Brown & Dunkley v Director-General, Department of Main Roads [1998] QLC 150

LAND COURT BRISBANE 2 DECEMBER 1998 Re: A97-24 Determination of Compensation - Resumption for Road Purposes - Acquisition of Land Act 1967 Erin G. Brown and Penelope G.H. Dunkley v. Director-General, Department of Main Roads JUDGMENT By proclamation published in the Government Gazette dated 15 September, 1995, the below described land was taken by the Chief Executive, Department of Transport (as he then was): County of Stanley, Parish of Woogaroo - an area of 1.094 ha being the whole of Lot 147 on RP 90235 contained in Title Reference: 13697186. The registered proprietors of the land were Erin G. Brown and Penelope G.H. Dunkley. The land was situated at 143 Considine Street, Ellen Grove, about 19 km radially and about 25 km by road, south-westerly of the Brisbane GPO. It was zoned "Future Urban", serviced with a bitumen sealed road, electricity, water and telephone. The suburb of Ellen Grove comprised an older rural residential locality with mixed age and quality residential development. Adjacent to the locality to the east and north was the large expanding "Forest Lake" residential development. At the date of resumption, the subject land was developed as the "Paws & Whiskers" Dog Boarding Kennels and Cattery, with associated residential accommodation. The improvements comprised the main low-set, four bedroom dwelling which was about 35 years old, of timber construction and galvanised iron roof; a detached three-year-old self-contained two bedroom accommodation unit described as a "yurt" being of circular timber and metal construction; cavity brick office/reception and metal shed; concrete block, corrugated iron-roofed kennel building containing 40 kennels off a central corridor and breezeway with 20 associated external runs, the building capable of and registered by the Brisbane City Council, for accommodating [1998] QLC 150 -- 1 of 38 -- 2 80 dogs; concrete block, corrugated iron-roofed cattery building containing 46 cat cages; small brick puppy kennel building with concrete runs; cattery annexe of prefabricated aluminium sheeted sheds; tool and garden shed with roofed kennel area separation; goat and chicken sheds and yard; carport and aviary. The grounds were relatively level and well established with landscaping, concrete paving, rock retaining walls, timber and mesh fencing. Access from the street to the office reception area was by way of a gravelled circular drive with customer car parking for three vehicles. The whole of the property was resumed and at the time of the hearing, all improvements had been demolished with road construction having been commenced. Claim for Compensation The Claim for Compensation which had been filed in the Court was in the total amount of $1,150,000 but itemised as follows: Land $350,000 Improvements $476,500 Severance and Injurious Affection $673,500 Total $1,150,000 (sic) The amount claimed was varied during the proceedings on the alternative bases of the market value of the land and business together with special value to the owner (Exhibit 12) or on the basis of replacing the land and improvements and relocation of the business (Exhibit 13). The alternative claims were summarised as follows: "Exhibit 12 Value of land, licence, improvements $570,000.00 Value of business 187,200.00 $757,200.00 Special value to owner (notional replacement) Stamp duty 7,572.00 Legal fees 1,025.00 Removal costs 3,517.50 Client mail out (including postage, envelopes, photocopying), new brochures and business cards 955.10 Telstra redirection 387.26 Australia Post re-addressing 120.00 Loss of pay - P Dunkley 307.50 E Brown - 10 hours @ $10.00 100.00 Adco Planning - TP application 460.00 Ron Rumble - acoustic report 350.00 -- 2 of 38 -- 3 Foundation Engineering 210.00 Ross Nichols - structural engineer 520.00 Simmons & Bristow - water analysis 70.00 Enviro Australia 80.00 Cushway Blackford - hydraulic engineers 3,035.00 Ron Rumble - acoustic inspection 320.00 Daniels Crone - architect's fees 21,680.00 Council fees 4,716.00 New signs 712.90 Loss of income 87,239.00 133,377.26 Plus: Legal fees 4,000.00 Valuation fees 10,400.00 Property searches (time, travel and cost) 2,923.00 Total $907,900.26 " Further variance to the claim occurred when it was agreed between the parties that if this basis of assessment was to be adopted relative to special value to the owners, then the architect's fees should be reduced to $12,000. An error in the calculation of loss of income had been detected and the re-calculation finally reduced that item to $85,649. "Exhibit 13 Relocation: Purchase of land $239,588.68 Stamp duty 2,370.00 Legal fees on purchase 1,025.00  Building - Rainbow Beach construction 516,907.00 Small kennel renovations 25,073.00 Expenses associated with locating new premises 2,923.20 Professional fees: Government Chemical Laboratory 350.00 Adco Planning 460.00 Ron Rumble 350.00 Foundation Engineering 210.00 Ross Nichols - structural engineer 520.00 Simmons & Briwtow 70.00 Enviro Australia 80.00 Cushway Blackford 3,035.00 John Hodgkinson 850.00 Ron Rumble 320.00 Daniels Crone 21,680.00 Council fees 3,856.00 -- 3 of 38 -- 4 Bank loan establishment fees 3,315.00 New signs 712.90 Equipment purchases 123,841.00 Landscaping works 12,211.65 Potting mix for palms 300.00 Client mail out 1,955.10 Removalist 3,517.50 New brochures 425.30 Telstra redirection 387.26 Australia Post readdressing 120.00 Meetings with government/council 1,083.35 Bank meetings - time 269.80 Environmental planning 3,000.00 Travel to and from Gilmore Road - time 5,970.00 Travel cost 4,258.60 Property searches (time, travel and cost) 2,923.20 Move - E Brown 400.00 P Dunkley 307.50 Value of work carried out by claimants personally and associates 43,552.02 Loss of income 87,239.00 Total $1,028,217.82 (sic)  Quoted price by brother of E Brown." The total, on my calculations, should have been $1,115,457.06. There was found to have been a double entry of the expenses associated with locating new premises ($2,923.20). The item "loss of income" was amended as in Exhibit 12 to $85,649. In terms of s.27(2) of the Acquisition of Land Act 1967 the amount finally claimed was on my calculations, in the amount of $1,110,943.86 in accordance with Exhibit 13, as amended. The Respondent's Valuation The respondent's final valuation before the Court under the heading of land and improvements was in the amount of $480,000. However the respondent agreed that under the heading of claim, "Special Value to Owner" in Exhibit 12, a total amount of $121,212.26 on my calculations, and subject to submissions relevant to categorisation of the various items, was compensable. The respondent's final valuation before the Court therefore amounted to, on my calculations, $601,212.26. -- 4 of 38 -- 5 Witnesses Ms Brown and Ms Dunkley, the claimants, gave evidence concerning the history of their ownership of the resumed land and business operation, the effects of the resumption, and the relocation of the business. Assessment of the value of the land and improvements, was carried out for the claimants by Mr G.G. De Bruyn, a registered valuer in private practice. Mr L.G.F. Wright, a licensed real estate agent specialising in business brokerage and valuation of businesses, assessed the value of the "Paws & Whiskers" business as claimed in Exhibit 12.. Two witnesses gave evidence for the respondent - Mr J.D. Horrigan, a registered valuer in private practice who had conducted a valuation of the land and improvements, and Mr N. Calabro, a registered chartered accountant, who had been instructed to provide assessments of the value of the subject business as well as a business known as "The Pet Chalet". He had also made an assessment of loss of profits, as a consequence of the resumption, as a heading included in the respondent's final valuation. History of Ownership The freehold land, together with the kennel and cattery business conducted thereon, had been acquired by the claimants in February 1991. The property had been at that time in a state of general neglect. A renovation program was put into effect and the name of the business was changed to "Paws & Whiskers". Ms Brown and Ms Dunkley are heavily involved and successful in the breeding and showing of certain breeds of dogs and cats. Ms Brown has long experience in show judging. Their decision to purchase the property in the first instance had been influenced by the numbers of animals - dogs, in particular - which they owned and local government restrictions on the number of dogs which may be kept on a property within a residential zone. They were attracted to the potential which a kennel and cattery complex possessed to provide not only an animal orientated lifestyle and accommodation for their show and breeding animals, including dogs which had been retired from those activities, but a business opportunity. Ms Brown became involved in the day-to-day management of the business, while Ms Dunkley continued in her profession as an architect, assisting in the business in her spare time. -- 5 of 38 -- 6 Although much of the renovation work and improved presentation of the property had been completed prior to the resumption, it had been the intent of the partner claimants to further improve the property over time. Business growth had become established. Personal business planning involved eventual full-time participation by both partners. The kennels had been well designed and labour efficient. The cattery had been reconstructed in stages, utilising an existing garage structure. The infrastructure was considered by the claimants to have provided a facility of a competitive commercial standard. It was the claimants' belief that the business, under their management and with their personal expertise with animals, and Ms Brown's involvement within the industry (she served as President of the Queensland Pet Boarding and Grooming Association, in 1995) was well positioned to compete favourably with any comparable business within the demand catchment. High kennel food costs and veterinary expenses associated with breeding activities, combined with lack of commensurate return from progeny sales, deleteriously affects net income when compared to a pure boarding kennel business. Showing activities increase casual wage expenses, but it was the claimants' belief that their demonstrated expertise with animals had the beneficial effect of strengthening client confidence in their management of the facility and their ability to provide appropriate pet care. The progression of intense residential subdivision into the nearby locality (Forest Lake and Springfield) was seen by the claimants as a particularly positive feature of the location of the business. 