Chief Executive, Department of Main Roads v Murray Investments Pty Ltd [2001] QLAC 38 (2001) 22 QLCR 272

IN THE LAND APPEAL COURT HELD AT BRISBANE In the matter of an appeal from the decision of the Land Court - Claim for Compensation Acquisition of Land Act 1967 (A99-56). BETWEEN Chief Executive, Department of Main Roads AND Murray Investments Pty Ltd Appellant Respondent BEFORE THE HONOURABLE JUSTICE MULLINS, MR RP SCOTT AND DR NG DIVETT REASONS FOR JUDGMENT Delivered at Brisbane this fourth day of April 2001. Introduction On 25 July 2000 the President of the Land Court determined a claim for compensation by Murray Investments Pty Ltd ("the respondent") under section 20 of the Acquisition of Land Act 1967 in respect of the resumption by proclamation on 6 March 1998 by the Chief Executive, Department of Main Roads ("the appellant") of land leased by the respondent being part of Lot 2 on RP 122922 in the Parish of Mackenzie having an area of 1503 square metres. Compensation was determined in the sum of $616,427. The appellant appeals from this decision. The grounds of appeal are: "1. The Learned Member erred in law in not adopting market rent when assessing the value of the respondent's business. [2001] QLAC 38 -- 1 of 18 -- 2 2. By failing to adopt market rent in assessing the value of the respondent's business, the Learned Member acted contrary to the evidence and the weight of the evidence. 3. Alternatively: (a) The Learned Member erred by adopting the reduced rental as a component of special value to the owner as it arose out of the relationship between the claimant and the lessor; (b) The Learned Member erred in treating the reduced rent as a component of special value to the owner and thereby incorrectly took the reduced rent into account. 4. The Learned Member erred in law in allowing for income from the sublease of a part of the respondent's premises in assessing the value of its business. 5. By including rental income from the sublease as a part of the respondent's premises in assessing the value of its business, the Learned Member acted contrary to the evidence and the weight of the evidence. 6. In the alternative to grounds 4 and 5, if the Learned Member was to include rental income from a sublease of a part of the respondent's premises, he should have discounted such income to take account of the risks and/or delays associated with securing lawful tenants conducting ancillary uses of the service station." Background The resumed land was the site of a service station. In November 1987 Mr Angus Murray and Mrs Alwyn Murray commenced to operate the service station then known as "Esso Loganholme" under a franchise agreement with Esso Australia Ltd ("Esso"). Esso leased the subject land from the owner of the freehold, Lee Properties Pty Ltd ("Lee Properties"). In January 1990 Mobil Oil Australia Limited took over all service station sites operated by Esso and the service station thereafter traded as "Mobil Loganholme". In March 1990 Mr and Mrs Murray transferred the franchise to the respondent which purchased Esso's leasehold interest in the land. That lease was due to expire on 14 August 1991. By instrument of lease dated 20 February 1991 Lee Properties granted a lease of the subject land to the respondent for the period 15 August 1991 to 31 December 1993. Rent for the period 15 August 1991 to 31 December 1991 was specified in the lease to be $34,275 and for the succeeding years to be increased by -- 2 of 18 -- 3 the increase in the Consumer Price Index ("CPI") on the basis that the rent figure used in the calculation for the year ended 31 December 1991 was $90,000. The lease contained two options for further terms of 3 years each with the rental for the first year of each option period to be the sum agreed upon by the parties and, failing agreement, such sum as shall be determined as the current market rent for the demised premises in the manner prescribed by the lease with the rent for each succeeding year of the option period to be increased by CPI. By deed made on 3 May 1995 Lee Properties and the respondent agreed that the lease should be altered to insert provisions for third and fourth option periods on similar terms to those relating to the first and second option periods. The first and second options were exercised. On each occasion the rent for the first year of the new term was mutually agreed between the respondent and Lee Properties to be that determined by reference to the CPI increase. In respect of each of the first and second option periods the parties entered into a deed which acknowledged the new term and the agreed rent. The rent for the first year of the second option period, namely the year commencing on 1 January 1997, was agreed to be $105,714.84. The annual rent prevailing at the time of resumption, allowing for increase in the CPI, was therefore $106,240. The appellant had called evidence from valuer Mr Lloyd Parsons who assessed the market rental of the subject property as at the date of resumption as being $151,200 which equates to 3 cents per litre of fuel per annum sold through the service station. -- 3 of 18 -- 4 A rental of $106,240 per