Edwin & Staatz v Minister for Lands [1996] QLC 21

LAND COURT BRISBANE 29 FEBRUARY 1996 In the matter of an application for conversion of tenure Lease No.: SL 27/41047, Ipswich District Lessees: Lloyd Edwin and Gertrude Margaret Staatz (Hearing at Ipswich) D E C I S I O N This decision is with respect to a reference to the Land Court under s.207 of the Land Act 1962 for the determination of the purchase price of the land contained in Special Lease 27/41047. The lessees lodged an application with the Minister on 10 June 1993 for the conversion of the tenure of the Special Lease to freehold. The Minister determined the value of the land at $45,000, a figure not accepted by the lessees who requested that this matter be referred to the Land Court for hearing and determination. The lessees submit that the land should be valued at $33,000. The Minister's original offer was based on a valuation supplied by a Mr Mark J Wallis who, it seems, has travelled overseas for an extended period and did not appear to give evidence. His valuation statement, but without sales evidence, was included as an exhibit, having been supplied to the Court registry prior to the hearing. I was assisted by Jonathon David James Millar, a registered valuer employed by the Department of Lands, who agrees that the value of the land for conversion purposes ought to be $45,000, and by Graheme Ernest Kroll, a registered valuer in private practice and a lecturer in valuation at the Gatton Campus of the Queensland University, who was retained on behalf of the lessee applicants. The subject land comprises an area of 11.1 hectares and is situated approximately 4 kilometres north-west of the Town of Laidley. Access is available to the land via the old Laidley-Forest Hill Road which is bitumen sealed, but access from that onto the property is over black soil which is occasionally subject to flooding. The main access is from Harvey Road which is unsealed and is in fair condition only and access from it in wet weather could also be problematic. [1996] QLC 21 -- 1 of 12 -- 2 The property is triangular shaped, being partially timbered with ironbark and gum. Mr Kroll's report says that the block has been selectively cleared for grazing purposes. Much of the land is low-lying, excepting for a sandy ridge in the north-eastern corner and the evidence is that up to one half of the property would be subject to flooding. The land is intersected by a "near permanent lagoon" (Mr Millar's evidence) or a "non-permanent watercourse" (from Mr Kroll's report). The land is zoned "Rural B" under the Laidley Shire Town Plan which applied at the relevant date. This zoning permits subdivision to a minimum size of 4 hectares, however, neither valuer proceeded on the footing that the subject land has subdivision potential. It is agreed that there is only one good building site on the subject owing to the restriction from potential flooding. Mr Kroll said that the subject had a highest and best use "as a rural residential homesite" whilst Mr Miller used the term "single rural residential site". Mr Millar's approach to his valuation task was to refer to three sales which he thought to be comparable with the subject and to analyse those sales back to an unimproved value and then compare the resultant value with the subject, without having regard to improvements on the subject. Mr Kroll, on the other hand, said that he had valued the subject, "on the basis of what it would sell at the current point in time and then deducted the value of the various improvements off that price and then had some recourse to comparing it with the unimproved values which had been already established in the area just as a guide". I take Mr Kroll's reference to "the current point in time" to be a reference to the relevant date in this case, that is 10 June 1993. In comparison with sales, Mr Kroll valued the subject land as improved at $55,000 which he analysed back to an unimproved value of $33,000. Putting aside for the moment the reference to unimproved values, I will consider whether Mr Kroll's primary method is appropriate. The Privy Council had to consider the matter of unimproved value in Toohey's Ltd v. The Valuer-General (1925) AC 439 where the Valuer-General had first decided the market value of the property as improved, together with a liquor licence, and had then deducted from that value the value of the buildings. Lord Dunedin, in delivering the opinion of the Privy Council said that improvements on the subject land were to be "left entirely out of view" and then went on to say: "It is, therefore, to approach the question from a completely wrong point of view to begin with a valuation which takes in the improvements and then -- 2 of 12 -- 3 proceeds by means of subtraction of a sum arrived at by an independent valuation in order to find the required figure. What the Act requires is really quite simple. Here was a plot of land; assume that there is nothing on it in the way of improvement, what would it fetch in the market". Toohey's case has been referred to with approval and has been applied in many instances in Queensland and the quotation that I have included above has been referred to in part in at least one case (Holt v. Valuer-General (1964) 31 CLLR 132 at 137). Interestingly, in the cases referred to me in address in which the valuation method, criticised in Toohey's, arose as an issue, Toohey's was not referred to. See, for example, Ussher v. The Valuer-General (1978) 5 QLCR 175 and Grazing Selection No. 8212, Gympie District, Conversion (1964) 31 CLLR 246 at 247 where the Court said: "I have never been impressed with a method of valuing wherein an improved or market value of a property is postulated and the unimproved value derived by deducting