Cupo v Department of Natural Resources and Water [2009] QLC 33

LAND COURT OF QUEENSLAND CITATION: P and R Cupo v Department of Natural Resources and Water [2009] QLC 33 PARTIES: Paolo and Rosa Cupo (applicants) v. Chief Executive, Department of Natural Resources and Water (respondent) FILE NO: AV2008/0297 DIVISION: Land Court of Queensland Appeal against annual valuation of land under the Valuation of Land Act 1944 DELIVERED ON: 26 February 2009 DELIVERED AT: Brisbane HEARD AT: Brisbane MEMBER: Mr RS Jones ORDER: (i) Appeal AV2008/0297 is allowed. (ii) The unimproved value of Lot 2 on Registered Plan 10193, Parish of North Brisbane, as at 1 October 2007 is determined at Seven Hundred and Seventy Thousand Dollars ($770,000). CATCHWORDS: Valuation of Land Act 1944 – s.33 VLA – presumption of correctness of statutory valuation – onus of proof – competing valuation methodologies – preference for comparable sales method over hypothetical development and/or cash flow valuation – reliability of sales evidence – highest and best use – application of sales evidence – sufficiency of exposure of basis for valuation – person acting as advocate and expert witness. APPEARANCES: Mr D Hyne, valuer, for the applicants Mr K Fisher of counsel of Crown Law for the respondent -- 1 of 12 -- 2 Background [1] Paolo and Rosa Cupo, the applicants, have appealed against the assessment of the unimproved value assigned to their land by the respondent, the Chief Executive, Department of Natural Resources and Water. The applicants are the registered proprietors of a parcel of land located at 41 Berry Street, Spring Hill, more properly described as Lot 2 on Registered Plan 10193, Parish of North Brisbane. [2] The unimproved value determined by the respondent as at 1 October 2007 was originally $1,250,000. This valuation was later revised downwards to $1,000,000 and it is that valuation that the applicants are now challenging. The applicants’ estimate of the unimproved value is $650,000. [3] The subject land is 455 m² in area and is located in the suburb of Spring Hill less than one kilometre from the heart of the Brisbane Central Business District. The land, as at the date of valuation, was essentially vacant1 and all the usual urban services and amenities are readily available. [4] Under the City Plan 2000 for the City of Brisbane the land is designated Low to Medium Density Residential, Sub Precinct Low Rise 2 in the "Petrie Terrace and Spring Hill Local Plan". Under this designation, as the land is less than 1,200 m² in area, the gross floor area permitted for any development on the land is 1.0 times the site area. That is the land has a gross floor/area plot ratio of 100%. [5] At the hearing of this appeal the applicants were represented by Mr D Hyne, a registered real estate valuer. Mr Hyne also gave valuation evidence on behalf of the applicants and more will be said about that later. The respondent was legally represented by Mr K Fisher of counsel employed by Crown Law and relied on the evidence of Mr G Ooi, a registered real estate valuer. Issues in the appeal [6] Leaving out the particulars of the grounds of appeal, the grounds of appeal as pleaded are: “1. The valuation is excessive and wrong in law whereby the Chief Executive has undertaken the valuation otherwise in accordance with applicable provisions of the Valuation of Land Act 1944. 2. The Chief Executive, in deciding the unimproved value of the subject land, has wrongly applied sales of properties having a different highest and best use to the subject land including sales of properties purchased for redevelopment and/or subdivision. 1 The limited extent of the improvements on the land are described at p.9 of Mr Ooi's report, Exhibit 3. -- 2 of 12 -- 3 3. The Chief Executive, in deciding the unimproved value of the land has wrongly applied the direct comparison method of valuation and thereby erred in his determination of unimproved value. 4. The Chief Executive, in deciding the unimproved value of the land has ignored and/or failed to have sufficient regard to the limitations which affect the subject land, such limitations and restrictions being the adjoining lot which is zoned ‘Heritage Place’ and which therefore has restrictions affecting highest and best use of the subject site and limiting the highest and best use to a single residential homesite. 5. The unimproved value of the land is manifestly excessive. 