48% of their clients had been sourced from within 10 km of the resumed land. Research had indicated that 47% of their clients had heard of their business through veterinarians, 25% through Yellow Pages advertising and 15% from friends. The claimants had first become aware of the road proposal which eventually led to the resumption, in early 1993. There had been strong local opposition to the proposal and that opposition had been well exposed through the media, during 1993 and 1994. Although the resumption had been seen by the claimants as inevitable after the proposal had first been made public, the Notice of Intention to Resume was not served until June 1995. The land had been formally taken in September 1995 and the claimants had been advised, initially, that vacant possession would be required in May -- 6 of 38 -- 7 1996. However, they had eventually been permitted to remain in occupation until April 1997. The claimants had commenced their search for a replacement property in 1994. It is their evidence that the publicity had caused client concern as to the future availability of the facility. Due to demand for boarding accommodation during the peak holiday periods most kennel facilities are full (to overflowing) during those periods. It is common for clients to book yearly in advance for peak periods. The "Paws & Whiskers" management policy, prior to the resumption, had been not to accept bookings for the Christmas and New Year period for stays shorter than 10 nights. As the road proposal firmed, however, no guarantees could be given by management as to the future availability of boarding accommodation. Peak period occupancies had been able to be maintained due to the general demand exceeding kennel supply. Annual trading results showed growth into the financial year ended 30 June 1996. However, it is part of the claimants' case that the rate of growth which might have been expected as a result of their efforts to consolidate and improve the business and client base, had been affected by client and management uncertainty as to the future of the premises. After many inspections to find a replacement property, including an inspection of The Pet Chalet at Brookfield, which had been offered for sale but failed to sell at public auction in May 1995, the claimants unsuccessfully made offers to buy various properties, including vacant land for development with kennels. Eventually, a conditional contract had been signed for land at Ritchie Road, Pallara - a location which the claimants considered to be generally comparable to that of the resumed site. However, a development application had attracted significant local objection and the contract was allowed to lapse, after several extensions, in February 1996. With the initial May 1996 deadline for handing over possession of the resumed property looming, the claimants had made an unsuccessful offer to purchase another established kennel complex at Durack in January 1996. The Pet Chalet property had been sold in late December 1995. Finally a contract had been signed on 26 February 1996 for property at 98 Gilmore Road, Berrinba, a location about 20 km south-easterly of the resumed property, at that time within the Brisbane City Council local government area. Subsequent to the purchase a local government boundary amendment resulted in the Berrinba locality being transferred to the Logan City local government area. The -- 7 of 38 -- 8 Gilmore Road property had a dwelling, but inferior in quality to that resumed, together with kennels registered to accommodate 30 dogs. The claimants at that time had at least 12 dogs of their own together with up to 20 cats, and felt that at least the purchase would provide legal accommodation for their own animals, when the May 1996 deadline arrived. Subsequent to the acquisition of the Gilmore Road property, it was found that there had been a previous approval for development of that land with a kennel complex for the accommodation of 100 dogs. The claimants then proceeded to successfully reinstate that approval and set about redeveloping the property as the relocated site of the "Paws & Whiskers" business. In the meantime, the May deadline for possession of the resumed land had been extended by the respondent, on the basis that at least four months' notice would be given prior to vacation being required. The evidence before the Court was that the operation of boarding kennels has, in recent years, come under close scrutiny by local governments. There are town planning restrictions on the location of new developments which are then subjected to stringent development conditions, particularly with regard to noise abatement, effluent and waste disposal and environmental considerations generally. The claimants experienced the force and expense of these considerations in the redevelopment of the Gilmore Road site, first under the control of the Brisbane City Council, then the Logan City Council. A negative feature of the Gilmore Road site had been the unavailability of reticulated water. Artificial supplies including an earth dam and rainwater collection were necessitated. The redevelopment included the renovation and reconstruction of the original kennels, the construction of a large new kennel building, a new cattery building, new office/reception, private animal facilities, sheds and various infrastructure including an industrial standard footpath crossing, sealed driveway and car park, landscaping, fencing and ground improvements generally, including earth moundings for noise abatement. Ms Brown's brother is a registered builder and buildings were constructed on a cost-plus-supervision basis, while the cost of much of the additional work was reduced through the claimants' efforts together with voluntary labour of friends. From the photography tendered to the Court, it would be fair to say that the kennel and cattery complex has been constructed and is presented as a development of exceptional standard. Apart from private facilities, the commercial complex provides -- 8 of 38 -- 9 high quality registered kennel accommodation for 100 dogs, and a "state-of-the-art" cattery complex for 76 cats. Mr De Bruyn's Evidence Mr De Bruyn had first valued the resumed land for the purpose of compensation negotiations. At that time there had been limited sales evidence relative to properties developed as operating kennels. In a valuation report which had been exchanged a short time before the hearing commenced, it appeared that his earlier valuation assessment may have been amended, although the body of the report had not been substantially altered, including reference to the available market evidence. Tendered through him but not earlier exchanged, was an addendum to his report which referred to the claimants' purchase of the Gilmore Road property, and the development works which had been effected since its purchase. Mr De Bruyn had compiled a schedule of items which he described as "relocation costs". The claimants had provided him with the total costs associated with acquisition of the replacement property and its subsequent development. His schedule represented an extract of only those items which he believed were relevant to the claim. The amounts allowed by him were either actual costs, or estimates provided, but adjusted where he considered it necessary, for the purpose of maintaining equivalence of reinstatement of that which had been taken. Individual items will be discussed later, but the "relocation costs" which he assessed as being relevant and equivalent, amounted to $863,420. Included in the addendum to his report was the heading "More Recent Sales Evidence". It was explained that since the date of resumption "and since the date of our valuation report" he had become aware of the sale of the property known as The Pet Chalet at Carbine Road, Upper Brookfield. That sale had taken place he said in January 1996, for $645,000. His evidence, which I accept, was that the valuation report to which reference had been made, had been his original report and not the report, or at least the assessment within the report, tendered to the Court. It appears that specifically as a result of the sale of The Pet Chalet, Mr De Bruyn's original assessment of the value of the subject property had been reduced from some undisclosed amount, to $570,000 as the value of the land and improvements. That valuation was calculated as follows: Land including Licence for 80 dogs $300,000 Dwelling $70,100 Yurt $30,150 Office/Shed $22,100 -- 9 of 38 -- 10 Cattery $20,100 Dog Kennels $102,000 Ground improvements $25,000 Total $569,450 Rounded off at $570,000 As it happened, the sale of The Pet Chalet became the critical evidence of value in this matter because it also provided the precise basis for the respondent's valuation of the subject land and improvements. Mr De Bruyn, in the course of his professional valuation employment, had been called upon in January 1996 to assess the market value of The Pet Chalet "for the purposes of advancement of Mortgage Funds", in connection with its sale (by contract dated 27 December, 1995). His valuation adopted the sale price as being the then current market value of the property, calculated as follows: Land including Licence for 80 dogs $345,000 Dwelling $78,450 Kennels $97,800 Cattery $10,400 Office and work area $3,600 Dams $5,000 Ground improvements $10,000 $550,250 Business @ 1.5 years' purchase $94,500 $644,750 Adopt $645,000 It was Mr De Bruyn's evidence that his analysis of the available sales evidence prior to the sale of The Pet Chalet had indicated to him that a value in the range of $1,375 to $2,300 per registered dog, attached to the site value of land developed with registered kennels. The methodology he adopted in his sales analyses of kennel properties and application of the analysed evidence to the subject property, was to value the land, as zoned on a site basis, then to add to that figure a value for the licence, based on the number of dogs permitted. For example, The Pet Chalet land, as a "non-urban" zoned rural residential site of 3.92 ha had, in his opinion, a site value of $185,000. It had been his interpretation of the market that the greater the number of dogs for which any site was registered, the greater the value per dog. The Pet Chalet licence was in the upper range of dog numbers for kennel businesses, and he had decided to apply a value of $2,000 per dog to that licence. That amounted to -- 10 of 38 -- 11 $160,000 for the 80 dog licence, which when added to the site value of $185,000, gave a valuation of $345,000 for the land "as licensed". His valuation of The Pet Chalet business involved acceptance of profit and loss statements as had been provided to him. He adjusted the figures for the 1994/95 financial year to exclude depreciation and interest charges. The net income for that year as adjusted, became $63,647. After seeking some advice from a colleague and a business broker (Mr Wright) he decided to adopt 1.5 years purchase of the net income (66.6% capitalisation rate) as representing the value of the business. On his calculations that was $94,500 (although it seems it should have been on that