annum equates to a rental rate of about 2.1 cents per litre of fuel sales for the subject service station. This is a substantially lower rate than each of the properties included in Mr Parsons' valuation as indicators of market rentals. The President accepted that the rent payable under the lease at the date of resumption of $106,240 per annum was less than market rent and that Mr Parsons had correctly assessed the market rent as at the date of resumption at $151,200. The President also found that it was unlikely that the market rent would have been much different by the end of the second option period which was 31 December 1999. In valuing the respondent's business, the President adopted the capitalisation of net profits limited to the balance of the existing term plus the third and fourth option periods. As to what rent should be adopted for the third and fourth option periods in calculating the value of the business, the President stated at p25 of the reasons for judgment: "In my opinion, at the date of resumption a hypothetical prudent purchaser aware of the rental history of the service station would expect to be able to negotiate rent in accordance with the provisions of the lease at the end of each option period. It would seem unlikely, given the past rental history of the property, that the lessor would have increased the rent by almost $50,000 for the period commencing 1 January 2000. Therefore, I am of the view that the probability of a negotiated rent for each option period is an attribute which was not unique to the claimant, but would have extended to a hypothetical purchaser of the claimant's business. Therefore, the probability of the rent continuing at less than market rent was not an attribute of 'special value', but was an element of the market value of the subject business. It was a matter which a prudent purchaser would have taken into account in assessing the price which he or she would have paid for the business. -- 4 of 18 -- 5 However, if I am wrong in so finding then in my view the concessional rent should be taken into account as part of the special value to the owner, under the principles outlined earlier." The conclusion of the President was, therefore, that the respondent was paying less than market rent at the date of resumption. Because of the President's conclusion that the reduced rent would be likely to continue throughout the third and fourth option periods whether the lease was held by the respondent or by a purchaser of the business, the President adopted the reduced rent as the market rent for the purpose of valuing the respondent's business in respect of the third and fourth option periods. The President also had to determine whether and to what extent the income from the respondent's subleases to Handi Trailers and Licence to Call should be included in the maintainable earnings of the business. The President found that there was some doubt as to the lawfulness of the uses prior to the resumption, particularly that of Handi Trailers, but the appellant had conceded before the President that those uses could have been replaced by other lawful uses. Given that concession, the President was prepared to accept that the location of the site was such that the respondent would have had little difficulty in leasing the premises to lawful users and therefore took the whole of the income stream from the subleases into account in determining the maintainable earnings for the business. Approach on appeal It is well settled that on an appeal in relation to the assessment of compensation for a compulsory acquisition that: -- 5 of 18 -- 6 "It would not be proper for this court on an appeal of this nature to substitute its own opinion for that of the court below unless it was satisfied that the court below acted on some wrong principle of law, or that the value was entirely erroneous." See Commissioners of Succession Duties (SA) v Executor Trustee and Agency Co of South Australia Ltd (1947) 74 CLR 358 at 367. Mason J in Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1981) 146 CLR 337 stated at 381: "Nevertheless, I am unwilling to disturb his Honour's finding on valuation. This Court has consistently applied the rule that on a question of valuation an appellate tribunal is not justified in substituting its own opinion for that of the court below unless it is satisfied that the court below acted on a wrong principle of law or that its valuation was entirely erroneous (The Commonwealth v Milledge (1953) 90 CLR 157 at 159; Commissioner of Succession Duties (S.A.) v Executor Trustee and Agency Co of South Australia Ltd (1947) 74 CLR 358 at 367; The Commonwealth v Reeve (1949) 78 CLR 410. See also Emerald Quarry Industries Pty Ltd v Commissioner of Highways (1979) 142 CLR 351 at 356, 374. As with the assessment of damages, especially in personal injury cases, the valuation of property by a court has many of the characteristics of a discretionary judgment. Valuation is a matter of estimation, not of precise mathematical calculation. It certainly involves the making of a value judgment in the metaphorical as well as the literal sense." (Footnotes added) Whether