Caruana v Port Macquarie Hastings Council

Caruana v Port Macquarie-Hastings Council [2007] NSWLEC 109 (6 March 2007)

NEW SOUTH WALES LAND AND ENVIRONMENT COURT

FILE NUMBER(S): 31558 and 31568; 31549; 31557 of 2005

CATCHWORDS: Compulsory Acquisition of Land :- Compensation:- capitalisation of rents methodology – whether permissible to take into account pre-acquisition offer to rent subject property in a claim under Land Acquisition (Just Terms Compensation) Act 1991 (NSW) – admissibility of offers when determining value – loss attributable to disturbance as defined in s 59 – whether pre-acquisition rental losses are financial costs, relating to the actual use of the land, as a direct and natural consequence of the acquisition within s 59(f) – whether pre-acquisition legal and valuation costs are financial costs incurred in connection with the compulsory acquisition of the land within s 55(a) and (b)

LEGISLATION CITED:

Land Acquisition (Just Terms Compensation) Act 1991 (NSW) ss 54, 55, 56, 59, 70

CASES CITED:

Blefari v The Minister (1962) 8 LGRA 1

Brimbank City Council v Keilor Homes Pty Ltd [2006] VSC 222; (2006) 148 LGERA 24

Chen v Karandonis [2002] NSWCA 412

Cordelia Holdings Pty Ltd v Newkey Investments Pty Ltd [2004] FCAFC 48

Director of Buildings and Lands v Shun Fung Ironworks Ltd [1995] 2 AC 111

Fitzgerald v Blacktown City Council (NSWLEC, 28 March 1994, unreported)

Fitzpatrick Investments Pty Ltd v Blacktown City Council (No 2) (2000) 108 LGERA 417

Goold & Rootsey v Commonwealth [1993] FCA 157; (1993) 42 FCR 51

Henderson v Amadio Pty Ltd (No 1) [1995] FCA 1300; (1995) 62 FCR 1

Hustlers Pty Ltd v Valuer General (1967) 14 LGRA 269

King v Minister for Planning and Housing (1991) 76 LGERA 288

Lasermax Engineering Pty Ltd v QBE Insurance (Aust) Ltd [2005] NSWCA 66

March v Stramare [1991] HCA 12; (1991) 171 CLR 506

McDonald v Deputy Federal Commissioner of Land Tax (NSW) [1915] HCA 54; (1915) 20 CLR 231

Mir Bros Unit Constructions Pty v Roads and Traffic Authority of New South Wales [2004] NSWLEC 612

MMAL Rentals Pty Ltd v Bruning [2004] NSWCA 451; [2004] NSWCA 451; (2004) 63 NSWLR 167

N Stephenson Pty Ltd v Roads and Traffic Authority of New South Wales (1994) 83 LGERA 248

Overton Investments Pty Ltd v Minister Administering the Environmental Planning and Assessment Act (NSWLEC 24 December 1998 unreported); [2001] NSWCA 137; (2001) 113 LGERA 439

Palmer Bruyn & Parker Pty Ltd v Parsons [2001] HCA 69; (2001) 185 ALR 280

Peter Croke Holdings Pty Ltd v Roads and Traffic Authority of NSW (1998) 101 LGERA 30

Phillipou v Housing Commission (1969) 18 LGRA 254

Sheath v Valuer General (1963) 10 LGRA 20

Spencer v Commonwealth [1907] HCA 82; (1907) 5 CLR 418

State Bank of NSW v Blacktown City Council (NSWLEC 30 September 1994 unreported)

Stockl v Rigura Pty Ltd [2004] ANZ ConvR 265

Walker Corporation Pty Ltd v Sydney Harbour Foreshore Authority [2004] NSWLEC 535; (2004) 136 LGERA 164

Western Australian Planning Commission v Arcus Shopfitters Pty Ltd [2003] WASCA 295

CORAM: Biscoe J

DATES OF HEARING: 19-21 September 2006, 18 October 2006

JUDGMENT DATE: 6 March 2007

LEGAL REPRESENTATIVES

APPLICANTS:

Mr J Webster SC

SOLICITORS

Stacks

RESPONDENT:

Ms A Pearman, barrister

SOLICITORS

Donovan Oates Hannaford

JUDGMENT:

THE LAND AND ENVIRONMENT COURT OF NEW SOUTH WALES

BISCOE J

6 March 2007

31558 of 2005 and 31568 of 2005;

MICHAEL CARUANA AND KAY SIMMONS v PORT MACQUARIE HASTINGS COUNCIL

31549 of 2005

BARBARA AYTON v PORT MACQUARIE HASTINGS COUNCIL

31557 of 2005

OWNERS OF STRATA PLAN 12292 v PORT MACQUARIE HASTINGS COUNCIL

JUDGMENT

HIS HONOUR:

INTRODUCTION

1 These four claims under the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) (Just Terms Act) have been heard together. They are by way of objection against the amount of compensation offered to the applicants by the respondent, Port Macquarie Hastings Council, in respect of the compulsory acquisition on 2 September 2005 of the applicants’ properties in the Ritz Arcade, Clarence Street, Port Macquarie.