basis $95,500). Mr De Bruyn's apportionment of values for mortgage security purposes, became, in effect, his eventual analysis of the actual sale. The dog "licence" for the subject property had been identical in terms of numbers. While he saw the subject property as generally superior to The Pet Chalet in terms of location for a kennel business, the actual site value as zoned was less valuable, in his opinion, being worth only $140,000. To the site was added the same value per dog, ie $2,000, as was applied in his analysis of The Pet Chalet sale. That resulted in his valuation of $300,000 for the subject "land including licence for 80 dogs".. Mr Horrigan's Evidence Mr Horrigan certified the market value of the property "excluding any goodwill/business value" as being $480,000, as at the date of resumption. He had first inspected the property in May 1995. At that time his research had revealed eight sales of properties with dog kennel registrations, in the period from July 1992. None of those sale properties had been considered comparable to the subject property. However, Mr Horrigan found the sale of The Pet Chalet shortly after the relevant date of valuation in this matter, as offering reliable evidence of value. In his opinion, a direct comparison with the subject property was possible. He had not attempted to assess the value of the business component involved in the sale. Instead, he relied entirely on the assessment of that value, as conducted by Mr Calabro. That assessment will be discussed later, but was in the amount of $221,000. It will be recalled that Mr De Bruyn had analysed The Pet Chalet sale by adopting a business value component of $94,500. It will be immediately obvious that as The Pet Chalet -- 11 of 38 -- 12 sale had been accepted by both valuers as the best evidence as to the market value of the subject property, analysis of that sale is critical to the outcome of this matter. Mr Horrigan applied different methodology to that adopted by Mr De Bruyn in the analysis of the sale and its application to the valuation of the subject property. Mr Horrigan's analysis was as follows: Sale Price $645,000 Less value of business (Calabro) $221,000 Land and improvements $424,000 Less Dwelling $78,500 $345,500 "That is $4,318 per dog ex dwelling and business value. Adopt $4,320 per dog." (as registered) Mr Horrigan applied that derived unit of value directly, without variation, to the subject property then added his valuation of the subject dwelling, granny flat and the reception area/shed. (The Pet Chalet had not been considered to have infrastructure equivalent to the reception area/shed). The resultant valuation for the subject property became: 80 dogs @ $4,320 $345,600 + Dwelling $66,000 + Granny Flat $40,000 +Plus Reception/Shed $26,000 $477,600 Adopt $480,000 (Excluding business value and any other disturbance items). In the valuation report, the goodwill of the business had been specifically excluded from assessment, on instructions. The reason given was "that the business of 'Paws & Whiskers' had continued to operate from the subject premises until May 1997". Mr Horrigan had been provided with the trading figures for the subject "Paws & Whiskers" business for the 1992, 1993 and 1994 financial years. He had deduced, after adding back interest payments and depreciation, that for those respective years the actual net profit had been $25,629, $27,126 and $35,080 from gross sales of $80,047, $76,127 and $89,935. He had been made aware of projected sales estimates -- 12 of 38 -- 13 of $114,000 per annum. He noted that the expenses of the business had included casual salaries but excluded any allowance for salary or superannuation for the partners. Also included in expenses had been some "show expenses" and motor vehicle expenses, which he commented might be added back to the net profit. However, as he believed the breeding and showing of dogs and the use of a motor vehicle promoted the business and generated some income, it was reasonable that those expenses be included in the net profit calculation. His analysis of the trading history as provided to him, indicated that while the highest and best use of the property was as existing, with the kennel-related improvements adding value to the land, there would be no super profit once the partners' salaries and superannuation were deducted. In his opinion, "the business was such that it was difficult to establish, based on the figures available, any major component for goodwill". It was revealed during the hearing that Mr Horrigan had, prior to the sale of The Pet Chalet, and the date of resumption, prepared for the respondent a valuation of the subject property, as a going concern, in the amount of $585,000. The date of that valuation was said to have been 31 May 1995. In that valuation report, which made reference to requests for trading projections for the financial year to 30 June 1995, having not been met "as late as August 1995", Mr Horrigan had commented that projected gross sales of $114,400 as had been suggested by the claimants, could have resulted in a net profit of "around $51,500" being achieved. He noted the steady increase in the net profit over the three years from 1992 "which is an indication of a good business venture and further increases can be expected". In that valuation report, comment had also been made as to the lack of super profit if an allowance for owners' salaries and superannuation had been made. Nevertheless, Mr Horrigan had then considered that a premium could attach to the value of the property for the business operation. He had commented as follows (p.9 Exhibit 27): "The property does provide a work situation for the current owner-operators and could attract an additional premium over and above the real estate value of the property, due to its location and the lifestyle offered. Any such premium would be in the nature of site goodwill for which an intending purchaser would be prepared to pay over and above the real estate value in order to obtain it. This figure has been determined at $50,000 and is identified as premium (site goodwill)." The valuation at that date in that report was apportioned as follows: Land $140,000 Business goodwill $50,000 -- 13 of 38 -- 14 Improvements $395,000 Total $585,000 Prior to the hearing, Mr Horrigan had become aware of a sale of the Bracken Ridge Pet Motel on 26 November 1997, for $325,000, excluding the business. The business had been subject to a separate contract of sale in the amount of $50,000. The property comprised a dwelling; double metal garage/reception area; carport; kennels for 72 dogs; cattery for 36 cats - on a 1.024 ha "Future Urban" zoned site. Mr Horrigan commented that this sale property "is generally considered to be inferior to the subject 'Paws & Whiskers' and is licensed to operate a slightly smaller number of dogs". He had analysed the sale to show a component of $250,000, excluding the dwelling, or $3,472 per dog. He said that the property "was listed for sale for a long period, approximately 18 months and was being marketed as having a gross turnover of $75,000 per annum." It was his verbal evidence that the original list price had been $575,000 including the business. While he did not use the sale as a basis, he saw it as supporting his belief that his final valuation of the subject property had been generous. Although his initial valuation of the real estate component, before The Pet Chalet sale had occurred, was higher in the amount of $535,000 as compared to $480,000 based on The Pet Chalet sale, at p.175 of the transcript, Mr Horrigan's reply to the question - "In arriving at a correct value it's a very difficult task, if there's a single sale, to be confident that that sale in fact reflects the market?" was - "Yes. Well I know what you're referring to, but if I had've used the other sales and also Barbour Road, Bracken Ridge, I would've determined a far lower value, so if anything I thought that I was being generous by using The Pet Chalet sale only". Mr Horrigan had not seen it as correct valuation methodology to apply a value for the licence, to the land content of a kennel property. He accepted that if the highest and best use of a site was for establishment of a kennel business, a development approval could enhance the vacant land site value. However, as the licence could not issue until the kennel infrastructure as approved, was established, he saw the value of the licence attaching to both the land and the kennel improvements. In his opinion, to endeavour to analyse a kennel property sale, by apportioning a separate value to the licence, introduced an element of value which had been incapable of proof on the available evidence. It was more realistic, in his opinion, to establish an analysed unit of value for the land and kennel infrastructure and to apply -- 14 of 38 -- 15 that unit of value, adjusted as considered warranted, on a like with like comparison, to that component of the property to be valued. Mr Horrigan did not believe that the more stringent kennel development conditions being imposed by local governments had increased the market value of existing kennel premises as at the date of resumption. He saw it as logical that increased development costs of new premises would eventually have an enhancing effect on the value of established premises. However, in his opinion, increased development costs would not necessarily result in added market value, until accompanied by increased maintainable earnings. Mr Calabro's Evidence I will deal with Mr Calabro's evidence before that of Mr Wright. Mr Calabro had been engaged by the respondent to provide valuations of both The Pet Chalet and the "Paws & Whiskers" businesses. He had also provided an opinion as to the loss of profit suffered by the subject business consequent upon the resumption of the property and the subsequent relocation of the business. The Pet Chalet Mr Calabro had been aware that The Pet Chalet freehold including the business had sold for $645,000 in December, 1995. His task, as he had seen it, was to value the business as at the date of sale. The methodology he adopted was to capitalise his estimate of future maintainable earnings. Available to him had been profit and loss statements for the 1994 and 1995 financial years, together with the reported turnover and operating profit for the 1992 and 1993 financial years. He made adjustments to those figures to account for items of both income and expenditure which were considered unrelated to normal operations and of a non-recurring nature. A notional market rent for the business premises was deducted as an expense and Mr Calabro had seen it as reasonable to adjust actual owners' remuneration by adoption of an estimate of reasonable management allowance. The turnover figures had shown steady growth. There was a fairly steady, slightly increasing relationship between the adjusted earnings and turnover, until 1994, when a fairly