Mr Parsons' estimate of market rent of $151,200 can be accepted as the market rent of the subject property as at 1 January 2000 As a basis for dismissing grounds 1 and 2 of the appeal, the respondent submits that this court should hold that the finding of the President in respect of his acceptance of Mr Parsons' evidence as to the market rent which applied as at 1 January 2000 was not a finding which was reasonably open on the evidence. As the respondent points out, grounds 1 and 2 of the grounds of appeal proceed on the basis that there was evidence that established the market rent as at 31 December 1999. It is therefore appropriate to deal with this argument of the respondent, before dealing with grounds 1 and 2 of the appeal. -- 6 of 18 -- 7 At the hearing of the appeal Counsel for both parties referred to specific evidence relating to this issue of whether Mr Parsons' estimate of market rent of $151,200 could be applied as at 31 December 1999. It should not be overlooked that the relevant finding of the President was made against all the evidence such as the trading history of the respondent's business and was not confined to the specific evidence to which reference was made on appeal. Mr Parsons' estimate of market rent of $151,200 applied as at 6 March 1998. He had not attempted in his report to estimate market rent as at 1 January 2000. He said that it was very difficult to determine a rent so far in advance, but that if the service station business had continued to perform in a similar manner then the rental that he had determined for the date of 6 March 1998 would be the same at 1 January 2000. The President made an express finding at p22 of the reasons for judgment in relation to the profitability of the respondent's business beyond the date of resumption: "However, it would seem that with the completion of roadworks in the area, further disruption over the next eight years would have been unlikely. The only evidence of trading performance after completion of those works is from April 1997. There was a general trend showing improvement in performance and profit margins from then on. On the basis of that evidence, it would be reasonable for a prudent purchaser to assume that there would have been a steady increase in profitability." We therefore do not accept the submission made by the respondent that there was no evidence to support the finding that it was unlikely that the market rent would have been much different than the sum of $151,200 by the end of the second option period. The President's finding about the continued profitability of the business -- 7 of 18 -- 8 together with Mr Parsons' estimate of market rent as at 1 January 2000 on the basis that the business continued to perform in a similar manner reasonably supported the finding about market rent as at 1 January 2000. Grounds 1 and 2 – Applicable rent for assessing value of the respondent's business These grounds of appeal are based on the President's express finding that the market rent of $151,200 per annum would have been applicable at the commencement of the third option period and attack the President's conclusion that for valuing the respondent's business the reduced annual rent of $106,240 should be used as the market rent at the commencement of the third option period. The President had to take account of the evidence that Lee Properties and the respondent had agreed in respect of the commencement of each of the first and second option periods for rent to increase in accordance with the CPI formula only, when the option clause expressly provided for rent to be reviewed to current market rent for the demised premises, if the parties had failed to agree on the rent for the first year of the option period. The fact that, in the absence of agreement between the parties rent is required to be reviewed to market does give parameters to the parties in negotiating the new rent. It is quite usual for a review to market clause to provide for the intervention of an independent party to determine the market rent only after there has been a failed attempt by the parties to reach agreement as to the new rent. This is obviously to enable the parties to reach agreement as to the new rent without the delay and expense of resorting to formal dispute solving processes in every case. The fact that, if the -- 8 of 18 -- 9 parties cannot agree, the independent party appointed to determine the rent is constrained by the express terms of the rent review clause to determine current market rent must normally be a factor affecting the course of the negotiations between the parties in the attempt to agree on the new rent: MJ Redfern & DI Cassidy Australian Tenancy Practice and Precedents (Butterworths 1987) at para [25 155]. Mr Murray on behalf of the respondent said in evidence that he would have thought that neither he nor Mr Lee on behalf of Lee Properties would have contemplated rent going to a figure as high as Mr Parsons' estimate. He acknowledged that he and Mr Lee had built up a good relationship over the period of the lease, but placed that relationship no higher than being an amicable business one. It could