6. The increase in the unapproved (sic) value of the subject land from the date of the last annual valuation is arbitrary, wholly unreasonable and unsupported by any sales evidence.” [7] Notwithstanding the breadth of some of the grounds of appeal, by reference to the valuers’ reports and their “joint statement”2 the real issues in the appeal could be summarised as: 1. The development potential of the land (the highest and best use issue) 2. The reliability of the check valuation methods adopted by the valuers 3. The determination and application of the most reliable sales evidence [8] Grounds 4 and 5(c) of the particulars given in the notice of appeal raised a number of other issues about which no probative evidence was led by the applicants. These grounds were abandoned by Mr Hyne during final submissions. [9] In this appeal, pursuant to s.45(4) of the VLA the applicants are limited to the grounds stated in their notice of appeal and bear the burden of proving each and every ground they relied on. Further, pursuant to s.33 of the Act the valuation appealed against is deemed to be correct until proven otherwise. In Brisbane City Council v The Valuer- General,3 the High Court considered that the statutory presumption in favour of the correctness of the statutory valuation may be rebutted where it can be shown that it was based on a wrong principle and/or involved a significant error of fact and/or was made by a fundamentally erroneous method. Highest and Best Use Issue [10] During the course of this appeal it became apparent that the issues identified above were all inter-related. This was so for a number of reasons, the most influential being the 2 Report of Mr Hyne – exhibit 2; Report of Mr Ooi – Exhibit 3; Joint Statement – Exhibit 1. 3 (1977-78) 140 CLR 41 at 56-57. -- 3 of 12 -- 4 scarcity of truly comparable sales evidence and the extent of the uncertainty surrounding what the actual highest and best use of the land was. [11] According to Mr Ooi, the valuer relied on by the respondent, the highest and best use of the subject land was for multi-unit development. According to Mr Hyne, the valuer for the applicant the highest and best use was for a single dwelling house site. It seemed common ground between the valuers that any unit development, if it was in fact economically viable, would be limited to 6 units on a plot ratio of 1 (or 100%) and 2 on a plot ratio of 50%. [12] In support of his opinion, Mr Ooi had regard to the land use designation under the City Plan 2000, the location of the land and the fact that unit development had already occurred in close proximity to the land. Mr Ooi, in response to Mr Hyne's valuation, also carried out hypothetical development exercises of a 6 unit development on the land to show that such development would be viable with a land purchase price of about $1,128,000.4 In Mr Ooi's hypothetical development exercises he referred to the development as comprising of units5 whereas Mr Hyne described his development as townhouses. As the evidence evolved nothing seemed to turn on this difference in description. [13] According to Mr Hyne any unit development on the land would not be commercially viable. He reached this conclusion after carrying out two hypothetical development scenarios.6 [14] On this topic I prefer the evidence of Mr Hyne to that of Mr Ooi. Mr Hyne's experience in this part of the Brisbane real estate market is extensive if not specialised. This allowed Mr Hyne to give more precise and detailed evidence. [15] On the other hand, while I do not doubt that Mr Ooi had regard to the other matters referred to above in paragraph 12, it seemed to me that he placed too much emphasis on the land use designation given to the land under the town plan. That factor seemed to dominate other important considerations. By way of example; first, Mr Ooi considered his Sale 1 to be the sale that gave the best indication of value for the subject. An important element in his reaching that conclusion was that Sale 1 had the same land use designation as the subject land.7 However, the evidence later revealed that this land was purchased for a single residential dwelling. Second, on more than one occasion, Mr Ooi, in response to a series of questions from Mr Hyne, gave evidence to the effect that, in reaching his decision about highest and best use he was primarily influenced by the 4 Attachments to Exhibit 1. 5 See under the heading "Notes" in attachments to Exhibit 1. 6 Exhibit 2 attachments. 7 Exhibit 3, p 11 and transcript (T) 54 L 32 – 35. -- 4 of 12 -- 5 permitted use under the town plan, his hypothetical development exercises and that similar development had occurred in the area.8 I did not find this evidence convincing for several reasons. A use permitted under the town plan, while an important factor, is far from being definitive in determining the highest and best use of a parcel of land. Also, it is clear that Mr Ooi had reached his conclusion about highest and best use before he carried out his hypothetical development exercises. No such exercises appear in his primary report (Exhibit 3). They were prepared after his report was completed (including his determination about highest and best use) for the purpose of rebutting Mr Hynes' hypothetical development exercises.9 [16] Third, for reasons discussed in more detail below, I am unable to accept as reliable Mr Ooi's hypothetical exercises. Last, without more detail, reference to what development has occurred in the area is largely unhelpful. Not much can be drawn from such