the value of the improvements from the postulated market value. Such a method starts with an assumption and ends with a figure dependent not only on the accuracy of the initial assumption but also on the reasonableness of the value attributed to the improvements." In the current edition of the text "Land Valuation and Compensation in Australia" (Rost and Collins) the authors say this about the method of ascertaining unimproved value at p.63: "It need hardly be emphasised that the best way to ascertain the unimproved value of land is relating it to sales of unimproved comparable lands which were made reasonably close to the date at which the valuation is required. This cannot always be done because in old-settled rural districts and in parts of many towns and cities there remains little, if any, completely unimproved land, the sale of which might provide direct evidence of unimproved value. In these circumstances, analyses of sales of improved lands provides the readiest and most reliable evidence of value." I have also referred to the text "Principles and Practice of Valuation" (Murray Last Edition 1973) in which the author sets out four methods of ascertaining unimproved value, none of which include the method utilised by Mr Kroll as his primary method. -- 3 of 12 -- 4 In Estate of Late George James v. Valuer-General (1942) 7 The Valuer 132 the Court was confronted with a block of land described as being unique and where there were no sales of comparable land, either improved or unimproved, which could be utilised as bases. In the circumstances, the Court found that it would be appropriate to value the subject land using what is now often referred to as the hypothetical development (or notional development) method to assist in determining the unimproved value of the land. Putting aside any criticism of the hypothetical development method (e.g. Merivale Motel Investments Pty Ltd. v. The Brisbane Exposition and South Bank Redevelopment Authority (1984-85) 10 QLCR 268), it is my understanding that the approach endorsed in James, that is of valuing the subject land as if improved then deducting the value of improvements, should occur only in circumstances where suitable sales evidence and/or other unimproved value evidence is unavailable. Certainly, I have found no instance where James has been followed and have noted that Justice Roper, who was the Judge in that case, has criticised the method in circumstances where sales evidence was available, namely Berger v. The Valuer-General (1942) 7 The Valuer 100. I should also make the point that James was concerned not with valuing the land as it was improved (Mr Kroll's method) but by using an attributed improved state as part of a process of arriving at an unimproved value. My own thoughts on the matter are that an improved value for the subject parcel could be arrived at only by comparing the subject with suitable sales and, in so doing, allocating values to all of the components that make up the subject property, that is the land component and the visible and invisible improvements. In so doing then, the valuation process would involve the introduction of a land value which begs the question as to why this would need to occur as part of the ascertainment of an improved value which is then analysed back to find an unimproved value, that is the value of the land component. If it were to be argued, however, that in arriving at the improved value a broad comparison with the sales would be made and not a component valuation of the type that I have outlined, then I would criticise such a method on the basis of it being imprecise and impressionistic and incapable of detailed explanation to a Court. Although I reject Mr Kroll's primary method of valuation, there are other aspects of his evidence that need to be considered. Mr Kroll referred to a number of sales and expressed preference for two of these as supporting his valuation (his Sales 6 and 7). Before -- 4 of 12 -- 5 dealing with this evidence, I should mention that where Mr Kroll said in evidence that sales were either superior or inferior, I am assuming that such comparisons are made having regard to factors other than improvements, excepting where it is clear that this was not the case. Mr Kroll's first basis (Sale No. 6 on his schedule) was of a property of 17 hectares, being Lot 1 on CH3174, which sold in June 1993 for $47,000. Mr Kroll described this sale as being superior to the subject. This is a conclusion with which I have some difficulty as it is Mr Kroll's opinion that the subject has an improved value of $55,000, compared with the sale's improved price of $47,000; and an unimproved value of $33,000 compared with his analysed unimproved value for the sale of "about $30,000". Many of the general points of comparison between this sale and the subject will appear when I deal with Mr Kroll's Sale 7 below, (an adjoining sale) however, a question of some significance in this transaction is the question of the availability of a house site. During examination-in-chief Mr Kroll said, "Lot 1 certainly wouldn't have a house site" in reference to this sale, however, during cross-examination said, "... there may not necessarily be a house site on it, that the Council may not allow a house to go on that particular property." He said that this sale has been treated as "... a small site which is being used for rural pursuits." Whilst the matter was not thoroughly dealt with in evidence, I think that I would be safe in proceeding on the basis that a block without a house site would, all other things being equal, be of lower value than one with a house site. Mr Kroll said that his Sale 5 provided back-up to his valuation. This property sold in June 1992 for an amount of $42,000. The sale was not analysed back to an unimproved value. Mr Kroll described this sale as being superior to the subject which he had valued improved at $55,000. There was evidence that there was movement upwards in the rural residential market in the area between 1992 and 1993 and, given this and the absence of an analysis of this sale, I do not see it as being appropriate for direct comparison with the subject. I will deal with Mr Kroll's other main sale, that is Sale No. 7, together with consideration of Mr Millar's treatment of this transaction. Before coming to this, I will give some consideration to the other sales relied upon by Mr Millar. Mr Millar's Sale No. 2 has an area of 13.55 hectares according to Mr Millar (13.15 hectares according to Mr Kroll though nothing turns on this difference) and was sold for -- 5 of 12 -- 6 $66,000 on 6 July 1993, that is about one month past the relevant date. Mr Millar analysed this sale back to an unimproved value of $59,800 and both he and Mr Kroll agreed that the sale is superior to the subject. In particular, it is a slightly larger block and has superior topography to the subject. In addition, the sale is a black soil block and is capable of being cultivated. Mr Millar's Sale 3 took place on 3 August 1993 (almost two months after the relevant date) for an amount of $73,450. This sale has an area of 12.14 hectares and was analysed by Mr Millar to an unimproved value of $63,145. Mr Millar saw the sale as being overall superior to the subject, having very good elevation and aspect though with poor access. This sale was criticised from the lessees' side, particularly on the basis of its history. The land had sold some two months previously for an all-up price of $44,000 approximately, being part of a bulk transaction to a purchaser who then on-sold the purchased blocks individually. Mr Millar suggested that the earlier sale price of about $44,000 was not reliable as it seems as though in the bulk transaction the parties apportioned the total purchase price by mathematical deduction, arriving at a similar price for each of the blocks included in the transaction. In his valuation Mr Millar said, "Sale considered slightly over-priced - likely due to being developer sale". Mr Kroll would appear to agree with this as he said in respect of such transactions that "they virtually develop to a two-tiered market with the higher tier being the developer sale itself and somewhat between it and the lower figure is probably the correct figure." He went on to say that such a transaction would not be generally classed as indicating a reasonable level for valuation purposes. Given this caveat and the qualification placed on this transaction by Mr Millar, I, too, would treat this with caution as a basis for valuation. In cross-examination, counsel for the lessees criticised Mr Millar's Sales 1 and 2 as being far superior to the subject and, on that basis, not comparable with the subject. This is not a criticism that I can accept with regard to Mr Millar's first sale as Mr Kroll also relied on this sale as one of his two main bases, i.e. his Sale No. 7. I also note that whilst Mr Kroll expressly dealt with each of Mr Millar's basic sales, he did not venture the view that any was not suitable for comparison on the grounds of superiority. -- 6 of 12 -- 7 I will now consider in detail Sale No. 1 included in Mr Millar's valuation, which was Sale No. 7 in the schedule tendered by Mr Kroll. This property sold for $65,000 in March 1993 (that is some three months before the relevant date). The property has an area of 16.19 hectares, is fairly low-lying creek flat country which is subject to periodic flooding and has bitumen access. In his written valuation, Mr Millar wrote, when comparing this sale to the subject, "Similar in topography, i.e. part of block is subject to flooding. Overall slightly superior considering size and location." Under cross-examination he agreed that the sale block would have better soil than the subject, allowing cultivation, and that the sale's access to water from Laidley Creek would be superior to water available on the subject. One point of difficulty I have with this sale is the question of whether it has a house site on it. In Mr Millar's evidence he said that the property would have to undergo a flood study prior to an application for building a house on the land would be considered by the local authority, whilst Mr Kroll said, in reference to it, that it "... could have a house site, not quite as readily. I'm not admitting it does have a house site". This particular sale has the advantage, in this matter, of having been relied upon by both Mr Millar and Mr Kroll and being the only sale in which I was favoured with an analysis down to unimproved value by both valuers. It is unfortunate then that I do not have clear evidence as to whether a house site is available. Mr Millar interviewed the purchaser who indicated that the land had been purchased "... solely for primary production purposes and that they believed it was useless as a residential property." This is not conclusive as to whether a house site is available, however, does indicate that at least in the purchaser's mind the price paid was not for land suitable for use as a rural residential site. Whilst what was said about this matter by the two valuers has created a doubt in my mind as to whether a house site would be available, it seems to me that I would be leaning in favour of the lessee to assume the prospect of a house site being available or in making no allowances in this regard, so I will proceed on this basis. Following my invitation, Mr Millar tendered his sale analysis with respect to his Sale 1, that is Mr Kroll's Sale 7, which showed $150 had been