not, in his view, be characterised as a personal friendship. Mr Murray expressed the view that Mr Lee was "very happy" with the rent which he said was struck commercially. He described Mr Lee as being a very astute businessman. Mr Lee did not give evidence. At p25 of the reasons for judgment the President made the following conclusions about the respondent's paying a rent which was less than market rent at the date of resumption: "First, in relation to the agreed rent that was paid at the date of resumption: the history of the negotiations between lessor and lessee suggests that the lessor is not concerned to extract the highest possible rent from the lessee. The lessor was prepared to extend the lease by two additional option periods by the deed of variation. That would seem to indicate that the lessor's priority was to keep a good reliable tenant and was prepared to accept a rent less than market rent in order to do so." -- 9 of 18 -- 10 At the hearing of the appeal the appellant sought to rely on a number of Canadian authorities in respect of these grounds of appeal to which reference had not been made before the President. On the basis that the appellant was seeking to advance a new argument which was not before the President, Mr Allan of Counsel on behalf of the respondent submitted that in accordance with the principle of Coulton v Holcombe (1986) 162 CLR 1 at 7-8 the appellant should not be permitted to rely on those authorities. On considering those authorities both for the purpose of ruling on the respondent's application that the appellant not be permitted to rely on them and in connection with the reliance placed on them by the appellant, we have concluded that the authorities provide no assistance on the issues raised by grounds 1 and 2 of the grounds of appeal either in respect of the law or by being comparable assessments of compensation. It is therefore not necessary to rule on the respondent's application. The first Canadian authority to which reference was made by Mr Jones of Counsel on behalf of the appellant was Famous Players Ltd v City of Sudbury (1978) 15 LCR 49 which was a decision of the Land Compensation Board of Ontario. Reference is made to this decision in a quotation from another Canadian decision relied on by the appellant in para 12.5.5.4 of MS Jacobs The Law of Resumption and Compensation in Australia (LBC Information Services 1998) in support of the proposition: "A right to renew will not add to the market value of the leasehold interest, where, upon renewal, the rental is to be agreed upon or determined by arbitration. In such a case it will be assumed by the court that the rental for the renewal period will be at the full economic rent." -- 10 of 18 -- 11 That statement is relevant to the method of determining a resumed lessee's entitlement to compensation by ascertaining the difference between the contract rent and the economic rent for the premises which is referred to as the profit rent. See The Law of Resumption and Compensation in Australia at para 12.5.3 and The Minister v New South Wales Aerated Water and Confectionery Co Ltd (1916) 22 CLR 56 at 79- 80. This appeal was conducted on the basis that there was no challenge to the method of valuation used by the President of valuing the respondent's interest in the subject land by valuing the respondent's business conducted on the land on the basis that the leasehold interest would have existed for the balance of the existing term plus the third and fourth option periods. The relevance of the rent for the existing term and the third and fourth option periods is that it needs to be deducted from the value of maintainable earnings for that period in order to calculate the value of the business. On the other hand, the decision in Famous Players Ltd v City of Sudbury was concerned with valuing the claimant's leasehold interest for the remainder of the existing term by reference to the difference between economic rent at the date of expropriation and contract rent. There was an issue in that case about whether additional value could be attributed to the option to renew for a further term of 10 years at an annual rental to be agreed upon, or failing agreement, to be determined by arbitration. It was determined by the Board at p59 that the evidence in support of renewal of the lease at anything less than economic rent was not sufficiently convincing to make an award in respect of the option period. This was on the basis that if the option to renew was exercised at an economic rent there was no difference between economic rent and contract rent which could result in an addition to the market value of the leasehold interest. -- 11 of 18 -- 12 The other Canadian decision referred to in The Law of Resumption and Compensation in Australia at para 12.5.5.4 is Manitoba v Christie, MacKay & Co (1994) 111 DLR (4th) 607. That case was concerned with whether the appellant tenant which conducted a law firm from a building which was expropriated which had 6 months remaining on a 5 year lease which carried an option to renew for a further 5 year term was entitled to compensation for the cost of the rent differential