sharp increase in profitability then occurred in the 1995 financial year, prior to the sale. In the 1995 financial year from a turnover of $235,108 the adjusted earnings were $42,012. -- 15 of 38 -- 16 It was Mr Calabro's evidence that the trading results indicated "a beautiful set of figures" and he was comfortable in adopting the adjusted earnings for the 1995 financial year as capable of being maintained into the future. In "assessment of the most appropriate capitalisation rate" consideration was given to "many factors, including current yields of risk free securities such as government bonds; current economic conditions; industry risks, barriers to entry in the industry; the risk of achieving lower results given that I have adopted the latest year's results as maintainable earnings". Mr Calabro stated that he knew of "no established mechanism which allows the above qualitative risk factors to be translated into a quantitative discount factor". However, based on his personal experience he believed a capitalisation rate of 19% was appropriate "in the circumstances". He suggested in his verbal evidence that a capitalisation rate of 17% might have been more appropriate had he not relied on the single (1995) year's results, as being maintainable. The estimate of future maintainable earnings of $42,012 capitalised at 19% resulted in the value of the business being assessed in the amount of $221,000. "Paws & Whiskers": Financial statements had been prepared by the claimants' accountant, to exclude breeding activities for the financial years 1993, 1994 and 1995. The breeding activities had not been excluded for the 1996 financial year, but Mr Calabro adjusted that year's result accordingly. Excluding breeding activities, from sales of $76,127, $87,735, $102,285 and $117,000 in the 1993, 1994, 1995 and 1996 financial years, net profits of $14,457, $27,227, $31,495 and $38,223 were indicated. As with The Pet Chalet business valuation, various other adjustments were made to the trading results. A notional rent (identical to that estimated for The Pet Chalet) was deducted as an expense, as was an estimate of salaries and wages appropriate for the level of business activity. Dealing only with the 1994, 1995 and 1996 financial years, the adjusted profits were estimated by Mr Calabro to be $9,266, $18,418 and $18,527 respectively. Mr Calabro had been made aware that the claimants had commissioned the preparation, in 1995, of a business plan for the period 1995 to 1997. That plan included projected trading figures for the full 1995, 1996 and 1997 financial years. In both the 1995 and 1996 years there was only a slight difference between projected revenue and actual revenue. However, as Mr Calabro observed, the projections for 1997 "are based on a significant increase of approximately 40% in the occupancy level -- 16 of 38 -- 17 and an increase in average sales". Indeed, he calculated that if the 1996 financial year results were to grow to the 1997 business plan projection, there would need to be growth in the traditional off-peak occupancy of about 100% (Exhibit 28).Mr Calabro was unaware of any evidence "as to how these projections could be achieved considering that the actual increase in sales over the past few years has been between 14% to 16%". He also observed that the projection reflected very little increase in costs. He was unable to place any reliance on the business plan 1997 projection. Instead, "To account for the steady increase in profits" he saw the results of the 1996 financial year as being the earnings most likely to continue in the future, and adopted $18,500 per year accordingly. Using the same qualitative criteria as in The Pet Chalet business valuation, and again based on his personal experience, he adopted a capitalisation rate of 22%, as being appropriate in the circumstances. It was his view "that the Paws & Whiskers business is not as profitable as The Pet Chalet, hence a prospective investor would require a higher return". By capitalising the estimated maintainable earnings of $18,500 per annum at 22%, he valued the "Paws & Whiskers" business, excluding breeding activities, at a rounded $84,000. Loss of Profits Mr Calabro's interpretation of the trading results of the business was that no downturn had been discernible prior to May 1996 and that business activity had recovered by April 1998. He compared actual occupancy levels in the period of downturn with projected occupancies based on a continuance of the increase in actual numbers experienced from 1994 through 1995. Loss in turnover was estimated as being $76,783 with the loss in gross profit being estimated as $68,337. Mr Wright's Evidence Mr Wright dealt, in his comprehensive report, with both the value of the "Paws & Whiskers" business as it existed prior to the resumption of the property, and an estimation of relocation costs/expenses. The actual claim on the alternative relocation basis had not relied on Mr Wright's assessment under that heading and it is unnecessary to discuss that aspect of his report. It was Mr Wright's evidence that where a business is conducted from freehold premises and a market exists for the sale of the business as a leasehold business, "then -- 17 of 38 -- 18 the market traditionally values the freehold property as a separate entity from the value of the business entity, as the opportunity exists for the freehold property to be sold to a purchaser engaged in property investment". His valuation methodology was similar to that adopted by Mr Calabro, although Mr Wright's terminology was capitalisation of "highest and best use" estimated future maintainable net profits. The highest and best use qualification was intended to indicate a business operation concentrating on the generation of income from animal boarding activities and not, as the claimants had chosen to operate their business, with the boarding activities combined with breeding and showing activities. It was Mr Wright's opinion that by December 1994 the claimants "had prepared the foundation for a very strong business, should they have chosen a 'highest and best use' business policy aimed at directing their efforts towards maximising the income from kennelling" (and the cattery). The occupancy figures in the 1994 calendar year demonstrated to Mr Wright the results of the claimants' efforts since acquiring the property, with strong growth pattern evident. That growth pattern should have continued, in Mr Wright's opinion. Furthermore, had the business policy been directed towards maximising earnings through boarding activities, he could see no reason why the subject business would then not have achieved similar trading results as did other businesses throughout Brisbane with comparable kennelling registration. The Pet Chalet, for example, achieved sales of near $200,000 in the 1994 financial year and $235,000 in 1995. Another property in the "north-eastern suburbs" of Brisbane of which Mr Wright had been aware through its listing with his brokerage business at a sale price of $910,000, walk-in/walk-out, licensed for 70 dogs and with accommodation for 80 cats, had achieved sales of $225,000 and $232,000 in the 1995 and 1996 financial years and $176,000 from July 1996 to 15 February 1997. The Acacia Ridge Pet Motel with a licence for 80 dogs and accommodation for approximately 180 cats, achieved sales of about $211,000, $223,000 and $213,000 in the 1995, 1996 and 1997 financial years respectively. Mr Wright held the opinion that a prudent vendor of a business, willing to sell, but not over-anxious to do so, would first prepare the business for sale. Such preparation would ensure that the full potential of the business could be demonstrated through practices being put into place to achieve maximum turnover with minimum expenses. He was prepared to concede that if a vendor wished to sell a business -- 18 of 38 -- 19 before it was operating to its full potential, then the sale price may need to be reduced accordingly. Nevertheless, in his opinion, the reduction in price should not exceed the costs involved in bringing the business to its full potential - or "highest and best use" market value. Mr Wright was of the opinion that with the "Paws & Whiskers" business prepared for a "planned sale" as he believed both The Pet Chalet and the Acacia Ridge Pet Motel businesses had been, "the forecast trading performance contained in the business plan would have been achieved". The business plan (Exhibit 21), after actual occupancy of 7,743 dog nights and 4,068 cat nights in the year to December 1994 had projected an increase to 10,700 dog nights and 7,600 cat nights in the 1997 financial year. In Mr Wright's opinion, the 1995 financial year trading results for "Paws & Whiskers" should logically have shown growth comparable to, if not superior to, that experienced in 1994 compared to 1993. However, he suggested that the expressed client concerns relative to the future of the kennels and the inability of the claimants to confidently take forward bookings or give guarantees as to the future of the property, may have been the reason for a reduced growth in 1995. It was Mr Wright's assessment that the subject business should have had, at the relevant date, a "maintainable highest and best use" gross sales level not less than $205,000 per annum (as compared with the business plan projection for 1997 of $201,360). On a leasehold basis he assessed the market rental value of the premises, excluding the residential structures, as being $49,000 per annum. That assessment was based on a direct comparison with the rental determined in 1996 for the Acacia Ridge Pet Motel premises. As I understood his evidence, that rental had been determined on the basis that one cat place had the potential to generate, on the minimum industry expectations of occupancy levels, 22.5% of one dog place. The accommodation for 186 cats at the Acacia Ridge Pet Motel was considered to be the equivalent of 186 x 22.5% or a rounded 42 dog places. Such equivalent dog places together with the 80 registered dog places equated 122 dogs. The determined rental had been $1,270 per week or $10.41 per equivalent dog place per week. Using a similar formula the rental of $750 per week for an equivalent 70 dog places at a kennel business known as A-Durack Pet Motel, indicated a rental of $10.71 per equivalent dog place per week. -- 19 of 38 -- 20 The "Paws & Whiskers" accommodation of 80 dog places and 46 cats was an equivalent 90 dog places (80+(22.5% x 46)) to which Mr Wright applied $10.41 per place per week or a rounded $49,000 per annum. After examining the historical trading performance of the business and discussions with the owners, Mr Wright estimated that maintainable direct business expenditure including casual labour and rent would be $128,200, leaving a maintainable profit of $76,800 (before tax, leasing and finance costs and an owner/operator/manager salary). He then allowed a management salary