allowed for fencing, $3,300 for a shed and $12,000 for clearing and cultivation, leaving an unimproved value of $49,550. Mr Kroll provided his analysis figures at $5,658 for fencing, $5,000 for the shed, $12,960 for clearing and cultivation and $3,065 for development interest, leaving an analysed value of -- 7 of 12 -- 8 $38,215. My calculations produce a slightly different result, the difference being immaterial. During cross-examination, Mr Kroll agreed that Mr Millar's figures for fencing and the shed would be the better figures and, given that both valuers applied similar figures to clearing and cultivation, the only difference between the valuers would be with respect to the interest allowance. I consider now whether interest ought to be allowed in this sales analysis. In Kolan v. Valuer-General (1977) 4 QLCR 206 the then learned President said at 213-214: "It is a matter of researching the principle, its origin and underlying reasonings. The origin of the allowance of interest for a development period is to be found in Kiddle's Case 27 C.L.R. 316. I can do no better than quote the words of Knox C.J. at p.320 - the underlinings in the quotation are mine. `The question to be solved in ascertaining the value of improvements for the purpose of arriving at the unimproved value is what part of the improved value of the land is attributable to the improvements to be valued. Presumably, a purchaser of the land, if he considered this question at all, would determine that the amount to be attributed to value of improvements would be equal to the amount which he gained or saved by reason of the improvements having been made, he being thereby relieved from a necessity of making them. This amount would be found by ascertaining the amount which it would cost to make the improvements in question at the relevant date, including a proper allowance for loss of interest on all outlay during the period which must elapse before such outlay became fully productive, and by deducting from the sum so ascertained a proper allowance for depreciation or partial exhaustion of the improvements.'" In the text of Rost and Collins referred to above at p.320 the authors refer to the practice of allowing interest: "At the beginning of development and for some time thereafter the property would have little if any grazing capacity unless naturally untimbered, but capacity should increase gradually as the improvements become effective. Because of this deferred earning power it has long been recognised by valuers -- 8 of 12 -- 9 and approved by Australian Courts, that in determining the unimproved value of land, owners are entitled to an appropriate allowance on the value of the land, as unimproved, to cover loss of interest on their capital. However, some income is normally received during the transitional period, therefore the practice has been to allow interest at current rates for half only of the period required for development." The topic is also discussed in Murray cited above at p.315: "In determining unimproved value the subject land is notionally bare of improvements, and its value must be ascertained in the knowledge that some time would elapse before full development could be achieved, and so interest would be lost upon the capital outlay whilst the land was in a state of transition from an unproductive or partly productive state to its optimum earning capacity. Interest must therefore be allowed both upon the unimproved value of the land and upon the costs of the improvements. The period of development; the distribution in time of the expenditure; and the effects of the improvements upon productivity will determine the period over which interest should be allowed." I have read and noted many instances in the Queensland authorities where development interest has been allowed in cases of large farming and grazing blocks. I have found none where interest has been allowed in the analysis of rural residential or hobby farm sales. I understand the authorities to express a principle which is concerned with a rational economic approach to the expenditure of funds on a property which is to be brought into production as part of a business enterprise. Therefore, it would be appropriate to make an interest allowance where land is cleared and prepared for grazing or for agriculture, however, where land is cleared for the purpose of establishing a residential site or for providing a hobby, recreation or supplementary income on a rural residential site, the principles under which such improvements might be valued would be quite different. In such cases, the question of value relates to the value which the improvements add to the land and, at most, this would be equivalent to their cost but would not directly equate with the value that similar -- 9 of 12 -- 10 improvements would have in the hands of an owner of a grazing or agricultural enterprise. In the case of the enterprise the value relates to the opportunity for immediate productivity, whereas in the case of the rural residential it relates to the savings in cost to be made before the land may be used for whatever type and level of use is contemplated. In the case of Mr Kroll's Sale No. 7 (Mr Millar's Sale No. 1) it would therefore be appropriate to allow interest on clearing if there was evidence which indicated that this property would be sought after in the market either because it was an economic production unit on its own account or because it was in a market where purchasers saw a potential for the land to be used in conjunction with other farming lands, but not if its highest and best use was as a rural residential site. If I treated the sale as being farming land and therefore made an allowance for interest on development, then the sale