for the 5 year renewal period under the lease. It was claimed that the office premises to which the appellant had relocated were rented by the appellant at a greater rent than the appellant expected to pay if it had remained in the existing premises during the 5 year renewal period. The rent payable on the renewal was to "be mutually agreed upon ... or failing agreement, by arbitration ... based upon the then rental rate prevailing in the city of Winnipeg for comparable office space". The Manitoba Court of Appeal therefore applied the principle that a right to renew, not yet exercised, at a rent to be agreed upon or fixed by arbitration adds nothing to the market value of the lease. That principle has no relevance to the method of valuation of the respondent's interest in the subject land. The conundrum which faced the President on the evidence before him was that at the date of resumption the rent agreed between parties dealing on a commercial basis was significantly less than market rent at that date. That same conundrum presented itself to the President when it came to considering market rent at the date of commencement of the third option period. -- 12 of 18 -- 13 Notwithstanding that we find no error in the President's acceptance of Mr Parsons' opinion that the annual market rent of the subject site as at 1 January 2000 would be $151,200, this is not to say that it follows that the value of the business could not be struck on any other basis. Consistently with the principle set out in Spencer v The Commonwealth (1907) 5 CLR 418 at 432, 441, what is being valued in respect of the respondent's leasehold interest is what the hypothetical prudent, but well informed, purchaser would have been prepared to pay for the respondent's business. Such a hypothetical prudent purchaser may have regard to the course of dealings which had occurred between the respondent and Lee Properties as an indication as to what might be expected in the future. In the light of the terms of the clauses applicable to the rent payable for the third and fourth option periods of the lease, however, we have difficulty with the notion that the hypothetical purchaser would purchase the business on the basis that the owner of the freehold would not seek to obtain market rent for the first year respectively of each of the third and fourth option periods. Even having regard to the rental history that existed between Lee Properties and the respondent, it would have been a matter for speculation that at the date of resumption Lee Properties, or any purchaser of the reversion, would not seek to enforce the right conferred by the lease to obtain market rent for each of the first years of the third and fourth option periods. Although common sense would suggest that, when at the date of resumption the market rent was about 150% of the rent as agreed between the parties, the difference -- 13 of 18 -- 14 between that market rent and agreed rent would not disappear when the next review to market was permitted which was on the exercise of the third option, we consider that the hypothetical prudent purchaser of the respondent's business would value the business on the basis of the rent provided for in the option clauses. Unless the parties to the lease amended the terms to reflect their dealings on the fixing of the rent, we do not consider that the hypothetical prudent purchaser would proceed on the basis of the possibility that the landlord would not seek to claim that to which it was entitled as rent under the terms of the lease. It would not be consistent with prudence for a hypothetical purchaser to take that risk. We therefore do not draw the same conclusion as the President that the probability of continuing to be able to negotiate with the owner of the freehold for a rent which was markedly less than the market rent would have extended to the hypothetical purchaser of the respondent's business. We therefore do not consider that it was open for the President to apply, as market rent in valuing the subject business for the third and fourth option periods, the reduced rent which the respondent had been paying during the second option period and not the rent found by the President to be the market rent applicable at 1 January 2000. We therefore conclude that the appellant has established grounds 1 and 2 of the grounds of appeal. This aspect of the valuation of the respondent's business was a significant part of the calculation. It therefore requires this Court to correct the error in the valuation, unless the President's alternative basis for using the reduced rental as the market rental can be maintained. -- 14 of 18 -- 15 Ground 3 - Special value It is therefore necessary to consider the President's alternative finding set out at p25 of the reasons for judgment that the concessional rent of $107,000 (which was rounded up from $106,240) should be taken into account as part of the special value to the respondent under the principles outlined at pp7-10 of the reasons for judgment. There was no challenge to the correctness of the principles set out by the President. The special value which a claimant in the position