evidence absent details about how much was paid for the land, how much it cost to carry out the development on the land and how (if at all) profitable the projects were. [17] For the reasons expressed above and below under the next heading, I have concluded that at the relevant date of valuation the most likely highest and best use for the land was for a single unit dwelling house. Such use is not uncommon in the area. However, the evidence of Mr Hyne was that, at the relevant date of valuation, the demand by developers for land suitable for unit development was so strong as to, in some cases, cause some developers to reduce their margins from 17% to 18% down to 12% to 15%10 and be more speculative to secure the limited development opportunities that did exist.11 The prudent vendor of suitably designated land would be aware of this situation and seek to demand some form of premium. Any such premium would in my view be relatively minor. In areas such as this developers and house site buyers would be competing in the same market but the price to which one segment of the market might be prepared to go will not necessarily be the same for the other in respect of any particular parcel of land, each being motivated by different criteria. In the circumstances of this case, there is no reason to consider that, given the physical characteristics of the subject land and its limited potential for development, any disparity between the price one category of purchaser might pay in comparison with the other would be great. Significant disparity could well arise when a particular parcel of land offers a developer real development opportunities. An example of this might, at least partly, explain the price disparity 8 For example, T 61, L 15 – L 30; T 63, L 1 – L 20. 9 T 53, L 20 – L 27. 10 T 16, L 1 – L 25 and . 11 T 17, L 35 – L 47. -- 5 of 12 -- 6 between the other sales relied on by the valuers and Mr Ooi's Sale 3 and Mr Hyne's development site sale in Dornoch Terrace. Hypothetical Check Valuations [18] Both valuers started off by asserting that their primary valuation method was the application of comparable sales. This is consistent with comments made by this Court to the effect that usually the best evidence of unimproved value will be that of vacant or lightly improved comparable sales which occurred at or about the relevant date.12 However, as the hearing of the appeal progressed, because of the scarcity of truly reliable sales evidence the hypothetical valuation exercises carried out by the valuers, referred to as their "check methods", gained more importance. [19] While it is true that hypothetical development valuation exercises, including discounted cash flow exercises, have been the subject of some criticism by Courts, there is no doubt that they are legitimate and useful valuation methods. Most criticisms have been directed at occasions where valuers have failed to apply appropriate inputs in their valuations. Often small variations in inputs such as profit risk allowances or internal rates of return can greatly affect the bottom line. [20] In the circumstances of this appeal I have concluded that, subject to the matters addressed below, the evidence concerning these exercises assume greater relevance than might otherwise have been the case where, at face value, there seemed to be a sufficient number of comparable sales. [21] The major differences between the valuers in their hypothetical exercises were the gross realisations and costs of development adopted and applied by them.13 In respect of gross realisation the valuers were within about 10% of each other. A margin about which Mr Ooi agreed no valuer could say did not fall within the bounds of a reasonable estimate. [22] However, in respect of development costs there was a difference of some $400,000. At face value this difference very closely represents the difference between their estimates of the unimproved value of the land. [23] In arriving at his estimate of development costs, Mr Ooi relied on the indicative prices provided by the 2007 edition of Rawlinsons Construction Handbook. Because of his involvement with developments of the type in issue Mr Hyne was able to access actual costs of development from various projects located within the greater Brisbane area. [24] On balance, I prefer the evidence of Mr Hyne concerning development costs. Not only are his costs more likely to be reflective of what was actually occurring in the market 12 For example, Fischer v Valuer-General (1983) 9 QLCR 44 at 46 (LAC); Grahn v Valuer-General (1992-93) 14 QLCR 327 at 328-329 (LAC). 