would not be strictly comparable with the subject given the difference in usage. It seems to me then that by treating it as a rural residential site I am leaning in favour of the lessees, even though there would be no interest allowance included in the sales analysis. I should mention that I am proceeding with a full awareness that this sale block was purchased for farming purposes. If, however, a house site appears possible on it (and this seems to be the view that the market would have taken), the purchaser would have competed for the block in the same market as rural residential purchasers. Given the identified deficiencies in the sale analysis provided by Mr Kroll with respect to his Sale No. 7, I would have some trepidation accepting his analysed unimproved value of $30,000 for Sale No. 6. In concluding this, I also bear in mind that Mr Kroll said that there was little difference between the improvements on his Sales 6 and 7. I should mention that I think it appropriate where valuers rely on analysed sales that analyses be available to the Court. Neither valuer included an analysis in his initial valuation. Mr Millar included his analysed figures only in his report, whilst Mr Kroll mentioned the figures in cross-examination only, quite clearly because his primary method of valuation was not completed on this basis. Mr Kroll tendered information concerning valuations made under the Valuation of Land Act 1944. He indicated that it was his view that some of the statutory valuations struck in 1992 were too high and he further expressed the view that the level of increase of statutory valuation for the subject between 1990 and 1992 appeared to be excessive compared with increases in his main sales. Mr Kroll did not produce evidence to support his contentions in -- 10 of 12 -- 11 this regard and, in any event, in spite of counsel's submission that I would find the statutory valuations to be excessive, I must decline to express a view about them. Section 33 of the Valuation of Land Act 1944 provides: "Any and every valuation, or alteration of the valuation, of any land made, or purporting to be made, under this Act by the chief executive shall be deemed to be correct until proved otherwise upon objection or appeal or until altered or further altered." Unless I was hearing an appeal with respect to an individual statutory valuation, it would not be appropriate for me to express a view that such valuations were too high or too low, though I do observe in passing that s. 33 is a deeming provision only and does not have the effect of making the statutory valuations correct. As I understand it, Mr Kroll's reference to the statutory valuations was by way of a guide in assisting him to check the relativities that he had established between the subject and his basic properties in his valuation approach. The following table summarises the unimproved values, improved values and Mr Kroll's analysed unimproved values for his major basic properties and the subject which I hope have all been faithfully and accurately recorded by me. I express this qualification because I have studied the data on the table closely and have been unable to conclude that the relativities established by Mr Kroll's analysed unimproved values bears any relationship with the relativities established by the unimproved statutory values. If the point to be demonstrated by reference to this data is that the improved values maintain a similar relationship to Mr Kroll's analysed unimproved values, therefore the $55,000 is right, then this conclusion would be upset by Mr Kroll's conclusion that Mr Millar's analysis of Sale No. 7 is to be preferred (except, in Mr Kroll's view, for the matter of interest). Kroll Unimproved Unimproved Improved Analysed Values Values Values Values March 1992 June 1993 Kroll Sale 6 $30,000 $43,000 $47,500 $47,000 Kroll Sale 7 $38,000 $44,000 $48,500 $65,000 Subject $33,000 $35,000 $45,000 *$55,000 *As supplied by Mr Kroll Counsel for the lessees referred me to Grahn v. Valuer-General (1992-93) 14 QLCR 327 at 328 where the issue of relativities with respect to statutory rating valuations is discussed by the Land Appeal Court, however, I do not find this authority to be applicable in -- 11 of 12 -- 12 this case as it is not my task to attempt to maintain relativities in this matter, but to find a price at which the subject land might be converted to a freeholding lease. I do not find that reference to the statutory valuations and their relativity and the possibility of some being too high or of the subject being too high, as helpful in this matter. In conclusion, I find that Mr Kroll's Sale No. 7, that is Mr Millar's Sale No. 1 provides the best basis of valuation, supported by Mr Millar's Sale No. 2. I find that Mr Millar's analysis of his Sale No. 1 to be the better analysis. I also find that his and Mr Kroll's comparisons are appropriate to the extent that the subject land is inferior to each of these sales, however, I conclude that Mr Millar has not made sufficient allowance for the fact that the Sale 7 block has better soil than the subject and has access to Laidley Creek which provides a better source of water than the semi-permanent lagoon on the subject. These were two matters that were drawn out in cross-examination and were not included in his original valuation. These are not matters, however, that would loom large in the mind of those participating in the rural residential market, however, some further allowance needs to be made for them. Accordingly, I determine the unimproved value of the subject land for the purpose of conversion of the tenure to a freeholding tenure in the amount of Forty-three Thousand Dollars ($43,000). (RP SCOTT) MEMBER OF THE LAND COURT -- 12 of 12 --