of the respondent would be expected to pay as a hypothetical purchaser would relate to any use of the land by the respondent or any use in prospect which would yield to the respondent a commercial value greater than that available to any other purchaser. The evidence revealed no use to which the respondent could put the land which was not available to any other hypothetical purchaser. The President found that the respondent could expect to receive a commercial advantage on the basis that on the history of rent negotiations, it would continue to pay the reduced rent after 1 January 2000, as Lee Properties was prepared to accept a rent less than market rent to keep a good reliable tenant. That arrangement, however, cannot be attributed to the land itself. We therefore consider that the President has erred in viewing the concessional rent as part of the special value to the respondent. It is not special value in accordance with the principles found in Pastoral Finance Association Ltd v The Minister [1914] -- 15 of 18 -- 16 AC 1083, 1087-1089. The appellant therefore succeeds on ground 3 of the grounds of appeal. Grounds 4, 5 and 6 – Value of income from subleases Although grounds 4 and 5 of the grounds of appeal are framed on the basis that the President should not have allowed any income from the subleases in assessing the value of the respondent's premises, it was recognised by Mr Jones of Counsel on behalf of the appellant both in his written and oral submissions that some allowance for income from subleases had to be made as either new tenants conducting lawful uses could have been obtained or, to the extent necessary, the existing tenants could have made their uses lawful. Calculations were therefore submitted on the hearing of the appeal on the basis that a not inappropriate approach would have been to halve the existing income to take account of the delays and costs involved in locating new tenants or undertaking appropriate town planning procedures. This approach was consistent with the concession made by the appellant before the President that the uses by Handi Trailers and Licence to Call could have been replaced by other lawful uses. Having regard to the President's express finding that the location of the subject site was such that the respondent would have had little difficulty in subleasing the premises to lawful users, if that were necessary, it must be within the range of possible effect on the earnings of the respondent's business for the whole of the income stream from the subleases to be taken into account in determining the maintainable earnings for the respondent's business. -- 16 of 18 -- 17 To arbitrarily halve that income stream to account for risks that were obviously treated by the President as minimal would be to interfere with an issue of valuation where no error or application of wrong principle has been shown. The appellant cannot succeed on grounds 4, 5 and 6 of the appeal. Assessment of compensation Using the calculations submitted on the hearing of the appeal on behalf of the appellant and making the necessary adjustments for the appellant's lack of success in respect of the issue of the income from the subleases, the compensation is now calculated as follows: Period Period Maintainable Discount PV Earnings Factor @ 31/03/98 (25%) 01/04/98 to 31/12/98 9 months 144,094 0.8459 121,889 01/01/99 to 31/12/99 1 year, 9 months 192,125 0.6767 130,011 01/01/00 to 31/12/00 2 years, 9 months 147,925 0.5414 80,087 01/01/01 to 31/12/01 3 years, 9 months 147,925 0.4331 64,066 01/01/02 to 31/12/02 4 years, 9 months 147,925 0.3465 51,256 01/01/03 to 31/12/03 5 years, 9 months 147,925 0.2772 41,005 01/01/04 to 31/12/04 6 years, 9 months 147,925 0.2217 32,795 01/01/05 to 31/12/05 7 years, 9 months 147,925 0.1774 26,242 547,351 Rounded to: 547,350 Less: Value of Stock 75,000 Value of Plant & Equipment 30,000 105,000 Value of Goodwill 442,350 Add - Disturbance: Professional Fees (Agreed) 14,062 Mr Dodd's Fee 1,500 Items Agreed Independently 70,265 85,827 Total Compensation 528,177 -- 17 of 18 -- 18 It is apparent from the President's reasons for judgment how the orders for interest were derived. The amendment to the compensation has a consequential change for the order in relation to the payment of interest. Orders We therefore make the following orders: 1. The appeal is allowed. 2. The determination and orders made by the President of the Land Court on 25 July 2000 are set aside. 3. Compensation is determined in the sum of $528,177 (Five hundred and twenty- eight thousand one hundred and seventy-seven dollars) and the appellant is ordered to pay the respondent that amount. 4. It is further ordered that the appellant pay interest at the rate of 6 per centum per annum as follows:  on the amount of $212,615 from 1 April 1998 to 1 June 1998;  on the amount of $228,177 from 2 June 1998 to 28 September 1998;  on the amount of $28,177 from 29 September 1998 up to the day immediately preceding the date on which payment of compensation is made. (DA Mullins) JUSTICE OF THE SUPREME COURT (RP Scott) MEMBER OF THE LAND COURT (NG Divett) MEMBER OF THE LAND COURT -- 18 of 18 --