13 Mr Hyne at T13-T14 and T69, L 1- L 17: Mr Ooi at T53, L 45 – T54 L 1-15. -- 6 of 12 -- 7 place but it is also clear that the costs relied on by Mr Ooi are at best indicative only. This is clear from the disclaimers set out at page 172 of the publication.14 Of particular importance is that it is pointed out that prices can differ appreciably because of any specific requirements under the contract to build. Under the town planning precinct within which the subject land lies, it is subject to building design and character requirements. Among other things these require: "New buildings or additions to existing buildings must be compatible and in character with the building types that predominated during the period 1850 to 1935."15 [25] As Mr Ooi conceded the prices indicated in Rawlinsons would not have factored in such a requirement and it was at least possible that it could represent a more expensive form of construction.16 Contrary to Mr Ooi's initial evidence, the photographs showing multi- unit development in the Spring Hill area, in my opinion, tend to generally indicate that attempts were made to incorporate an older style of design into the façade of recently constructed buildings.17 In cross-examination Mr Ooi conceded that these photographs appeared to represent a combination of modern and "character" design and construction features.18 [26] As the evidence stands, it is not possible for me to definitively resolve the differences between the hypothetical exercises carried out by each of the valuers. Notwithstanding this, for the reasons expressed above, I am convinced that the exercises carried out by Mr Ooi tend to significantly overstate the value of the land and that the evidence supports Mr Hyne's conclusions concerning the highest and best use of the land. The Sales Evidence [27] Having regard to my findings concerning the highest and best use of the land, I reject as reliable evidence of value Mr Hynes' three "Development Site Sales" and Mr Ooi's Sale 3. As to Mr Hynes' sales, not only do they have real potential for multi-unit development they are also well removed from the subject land. And, in two instances, are more than twice the area of the subject and in one instance more than five times the area. As to Mr Ooi's Sale 3 it had some commercial potential and potential for up to 39 units to be erected on the site. According to Mr Hynes there was the potential that some units might have limited river views. The potential for development on this site exceeds by a factor of more than six even the most optimistic development potential of the subject land. It is not a comparable sale. In this context, Mr Ooi's evidence as to how he analysed and 14 Exhibit 7. 15 Exhibit 3, Appendix 3 at p 184. 16 T 70, L 10 – L 20. 17 See generally Exhibit 6 at pp. 20 to 22. 18 T 71, L 40 – T 72, L 1 – L5. -- 7 of 12 -- 8 applied his sales, particularly Sales 1 and 3, to arrive at his valuation was not particularly convincing.19 [28] This leaves as useful sales evidence Mr Ooi's Sales 1 and 2 and Mr Hyne's three "Home Site Sales". [29] Mr Ooi's Sale 1 is the most proximate to the subject being located at Spring Hill. It also has a similar land use designation and highest and best use as the subject. However, it is less than half the area of the subject. This makes any direct comparison difficult. Mr Hyne's sale in Reginald Street also falls into this category. Relatively speaking it is much smaller in area than the subject and is more removed from the Brisbane Central business district. The evidence concerning all of the relevant sales leads me to the conclusion that the subject land cannot be worth any less than Mr Ooi's Sale 1 and that that sale provides some support for Mr Ooi's opinion, with which I agree, that the proximity of Spring Hill to the City commanded a price premium over and above otherwise similar blocks of land located at Paddington, Red Hill and Newstead. [30] In comparison to the remaining sales I accept Mr Hyne's evidence that, generally speaking, the subject land has inferior residential amenity. It is situated in an area which also accommodates older style flats and boarding houses and also some commercial development. However these "negatives" seem to be largely offset by proximity to the City. [31] Notwithstanding that they are further removed from the City than the subject, I accept Mr Hyne's evidence that his Upper Cairns Terrace sale in Red Hill and Mr Ooi's Sale 2, located in Newstead, are, overall, superior to the subject. Both sales are located in superior residential dwelling urban environments. They are also located in near City suburbs, albeit not within city walking distance as is the subject. Both of these sales also have superior elevation to that of the subject which Mr Hyne described as being "at the bottom of the hill". In this context I accept that Mr Hyne's sale in Upper Cairns Terrace has extensive views including desirable city skyline views. The premium associated with extensive views is, at least to some extent, probably reflected in the price difference between Mr Hyne's sale in Wellington Road, Red Hill ($710,000) an inside lot which is located next to the Upper Cairns Terrace sale20 ($850,000), is only 66 m² smaller in area but has significantly inferior views. [32] Turning to the last remaining sale, Mr Hyne's sale in Wellington Street, Red Hill, I consider it to be, in conjunction with the two sales discussed above, the best evidence of value for the subject. I accept that it is located in a superior residential urban 19 See generally T 58 to T 67. 