of $30,000 leaving a "highest and best use" future maintainable profit of $46,800. He said in selecting a capitalisation rate he had given consideration to various factors nominated under eight headings, before deciding that a rate of 25% acknowledged the benefits and risks associated with the particular business. His valuation became $187,200 which he apportioned as: Goodwill value $177,200 Plant, fixture, fittings and equipment $10,000 $187,200 plus stock at valuation. Summary of Valuation Evidence Both Mr De Bruyn for the claimants, and Mr Horrigan for the respondent, had relied on the evidence of value provided by the analysis of the sale of The Pet Chalet, as a basis for the valuation of the subject land and improvements. Both valuers accepted that The Pet Chalet sale included a component of value for the business operation. Analysis of the sale required identification of that business component. Mr De Bruyn's analysis of the sale had been obtained from a valuation of The Pet Chalet which he had conducted, for mortgage security purposes, before settlement of the sale. His valuation of the business component, in the amount of $94,500, was based on a relatively broad-brush adjustment of the latest financial year's earnings, capitalised at a rate which had been derived from his interpretation of market expectations. His valuation of the land component included a premium for what he described as the licence for an 80 dog kennel operation. The basis for assessment of that "licence premium" is lacking in convincing evidential support. I prefer the principle in the methodology adopted by Mr Horrigan in his application of the evidence provided by The Pet Chalet sale, to the valuation of the subject property. However, his analysis of the sale to obtain a unit of value for each dog capable of being accommodated in accordance with the Brisbane City Council -- 20 of 38 -- 21 registration, depends on the veracity of Mr Calabro's valuation of the business component. It should be mentioned here that the evidence is that no registration is necessary for cat accommodation, although clearly the cat accommodation must form part of the comparison process. Mr Calabro's assessment was conducted in the absence of any consultation with either the vendor or purchaser of The Pet Chalet. His instructions had been to value the business and he was not concerned to establish if there had been any basis upon which the parties to the sale had come together. Mr Calabro had not previously valued a kennel business. His opinion as to a critical criterion in his valuation methodology - the capitalisation rate - was based on his business valuation experience. It appears that he made no attempt to seek a basis for "a quantitative discount factor" from any analysis of evidence of sales of kennel orientated, or comparable type, businesses. Although he sought to gain support for the capitalisation rate adopted from evidence presented by Mr Wright relative to a sale of the Acacia Ridge Pet Motel, he had not analysed the trading results of that particular business. There is no question that Mr Calabro has considerable experience in conducting business valuations. It seems to me however that in this field, too much gloss is placed on rather precise estimates of capitalisation rates said to be based on broad criteria, when no supporting market evidence is provided, or apparently even investigated. It is, after all, the marketplace which decides the value of a business. The valuer's task is to interpret that evidence. Nevertheless, if a capitalisation rate as precise as that adopted by Mr Calabro - ie 19% - was to be accepted, there would need to be real confidence that there was adequate support for the estimation of the other critical criterion - future maintainable earnings. One of the several difficulties which I have with Mr Calabro's estimate of maintainable earnings on a notional leasehold basis, is the "market" rental adopted. Again, Mr Calabro failed to support his notional rent assessment from any market evidence. In fact, he had adopted a rental for the "Paws & Whiskers" business based on a theoretical percentage of an unsupported capital value of the land and improvements as indicated in the balance sheets. That assessed rental ($23,790 per annum) was transposed to The Pet Chalet land and business improvements, which Mr Calabro accepted, apparently on Mr Horrigan's advice, as being directly comparable. Mr Wright, on the other hand, had assessed fair market rental for the "Paws & Whiskers" business, based on market evidence, as being $49,000 per annum. His was -- 21 of 38 -- 22 the only persuasive rental evidence before the Court. Its application to Mr Calabro's exercise would reduce his estimate of future maintainable earnings of The Pet Chalet business by approximately $25,000 per annum. Furthermore, Mr Calabro had erred in failing to deduct from The Pet Chalet's 1995 earnings, an amount of $7,053 for advertising which had been prepaid in the 1994 financial year. On the positive side, it is observed that the earnings of the business had been reduced by a depreciation allowance of $16,907 apparently attributable to the costs of fairly recent kennel building construction. No doubt, a depreciation allowance of this extent would be an attractive feature to a purchaser of the business. Also, on the positive side, were significant allowances for motor vehicle leasing and operating expenses, apparently unadjusted for any private use. Significant owners' salary allowance had been adjusted by Mr Calabro but employee wages still appeared unusually high in comparison with the evidence of the trading figures of other kennel businesses, as presented in Mr Wright's report. In the end result it is possible that apart from the prepaid advertising error, fine- tuning of the trading results could result in much of the apparent rental deficit in Mr Calabro's exercise, being offset, in the eyes of a purchaser, by apparently generous allowances for some of the other expenses as indicated. Other than to deduct the pre- paid advertising, reducing the estimate of future maintainable earnings to a rounded $35,000 per annum, I do not propose to tinker with Mr Calabro's estimate. Suffice to say however that I am left with little confidence in the accuracy of that estimate. For that reason, adjustment to Mr Calabro's adopted capitalisation rate is necessary. A capitalisation rate of 25% and maintainable future earnings of $35,000 per annum, from turnover of $235,000 per annum, would indicate a capital value of $140,000 for The Pet Chalet business. Mr Wright gave evidence to the effect that the Acacia Ridge Pet Motel leasehold business sold in March, 1998 for $160,000. The turnover for the 1997 financial year had been approximately $213,000 when the rental was approximately $76,000 per annum. Those premises were registered to accommodate 80 dogs and also 186 cats. According to Mr Wright that business had been previously sold in 1991 for $100,000 when the gross income had been about $190,000 per annum and the rental $52,000 per annum. Mr Wright had been aware of the sale of The Pet Chalet but had adopted, for discussion purposes, the apportionment as produced by Mr De Bruyn, but with the -- 22 of 38 -- 23 comments that the operating costs appeared to be very high. I have come to the conclusion that Mr De Bruyn's apportionment of the business component in The Pet Chalet sale is probably suitably conservative, for the purpose for which the original valuation had been conducted. However, doing the best I can, I will adopt a business component in the sale price in the amount of $140,000, which seems to me to have some support from the sales history of the Acacia Ridge Pet Motel. Using Mr Horrigan's methodology, I will adopt the following analysis of the sale of The Pet Chalet: Sale Price $645,000 Less business value $140,000 $505,000 Less dwelling $78,500 Land including kennel infrastructure as registered for 80 dogs and cattery infrastructure for 66 cats, including ground improvements $426,500 I will adopt Mr Wright's formula for conversion of cat accommodation into equivalent dog accommodation - ie one cat place having the potential to generate on the average, 22.5% of the income potential of one dog place. The 66 cat places of The Pet Chalet equates then to 15 dog places making the equivalent dog places 95 dogs. On this basis The Pet Chalet sale, excluding the business component and the dwelling, would show a unit value of $426,50095 = $4,489 per equivalent dog. Comparison of The Pet Chalet and "Paws & Whiskers" Mr Horrigan made no differentiation for the additional cat places at The Pet Chalet. He saw the premises as directly comparable, except that The Pet Chalet did not have an equivalent reception/shed facility. On a like land and infrastructure basis, Mr De Bruyn had through his summation approach, found The Pet Chalet to be a little superior in comparison with "Paws & Whiskers", with apportioned values of $471,800 and $447,100 respectively. Then, with the additional improvements on the "Paws & Whiskers" property, Mr Horrigan found added value of $132,000, while Mr De Bruyn was again more conservative with those additional improvements valued at $122,350. It may be, as the valuers suggest, that the replacement cost of the infrastructure on both premises on a like-with-like basis, is somewhat similar. It may also be that -- 23 of 38 -- 24 from a rural residential lifestyle comparison, the address of The Pet Chalet is superior to that of "Paws & Whiskers", as is inherent in Mr De Bruyn's site valuations. However, the claimants were strongly of the opinion that The Pet Chalet infrastructure was inferior, from a business point of view, to "Paws & Whiskers". Although some of the kennels were of more recent construction at The Pet Chalet, the claimants found the design as poor and inefficient, particularly with regard to layout and personnel access. There was no reticulated water to the site with the water supply including animal drinking water pumped from an earth dam storage. Effluent from the kennels was directed by an open drainage system into a septic installation then recycled into the dam. It was the perception of the claimants and one shared, according to them, within the industry, that inherent animal health risks attached to the water supply situation. The cattery was considered to be of poor design with insufficient protection from wind and wind-driven rain. The original topography of the developed area had required significant benching with client footpath access poorly maintained. Car parking and peak period vehicular access was considered to be inefficient in comparison with the subject property. The contour between the kennels and the residence was considered inappropriately steep for efficient management, particularly in the absence, at the date of sale, of an acceptable reception facility. In terms of location, I am able to accept that