuation of land. It was a case involving the proper approach to be taken to the valuation of the interest of a lessee when the lessor and lessee were related. In this case, what is in issue is the proper 144 (1916) 22 CLR 56, 70. 145 Ibid 71. 146 Ibid 76–78. -- 62 of 65 -- [2024] SASC 140 Kimber J 61 approach to the valuation of land owned by the first applicant which has granted a 10-year lease to the lessee with rights of renewal, when the first applicant is related to the lessee. 236 While the facts of this case can be distinguished from those in Aerated Water, the High Court cited with approval147 the approach of the Judicial Committee in Cedars Rapids,148 which had approved of the following general statement of the law by Lord Moulton in In re Lucas and the Chesterfield Gas and Water Board:149 The principles upon which compensation is assessed when land is taken under compulsory powers are well settled. The owner receives for the lands he gives up their equivalent, i.e., that which they were worth to him in money. His property is therefore not diminished in amount, but to that extent it is compulsorily changed in form. But the equivalent is estimated on the value to him, and not on the value to the purchaser, and hence it has from the first been recognized as an absolute rule that this value is to be estimated as it stood before the grant of the compulsory powers. The owner is only to receive compensation based upon the market value of his lands as they stood before the scheme was authorized by which they are put to public uses. Subject to that he is entitled to be paid the full price for his lands, and any and every element of value which they possess must be taken into consideration in so far as they increase the value to him. 237 As set out above, it can be accepted that the land had been developed to a high standard, was situated in a prominent location and that the land was particularly suited to the running of a childcare centre. It had been designed in a way expected by the first applicant and KKM to be appealing to caregivers. KKM was led by persons with considerable experience in the childcare sector and with skills in managing a childcare centre. The land is being valued with all of the features emphasised by the first applicant. At the same time, it remains the case the lease was not for 20 years. I am unable to determine why the first applicant contracted in the way that it did, but it is not necessary for me to determine that. 238 The willing but not anxious seller is not selling land that was subject to a 20-year lease. In this case, the willing but not anxious seller is selling land that was subject to a 10-year lease with the relevant rights of renewal. The desirous purchaser is purchasing land which was subject to a 10-year lease with the relevant rights of renewal, not purchasing land with the additional value provided by a 20-year lease. The desirous purchaser would know that once the land was purchased, there would no longer be the relationship between the lessor and lessee which, before the purchase, might have weighed in favour of the near certainty at least two renewals of five years contended for by the first applicant. 239 While the first applicant might have expected renewals, I am not satisfied that they were objectively certain when the initial term of the lease was for a term 147 The Minister v The New South Wales Aerated Water and Confectionary Company Ltd (1916) 22 CLR 56, 62-63, 67. 148 Cedars Rapids Manufacturing and Power Company v Lacoste (1914) AC 569. 149 (1909) 1 KB 16, 29-30. -- 63 of 65 -- [2024] SASC 140 Kimber J 62 of 10 years. Certainty of at least two renewals demands, at least in part, the success of KKM for many years into the future. 240 In my view, little of substance in support of the position of the first applicant can be drawn from the fact that other lessors had chosen to enter into 20-year leases. It may be accepted that may reflect, at least to some extent, an expectation of the prospects of success of those lessees over such a period. Nevertheless, of much greater significance in evaluation of market value is that a 20-year lease term is not a feature of this land. 241 In the circumstances, the first applicant has not established on the balance of probabilities that the land should be valued on the assumption that it was subject to a lease period of 20 years. To proceed on that basis would be to give the land a value greater than market value. The market value of the land – conclusion 242 The difference in the two valuations on the basis of a 10-year lease term is very limited. Both valuations are based upon the same methodology. I am unable to favour one over the other. 243 It follows the first applicant should be compensated for the land at the figure of $7,510,000 determined by Mr Schwarz. I so find. Orders 244 I make the following orders: 1. The value of the first applicant’s freehold interest in the land is to be determined by reference to the terms of the lease in place at the date of acquisition. On that basis, the land value is $7,510,000.00 plus interest calculated from the date of acquisition. 2. The second applicant is entitled to compensation on account of the loss of the value to it of the business extinguished by reason of the compulsory acquisition of the land on the basis of: a) an occupancy rate of 86 per cent; b) a daily fee per child of $121; c) an earnings multiple of 4.3. 3. The second applicant is entitled to lost profits arising from its decision to inform clients on 16 December 2019 of the impending acquisition and to cease trading on 21 February 2020. 4. As to the amount of compensation to which the second applicant is entitled for lost profits: -- 64 of 65 -- [2024] SASC 140 Kimber J 63 a) the appropriate methodology is a comparison of EBITDA in fact earned between 16 December 2019 and 16 April 2020 as against the counterfactual revenue that should have been earned in the same period; b) the occupancy rate to be used to calculate revenue is 86 per cent; c) the daily fee used to calculate revenue is $121; d) the calculation of lost profits is not impacted by the COVID-19 pandemic. The amount of $55,000.00 should not be included. 5. The second applicant is entitled to an amount of compensation in respect of redundancy payments to staff of $104,461.81. 6. A reduction of $9,920.00 is to be made from any further compensation to the second applicant. 7. Pursuant to s 33 of the Act, interest is calculated on any amounts payable to the first and second applicants and from the date of acquisition. 8. The issue of whether the applicants’ legal costs and disbursements (legal and expert valuers) are part of the compensation under the Act payable to one or both of the applicants and, if so, the basis on which each applicant is entitled to calculate its claim for legal costs and disbursements is deferred until the parties have considered orders 1–7 above. Specifically, the following issues are deferred: a) Does compensation under ss 22B and 25(1) of the Act include fees to lawyers and expert valuers? b) Are legal costs incurred by the applicants prior to the referral of questions into Court to be assessed differently from legal costs incurred by the applicants after the issue of proceedings, and if so, how? 245 I will hear the parties as to any further orders that may be appropriate. -- 65 of 65 --