20 See Exhibit 5, Cadastral Map. -- 8 of 12 -- 9 environment and is superior in elevation and size (47 m²). However, I have concluded that these matters are generally offset by the advantages associated with the proximity of the subject to the city. [33] Save for one matter yet to be addressed, I consider that the last three sales considered indicate that the unimproved value that should be assigned to the subject land would be in the order of $700,000. However, for the reasons set out in paragraphs [17] above I have concluded that some premium, albeit a relatively small one, ought be allowed for whatever limited potential the subject land might have had for multi-unit/townhouse development. As I understand the evidence, none of the three sales upon which I have predominantly relied have similar potential. [34] In the absence of any clear evidence as to what the value of the premium might be, consistent with my findings that it would be relatively minor, I will adopt 10% and determine the unimproved value of the subject land to be $770,000. An increase of more than 10% would, in my opinion, unduly inflate the value of the subject land in comparison with Mr Ooi's Sale 1 in circumstances where both are essentially no more than single dwelling house sites. While the base value as a house site of $700,000 might seem a bit low when compared to Mr Ooi's Sale 1 at $566,000, that sale being just less than half the area, that difference is significantly offset by the "broken city views" that land has and which would attract a price premium. Evidence of Mrs Cupo [35] Mrs Cupo gave evidence which was not challenged. I accept that evidence as far as it relevantly goes which is:21 (i) the land was on the market between August and October 2007. (ii) the applicants were told by real estate agents that only two people were interested at around the $650,000 mark. (iii) the applicants refused that price because they thought if they kept it on the market they would get more for the land. (iv) to date no formal offers had been made. [36] During the evidence of Mrs Cupo a letter dated 18 May 2007 from one "Gary" was admitted into evidence.22 Gary is, as I understand it, a real estate agent employed by the Spring Hill office of Raine and Horne Project Marketing Brisbane. It is not necessary to say much more about this letter other than to point out that it was the author's opinion that a developer might pay a maximum of $600,000 for the land subject to certain conditions including that the Brisbane City Council relax, among other things, the "… 21 T 7, L 25 – L 50. 22 Exhibit 4. -- 9 of 12 -- 10 50% site coverage to 60% …". This is somewhat confusing as the valuers agreed that under the relevant town planning scheme the land has 100% site coverage. The letter also suggests that a figure in excess of $600,000 might be achieved from the neighbours of the adjoining land, the United Services Club or the Astor Motel. In circumstances where qualifications of the author to express these opinions is not known, his opinions were not able to be tested in cross-examination and I have before me the evidence of two valuers, I cannot and do not place any weight on this document. [37] While I accept that Mrs Cupo was an honest and frank witness, her evidence does not cause me to reconsider my decision about the unimproved value of the land. Miscellaneous Matters [38] Before making my orders disposing of the appeal I feel compelled to deal with two issues which arose out of Mr Hyne's conduct of the case. [39] The first matter is the unsatisfactory nature of his valuation report. It was four pages in length excluding the hypothetical exercises. It, in my opinion, provided no reasonable disclosure of the facts, assumptions and reasoning underpinning Mr Hyne's final determination of the unimproved value of the land. To use the language adopted by this Court from time to time it was, to a significant degree, a "non speaking" report. [40] No objection was taken to the form of the report nor to Mr Hyne giving oral evidence in chief which significantly expanded on and enhanced his written report. This might not always be the case as an expert witness, in examination in chief, must not, except with the leave of the Court, expand on matters contained in the witness' statement of evidence (report) or introduce fresh material.23 Given the brevity of his report, had objection been taken to Mr Hyne expanding on it in his evidence in chief, that objection would have to have been given serious consideration. And, if the objection succeeded, the likelihood of the applicants succeeding in their appeal would have been greatly diminished. Any expert intending to rely on a report in this Court should be mindful of the operation of Rule 23(4) of the