the "Paws & Whiskers" site did not suffer in comparison with The Pet Chalet, relative to client catchment demography and was, if anything, better placed to take advantage of residential growth in the nearby localities. Although some of their recollections as to specific detail of The Pet Chalet premises were shown to be inaccurate, I am persuaded that the opinion of the claimants as to the overall superiority of the "Paws & Whiskers" infrastructure and topography resulted from the disappointment which they experienced following an inspection of The Pet Chalet as genuine potential purchasers. Their practical knowledge and professional expertise relative to design and operational requirements of infrastructure for a business of this nature, lead me to accept that their preference for the "Paws & Whiskers" premises would also be consistent with that of experienced operators in the marketplace. The evidence does not assist me in deciding the degree of superiority in monetary terms. However, all things considered, including the generally -- 24 of 38 -- 25 unsatisfactory evidence relative to the business component in The Pet Chalet sale, I will resolve any doubts in favour of the claimants in adopting a unit of value of $5,000 per equivalent dog place for the "Paws & Whiskers" premises, in comparison with the $4,489 or rounded $4,500 analysis for The Pet Chalet. Valuation of Land and Improvements The market value of the subject land and improvements., excluding the business component, is adopted as follows: Land, kennel and cattery infrastructure, registered for 80 dogs, with equivalent dog accommodation places including cattery, of 90 dogs @ $5,000 per dog place $450,000 Add - Reception/shed $26,000 Dwelling $66,000 Yurt $40,000 $132,000 Total land and improvements $582,000 I will round this amount to $585,000 to include minor structures (aviary etc) which attached to the residential component and which were apparently included within Mr De Bruyn's assessment of ground improvements but not specifically identified by Mr Horrigan. That assessment is coincidentally, the same amount as was assessed by Mr Horrigan initially but with the inclusion of the business component. "Paws & Whiskers" Business The business was relocated rather than extinguished as a consequence of the resumption. The value of the business is seen to be relevant only in consideration of the alternative claims before the Court. Mr Calabro valued the business in the amount of $84,000 and Mr Wright, $187,000. Mr Calabro accepted adjusted trading figures for the purpose of assessing maintainable earnings. Those trading figures were consistent with projections adopted in the commissioned business plan, except for the year 1997. It is true, as Mr Calabro observed, that a significant increase in occupancy, the potential for which was limited to other than peak periods, would have been required to achieve the business plan 1997 projections. It is clear that had Mr Calabro applied a fair market rental to the -- 25 of 38 -- 26 premises - ie say $49,000 per annum as compared to his estimate of $23,790 - no profit would have been available from his estimate of maintainable sales. Mr Wright was guided by the business plan 1997 projections because he believed they were in keeping with the trading results of businesses with comparable animal boarding facilities, but operated on a purely commercial basis, exclusive of private breeding activities. He was concerned that the trading results of the subject business did not represent full potential because there had been no attempt by the owners to prepare the business for sale, through maximisation of sales and minimisation of expenses. In assessment of the value of the business to the owners, it seems to me that potential is an important consideration. It also seems logical that in assessing potential, the trading results of comparable businesses is a helpful criterion. Mr Wright took that approach and gave consideration to factors which would favour rejection of actual trading figures as a valuation base. The business was not being run as a pure animal boarding operation; it had been fairly recently renovated and redirected in accordance with the owners' personal needs which, in his opinion, did not represent highest and best use for commercial purposes. The business, in the hands of the owners, was achieving their personal lifestyle needs as well as showing solid growth under their experienced management. Their planning for the future had been directed towards orderly manageable growth and not towards maximisation of turnover with a view to disposal of the business. Mr Wright's assessment appeared, however, to adopt optimistically low expense projections and a capitalisation rate which did not, in my opinion, reflect the need for projection of potential trading figures. Conversely, Mr Calabro, in my opinion, by relying on actual trading figures had not considered potential based on industry standards. Inherent in his assessment was the opinion that the trading figures of the business had not suffered during 1995 from the impending resumption. It would be clearly wrong for the business to be valued as if it was trading to full potential, when it was not. However, if it was under performing by industry standards for explicable reasons, it would also be clearly wrong to value it as if that higher potential did not exist. I am persuaded to accept that the potential of the "Paws & Whiskers" business was at least equivalent to that of The Pet Chalet, under similar management policies -- 26 of 38 -- 27 and conditions. If the potential of the business was therefore adopted as capable of achieving future maintainable earnings of $35,000 per annum, based on projections rather than actual trading history, a valuation in the range of $100,000 would not be seen to be unrealistic in comparison with the sales of the businesses of the Acacia Ridge Pet Motel, the business of the Bracken Ridge Pet Motel or the adopted analysis of the sale of the business of The Pet Chalet. A valuation of $100,000 on projected earnings of $35,000 per annum reflects a capitalisation rate of 35%, as opposed to the 25% adopted for The Pet Chalet business, with actual trading history, but for the reasons given a still uncertain level of net maintainable earnings. Going Concern Value The market value of the property as a going concern would, on the figures adopted above, become: Land and improvements $585,000 Business $100,000 Total $685,000 That valuation indicates an overall slight superiority attaching to the subject property as a going concern, in comparison with the sale of The Pet Chalet. Counsel for the respondent submitted that, on the evidence, the value of the subject property on a walk-in/walk-out basis could not exceed that of The Pet Chalet. He drew comfort for that submission from answers given by Mr De Bruyn whilst under cross-examination in relation to the comparison between the two properties. In Dangerfield v. Town of St. Peters (1971-1972) 129 CLR 586 at pp.589, 590, Barwick CJ had the following to say: " The basis of assessing compensation for the taking of land which has a special use, as undoubtedly the land had, has long been settled. Lord Moulton said, speaking for their Lordships of the Privy Council in Pastoral Finance Association Ltd v. The Minister ([1914] A.C. 1083 at p.1088): 'Probably the most practical form in which the matter can be put is that they' (the dispossessed owners) 'were entitled to that which a prudent man in their position would have been willing to give for the land sooner than fail to obtain it.' That is to say, one supposes that the owner of the land, with his knowledge of it and its suitability for the special purposes to which he has been putting it, was considering buying that land for that purpose from a willing seller. The sum he would pay to secure that land for those purposes rather than lose it will be the value of the land to him. The knowledge and experience he had of the particular use to which it could successfully and lawfully be put must be reflected in that sum." -- 27 of 38 -- 28 As earlier indicated, I have been influenced in this matter by the opinions of the claimants based on their knowledge of the practical utility of the various kennel and cattery improvements requiring comparison, in preference to the opinions expressed by the valuers. My conclusion is intended however to reflect market value rather than any special value in the hands of the owners. Reinstatement - Relocation Issues It could not be said that the subject property was of a nature for which no market existed. However, such properties are limited in number, the evidence being that in 1993 there were 82 registered kennels in Brisbane, licensed to accommodate 2,500 dogs. There is also evidence that in south-east Queensland, accommodation for 500 dogs has been lost to the industry since 1994. It is clear from the evidence that the claimants used their best endeavours to find a replacement property, within their financial capacity and one with the ability to provide, in their opinion, reasonable replacement of both the business and lifestyle infrastructure which had been taken. The best that they could achieve in the circumstances had been to acquire the Gilmore Road property as the first stage of their relocation. They did not wish to have their business destroyed and proceeded then to reinstate the business infrastructure. Their preferred basis of claim is as contained in Exhibit 13 as amended. That alternative claim is put before the Court as a reflection of what occurred in the relocation and reinstatement. However, the claim was not based on the actual cost of reinstatement rather on the notional cost had the redevelopment of the acquired property been conducted on a contract basis. Ms Brown's brother who is a builder, provided a quote on a full contract basis for the main structural work which was effected. That quote was in the amount of $516,907. In fact the work for which the quote was given, but which was not itemised in any detail, was said to have cost $400,496.46. That was on a cost plus supervision basis, exclusive of builder's profit. Other work, which had not been included in the quote but effected by the claimants themselves or on a voluntary basis by friends and associates, at no direct cost to the claimants, was estimated to have had a contract value of $43,552.02. Regardless of the correct basis of claim, if the reinstatement approach was to be adopted, i.e. on incurred cost or an estimated contract cost, the actual cost of the reinstatement -- 28 of 38 -- 29 exercise was significantly greater than the market value of that which had been resumed as a going concern. Counsel for the respondent argued that the reinstatement approach was appropriate in cases where the land resumed and the use to which it was placed, was of such a nature that there was no general demand or market, and where adequate