Land Court Rules and ensure that his/her report contains and exposes all the material facts and/or assumptions underpinning the final conclusions and opinions. [41] The second matter is that Mr Hyne not only appeared as advocate for the applicants but also as their expert witness. This is, in my view, a situation that ought be avoided in all but exceptional circumstances. Generally speaking, subject to his/her duties to the Court, opponent, client and professional governing body, an advocate's role is to persuade the Court to adopt his clients' case and reject the case for the opposition. On the other hand the role of an expert witness is to assist the Court by giving honest and objective 23 Rule 23(4) Land Court Rules 2000. -- 10 of 12 -- 11 evidence. The failure of any expert to act otherwise would place him/her in breach of the expert witness' overriding duty to the Court.24 The real potential for tension arising when a person attempts to act as an advocate and expert witness is obvious. [42] In this case no objection was taken to Mr Hyne acting in both roles. In circumstances where such an objection was taken the then President of this Court identified the difficulties confronting both the Court and the individual involved. In Pratt v The Department of Natural Resources and Water the then President said:25 [12] However, although as agent and advocate Mr Whip had identified with his clients’ case, he felt that he could give his valuation evidence in an objective and impartial manner. I have no doubt that he tried. However, that placed a great deal of stress upon him throughout these hearings. In an attempt to separate the two roles, when acting as advocate he went so far as to refer to himself as the valuer in the third person. Although he consciously attempted to separate the conflicting duties when acting as a valuer, he was unable to completely divorce himself from his partisan interest in the outcome of the case. That may well have been subconscious rather than deliberate. [13] There is a continuing debate about the independence of any expert witness retained by a party. The argument goes that a paid expert will usually adopt his client's case and skew evidence to present it in the most favourable light in order to secure a favourable outcome for the person who pays him. Such bias may not be designed to deliberately mislead, it may be more a matter of emphasis. [14] In the present case, there is no doubt that Mr Whip was more sympathetic to his clients’ case, even though he tried to remain impartial in giving his valuation evidence. Therefore, I have no alternative than to find that his evidence is tainted to that extent. However, there is some authority for the proposition that an interest or a perceived interest in the outcome of litigation does not constitute a justification for the exclusion of expert evidence. It is simply a matter which goes to the weight of that evidence. Therefore, even though Mr Whip's evidence was tainted, it was admitted. However, any argumentative or adversarial statements were excluded from consideration. Furthermore, where there was a conflict between Mr Whip's evidence and that of the Department's valuer, little or no weight was attributed to Mr Whip's evidence unless it was corroborated from another source, or unless the Department's valuer was demonstrably wrong. [15] Before leaving this topic, it must be pointed out that throughout these proceedings it cannot said that Departmental valuers were entirely independent and unbiased. They are employed by the Department and clearly have an interest in the outcome of the litigation. However, their evidence was afforded a higher degree of weight than that of Mr Whip, because generally there was not a blurring of the duties they owed to the Court. However, from time to time a bias was apparent, in failing to make concessions where appropriate and in advancing or endeavouring to support propositions which were clearly wrong." (Emphasis added). [43] While in this case I was not asked to find that Mr Hyne's evidence was tainted because of his dual roles, and, in any event, did not consider it to be so, the importance of the observations made by the President cannot be overstated. [44] The person who attempts to be both advocate and expert witness runs the grave risk of having the weight which might otherwise be accorded to his/her evidence significantly 24 See Rules 426(1) and (2) of the Uniform Civil Procedure Rules and Barns v Director-General, Department of Transport (1996- 97) 16 QLCR 22 at 28-29. 25 [2008] QLC 0063 at paras [12] to [15]. -- 11 of 12 -- 12 eroded and, in more extreme cases, even rejected entirely. It is a situation that should be avoided. Orders (i) Appeal AV2008/0297 is allowed. (ii) The unimproved value of Lot 2 on Registered Plan 10193, Parish of North Brisbane, as at 1 October 2007 is determined at Seven Hundred and Seventy Thousand Dollars ($770,000). RS JONES MEMBER OF THE LAND COURT -- 12 of 12 --