compensation could not otherwise be determined. However, it was submitted that as a market did exist for kennel properties, the market value of the land and the loss sustained by the claimants was capable by being assessed through reference to that market. Counsel for the claimants submitted that there was a connection between the proposition that the value of the land for compensation purposes is not limited to the market value of the land but rather the value to the owner, and the further proposition that the cost of reinstatement needs to be considered in determining the value to the owner. Reinstatement, it was submitted, was not an independent method in determining compensation but a tool in determining value to the owner, as had been observed by Sugerman J in Cook v. Commissioner for Railways (1954) 19 LGR 226 at p.229. Then, in Banno v. Commonwealth of Australia (1993) 45 FCR 32, Wilcox J in referring to a judgment of Hemmings J in Brown Brothers (Marine) Holdings Pty Ltd v. New South Wales Land and Housing Corporation (1991) 72 LGRA 50 observed at p.44: "That case concerned the acquisition of waterfront industrial land at Balmain, Sydney. The resumee relocated its business at Tomago near Newcastle and sought compensation on a reinstatement basis. The respondent objected that the claimed reinstatement cost exceeded the value of the business but Hemmings J held that this was not determinative of the issue. It was only one of the matters that should be considered; …" Earlier at p.42 in Banno (supra) His Honour had referred to Commissioner of Highways v. Shipp Bros Pty Ltd (1978) 19 SASR 215. In that matter Wells J had rejected the reinstatement approach but in the course of his reasons he had summarised the relevant principles and "pointed out (at 219-220) that, in compensation cases, the court is concerned to consider the value of the land from the viewpoint of the claimant; this value may be greater than market value". However, Wells J had also observed (at 221) that - "[i]f the costs of available relocation plainly and substantially would exceed the value of the business as a going concern (after making due allowance for -- 29 of 38 -- 30 retained movable assets) it would not be the reasonable and natural consequence of expropriation to incur such costs, and hence compensation could not justifiably be assessed by reference to them … Even if the claimant has no alternative to obtaining new fixed assets that are more expensive and commodious than those he has lost, the court may well make some allowance against the claimant in recognition of that enhancement." In this matter I am satisfied that the claimants acted reasonably in acquiring an alternative site and then setting about relocating their business. That necessitated, in the main, construction of new infrastructure to replace that resumed. The "reinstatement" went further than merely replacing the infrastructure which was lost however, but increased the overall capacity of the business component. Generally, the efficiency of at least the new dog kennels was said to have been of a design and efficiency equivalent to those resumed. However, development conditions required more expensive construction, relative in particular, to noise attenuation and town planning considerations. At least Mr De Bruyn made an attempt to recognise the need for discounting the reinstatement cost. In his assessment of what he described as relocation costs "based on discussions with the claimants", he had allowed many but not all of the items claimed in Exhibit 13 then apparently some additional items and some items at reduced amounts. From the perspective of principle, he allowed "building and renovation work" (exclusive of the original kennels) as "80% of total cost as this involved some 80 dog licence to 100 dog licence". He had discounted the quote of $516,907 rather than the actual cost of approximately $400,000. His total assessment of relocation costs was $863,420. If it was necessary to analyse his assessment of relocation costs, particularly with regard to the apportionment of building costs, further adjustment would have been considered necessary to account for the improved cattery accommodation and the cost of renovation of the existing kennels, which contributed to the increased dog accommodation. There are several concerns which I have relative to the alternative claims made and the evidence generally with regard to items of relocation and/or reinstatement. There was a lack of precision in the compilation of the claim in Exhibit 13 and what appears to have been a lack of correlation between the costings or estimates of several heads of claim; the amounts actually claimed in Exhibits 12 or 13; and/or amounts contained in Mr De Bruyn's schedule. There was no evidence before the Court to indicate the breakdown between the incurred costs of, or alternatively the quote for, -- 30 of 38 -- 31 the construction of individual new structures involved. In the subject case, as an example, it is highly unlikely that prudent and experienced persons would have constructed a cattery of a size or standard the cost of which did not add full value to the land. There seems to be a suggestion, certainly from Mr Horrigan, that a kennel structure constructed in accordance with the now stringent local government standards but incapable of producing greater income than established kennels of lesser standard, would more than likely not add value equivalent to cost. On the values determined, the cost of reinstatement as claimed has been significantly greater than the market value of the land and business as a going concern. It would be seen as most unlikely, that the capital value of the Gilmore Road property as redeveloped would not also be significantly greater than the capital value of that resumed. However there is no valuation evidence before the Court to indicate the relationship between the cost of reinstatement and the market value of the reinstated premises. All things considered, I am of the opinion that the reinstatement which occurred was in excess of the natural and reasonable consequences of the resumption. That is not to say that it was unreasonable for the claimants to redevelop to the extent which they did, but it would be unreasonable for them to expect to be compensated on the basis of the actual reinstatement which was effected. However, I agree with the submission for the claimants that the reinstatement which was effected is, once discounted sufficiently, of assistance in considering the question of the value of the resumed property to the owners. Special Value to Owners Had the business been destroyed the claimants would have been entitled to the market value of the resumed land as a going concern, together with disturbance items which were a natural and reasonable consequence of the resumption. The circumstances in this matter are a little unusual because of the existence of additional accommodation (the "yurt") which had been occupied by members of one of the claimant's family and also because the resumed property allowed the accommodation of the claimants' various animals - dogs in particular, which were of a number not permitted in suburban premises. The Gilmore Road acquisition provided for the claimants' accommodation and that of their animals, but did not provide the additional accommodation equivalent to -- 31 of 38 -- 32 the yurt (valued by Mr Horrigan at $40,000), or as it existed when acquired, the majority of the infrastructure required for the business. Legal Fees and Stamp Duty - Acquisition of Replacement Property The claim as contained in Exhibit 12 sought compensation for the costs (legal and stamp duty) involved in acquisition of a replacement property of equivalent "going concern" value, to that resumed. Because the business was not destroyed, but relocated, the basis for such a claim is not seen to be wrong in principle. However there were contained in the claim in Exhibit 12, various items which, as counsel for the respondent argued, were expended only because a suitable "going concern" replacement property had not been available for acquisition. In the circumstances I agree with the submission for the respondent, that there would be an element of double-accounting if items relevant to the redevelopment at Gilmore Road were found to be compensable as well as the notional costs associated with acquisition of a replacement "going concern" property. On the evidence, it appears to me that the resumed land, exclusive of the commercial kennel and cattery infrastructure would have possessed value marginally more than the purchase price of the Gilmore Road property. I have decided to allow a rounded $3,500 for legal fees and stamp duty involved in a notional acquisition of replacement property equivalent to that resumed, exclusive of the business and its infrastructure. Loss occasioned by Council Development Conditions The respondent, in my opinion, demonstrated a reasonable attitude to the balance of the heads of claim as set out in Exhibit 12 contesting only the quantum for "loss of income" and the original quantum of architect's fees. The respondent took the view that some items were a natural and reasonable consequence of the resumption. Other items, such as professional fees and Council fees were seen as part of the reinstatement exercise which arguably should not have been compensable, except that, in the peculiar circumstances associated with the more stringent requirements for new kennel developments, these items may not have added value to the redeveloped site. It is my appreciation of the evidence that some further items included in Exhibit 13 as "equipment purchases" but more specifically in Exhibit 6 as "equipment and materials purchased - required by Council conditions" would also fall under the category of expenses incurred but which do not necessarily add value, at least -- 32 of 38 -- 33 commensurate with cost. The items which I would so categorise from Exhibit 6 (p.7) are as follows: Treatment plant $17,980 Communication system $6,770 Insulation and acoustic treatment $8,109 External kennel doors and operating equipment $7,309 Extra block work to soundproof kennels $2,332 Extra height block work for air movement $2,210 Commercial kerb crossing $3,379 Hair traps $2,282 Earthworks - mounding - excluding site clearing and dam - say $6,000 $56,371 Say $56,500 I do not accept that these items as identified would add no value. The Gilmore Road property could realistically be promoted as, it seems, the only kennel in south- east Queensland constructed to current stringent local government standards. However, whilst ensuring the registration future of the boarding kennels under proper management, such development conditions would not be expected to produce commensurately increased income, at least in the short term. In addition to items included under "Special Value to Owner" in Exhibit 12, at lines 9 to 19 inclusive, totalling $22,473.90, which I also categorise under this subheading and which items the respondent agreed were compensable, I will allow a further notional loss of $28,250 (being 50% of the $56,500 calculated above). This results in a rounded allowance of $50,725 under the subheading "Loss Occasioned by Council Development Conditions". Removal and Re-establishment Costs The respondent agreed to an amount of $5,387.36 being awarded for items as set out in Exhibit 12 at lines 3 to 8 inclusive under "Special Value to Owner". Property Searches (Time, Travel and Cost) The respondent agreed to this claim in the amount of $2,923. Loss of Profits The claim for loss of income (profits) had been based on calculations prepared by the claimants' accountant, with various amendments during the hearing. The actual occupancies of the premises from December 1995 through to July 1998 were compared with the occupancies which would have been expected under normal -- 33 of 38 -- 34 trading conditions. The December and January periods were dealt with separately as they are the months of high occupancy. December 1995-January 1996 were used as the base, and the actual variances in 1996/97 and 1997/98 calculated. The expected occupancies for the months February to November inclusive, then February to July 1998, were based on the average increase for those periods in the years 1993, 1994 and 1995. The average occupancy increase for the period February to November was 832 dogs (nights) and 303 cats (nights) and from February to July, 554 dogs and 317 cats. The total loss of dog occupancy for the period February to November 1996 and 1997 and February to July 1998 was calculated as 6,833 dogs then 155 for December 1996/January 1997 and 305 for December 1997/January 1998 - totalling 7,293 dogs. A similar calculation showed a total loss of cat occupancy as being 1,704 cats. The average nightly boarding rate over the period for dogs was $10.42 and for cats $8.45. The direct cost of earning that income was suggested as being for food only, and was estimated as 10% of the gross sales. The loss was calculated as follows: 7,293 dogs @ $10.42 $75,993 1,704 cats @ $8.45 $14,399 $90,392 Less food 10% $9,039 $81,353 As revenue is also gained from dog baths, diary entries indicated to the claimants that this service was provided on the average for 9.82% of the total occupancy nights, suggesting that of the lost dog occupancies during the period, 716 baths were lost at a profit adopted as $6 per bath, totalling $4,296. The amended total for lost profit became $81,353+$4,296 = $85,649. Mr Calabro had not been in a position to quibble with the calculation for dog baths as that information came to light on the final day of the hearing. The respondent accepted that aspect of the amended claim. However with regard to lost occupancies, Mr Calabro had been given the opportunity during the hearing to peruse the occupancy levels, as well as the numbers of existing clients who had followed the business to the new Gilmore Road location. The claimants had suggested that of the client base at Gilmore Road only 25% had been existing clients. Mr Calabro's research of the records indicated to him that, in the period May 1997 to April 1998 45% of the occupancy at Gilmore Road had come -- 34 of 38 -- 35 from retained clients. The source of business was not relevant, in his opinion, to the calculation of profit lost. Indeed, it had not seemed relevant to the claim until counsel for the claimants submitted that if the determination was to be based on Exhibit 12, rather than on reinstatement, the value of the business comprised both personal and locational goodwill and some assessment needed to be made of the loss of the established personal goodwill which needed to be regenerated to create a new client base at the new location. The investigation of the trading results at the new location suggested to Mr Calabro that the business with a mix of retained and new clients, had recovered to previous trading performance, by April 1998. It is my opinion that once that position had been reached and the cost of the relocation of the business recovered, it matters not whether the new trading results are generated from either personal or locational goodwill. In any event, the proof of a claim on the basis of loss of personal goodwill is the responsibility of the claimants and the Court was not assisted with regard to particularity of the suggested additional loss. In his calculation of loss of profits, Mr Calabro followed similar methodology as had been employed by the claimants' accountant. However, his appreciation of the trading results suggested to him that downturn in business and loss of profits had not commenced until May 1996 and, as mentioned earlier, had recovered by April 1998. He adopted as a base, the occupancy figures for the period May 1995 to April 1996, excluding December/January. From those figures he calculated the actual growth which had occurred from the previous year - May 1994 to April 1995 - then added that growth to the May 1996/April 1997 and May 1997/April 1998 periods to assess the difference between assumed constant growth and actual occupancies during those periods. In each case those periods were exclusive of the peak December/January months. There were minor differences between his and the claimants' figures when the December/January variances were calculated separately. His overall approach found a loss of 6,210 dog (night) occupancies and 1,429 cat (night) occupancies, calculated at average nightly rates of $10.42 per dog and $8.45 per cat. The total loss in turnover became $64,708. In his opinion there were expenses additional to direct food costs to be allowed in calculation of the lost gross profit. He deducted for variable costs, 11% of lost turnover leaving $68,337 as his assessment of lost profits. The facts are that there had been a higher increase in occupancies from 1993 to 1994, (after the business had first been re-generated) than from 1994 to 1995. A -- 35 of 38 -- 36 growth calculated over the two years was proportionately higher than for the single later year. While Mr Calabro had not necessarily been overly conservative in looking at the lower growth rate rather than including the earlier surge, the claimants' estimates had accepted (for the purpose of this specific calculation), that no loss in occupancy had been sustained in 1995 due to the impending resumption. While different interpretations may be placed on statistical records, it seems to me to be illogical to expect that the client concern as to the availability of the facility, of which there was evidence, had not had some impact on the 1995 off-peak occupancies, notwithstanding that growth still had occurred. Furthermore, Mr Calabro suggested that the business had recovered to previous levels by April 1998, but that appears to ignore any growth which may have occurred to April 1998, in the absence of the resumption. For these reasons and giving the benefit of doubt to the claimants in an area where precision is impossible, I prefer to base the lost turnover on the more liberal estimate of expected growth and for the full period, as adopted by the claimants. I will therefore adopt the claimants' estimate of turnover loss as being $90,392. However, I accept Mr Calabro's reasoning, based on the evidence, including the forthright evidence of Ms Brown, that the direct costs should be increased. I will accept Mr Calabro's estimate of 11%, as the variable costs in producing gross profit. The specific claim for loss of profits is decided as follows: Loss in turnover - occupancies $90,392 Less variable costs 11% $9,943 $80,449 Add dog bath losses 4,296 $84,745 Other Disturbance Items The respondent agreed that legal fees and valuation fees expended in the compilation of the claim for compensation, as included in Exhibit 12, were compensable as claimed in the amounts of $4,000 and $10,400 respectively. Findings I find that compensation should be determined based on:  the business having been relocated and not destroyed;  the market value of the land and improvements exclusive of the value of the business; -- 36 of 38 -- 37  the natural and reasonable costs of and losses associated with the relocation of the business;  other losses which were, or would have been a natural and reasonable consequence of the resumption. Determination The determination is calculated as follows: Land and improvements: Market Value - excluding business - $585,000 Special value to owners: Legals and Stamp Duty - notional acquisition $3,500 Loss occasioned by Council development conditions - notional $50,725 Removal and Re-establishment Costs $5,387 Loss of profits $84,745 Property Searches (time, travel and cost) $2,923 $147,280 Total Value to Owners $732,280 Adopt - in practical figures - $732,500 Disturbance: Legal fees - preparation of claim $4,000 Valuation fees - preparation of claim $10,400 $14,400 Total Compensation $746,900 Interest The claimants were paid an advance against compensation in the amount of $585,000 on 21 February 1996. They remained in possession of the property until 9 May 1997. The determination of compensation under the heading "Value to the Owner" is derived from the market value of the land and improvements together with special value considerations, the total of which exceed the market value of the land, improvements and business component as a going concern. The determination utilised an amalgamation of items of actual and notional relocation costs and losses, including loss of profits, none of which would have occurred until at various times subsequent to the date of resumption. However, the basis of assessment is the loss sustained by the claimants as at the date of resumption. It is well held that interest should not be awarded on compensation in the absence of considerations relevant to continued occupation of the resumed land. In -- 37 of 38 -- 38 this case, as I understand the position, rent-free occupation of the land was enjoyed by the claimants. It is seen as fair and reasonable that the respondent should pay interest on the balance of compensation, after the advance payment calculation, from the date on which the claimants' occupation ceased. It is therefore ordered that interest at the rate of 6.25 per cent per annum on the amount of $147,500 be paid by the respondent to the claimants, commencing on 9 May 1997 up to and including the day immediately preceding the day on which final payment of compensation is made. It is further ordered that interest, at the rate of 6.25 per cent per annum, be paid on the amount awarded for legal and valuation fees. However, the claimants will provide to the respondent proof of payment of any of these amounts. Interest is then to be calculated commencing on the day of proved payment up to and including the day immediately preceding the day on which final payment of compensation is made. RE WENCK MEMBER OF THE LAND COURT -- 38 of 38 --