2 The notice of compulsory acquisition was published in the NSW Government Gazette on 2 September 2005. There had been an earlier notice of compulsory acquisition published in relation to the applicants’ properties on 18 February 2005 in the NSW Government Gazette (the notice was erroneously dated 18 January 2005) but it was formally rescinded by notice on 2 September 2005 under s 31 of the Just Terms Act.

THE ACQUIRED LAND

3 The council compulsorily acquired the Ritz Arcade building for the purpose of redevelopment for a community cultural and entertainment facility. It has since been demolished. The zoning was 3(t) Tourist Business under the Hastings LEP 2001. It was an older style two storey brick, timber and iron building that consisted of nine strata retail lots on the ground floor and 11 strata residential bed-sitter units on the first floor. The ground floor was a dead-end arcade with a 13.115 metre street frontage and a 40.265 metre depth. A shop awning encroached over the street frontage.

4 The Ritz Arcade was located in the central business district of Port Macquarie fronting Clarence Street on a busy pedestrian and traffic street. This is a prime retail and tourist location between the Port Central Shopping Centre and the Ritz Centre building. Directly in front is a bus stop, which generated significant pedestrian traffic and created a focus for potential shoppers. At the time of the acquisition, a new post office building was proposed diagonally opposite the arcade, although it has since been built elsewhere. The waterfront is some 250 metres to the north.

5 The acquired properties were as follows:

(a) The applicants Michael Caruana and Kay Simmons were the registered proprietors of Lots 2 and 8 in strata plan 12292, which were utilised as retail shops, in the Ritz Arcade. Shop 2 had an area of 24m2 and was used by Mr Caruana as a shoe repair and key cutting shop. Shop 8, diagonally opposite, had an area of 27m2 and was used by Mr Caruana and Ms Simmons as a ladies’ boutique. These two shops were located approximately midway in, and on opposite sides of, the arcade, with shop 8 more to the rear.

(b) The applicant Barbara Ayton was the registered proprietor of Lot 22 in strata plan 47462, in the Ritz Arcade. Lot 22 had an area of 50m2 and was utilised as two shops known as shop 6 and shop 5. Shop 6 had an area of 38m2 and Mrs Ayton had conducted a hairdressing business there. Shop 5 had an area of 12m2 and tenants had used it at various times for a beautician, massage/acupuncture and a builder’s office. These two shops were adjacent and at the rear of the arcade.

6 Mr Caruana, Ms Simmons and Mrs Ayton claim compensation for market value, disturbance and (if not covered by disturbance) for rescission of the earlier acquisition notice: ss 54 – 59 and 70 of the Just Terms Act. Strata Plan 12292 has a disturbance claim under s 59 of the Just Terms Act in relation to the common property.

LAND ACQUISITION (JUST TERMS COMPENSATION) ACT 1991

7 The Just Terms Act relevantly provides:

54 Entitlement to just compensation

(1) The amount of compensation to which a person is entitled under this Part is such amount as, having regard to all relevant matters under this Part, will justly compensate the person for the acquisition of the land.

55 Relevant matters to be considered in determining amount of compensation

In determining the amount of compensation to which a person is entitled, regard must be had to the following matters only (as assessed in accordance with this Division):

(a) the market value of the land on the date of its acquisition,

…

(d) any loss attributable to disturbance

56 Market value

(1) In this Act:

market value of land at any time means the amount that would have been paid for the land if it had been sold at that time by a willing but not anxious seller to a willing but not anxious buyer, disregarding (for the purpose of determining the amount that would have been paid):

(a) any increase or decrease in the value of the land caused by the carrying out of, or the proposal to carry out, the public purpose for which the land was acquired, and

(b) any increase in the value of the land caused by the carrying out by the authority of the State, before the land is acquired, of improvements for the public purpose for which the land is to be acquired, and

59 Loss attributable to disturbance

In this Act:

loss attributable to disturbance of land means any of the following:

(a) legal costs reasonably incurred by the persons entitled to compensation in connection with the compulsory acquisition of the land,

(b) valuation fees reasonably incurred by those persons in connection with the compulsory acquisition of the land,

(c) financial costs reasonably incurred in connection with the relocation of those persons (including legal costs but not including stamp duty or mortgage costs),

(d) stamp duty costs reasonably incurred (or that might reasonably be incurred) by those persons in connection with the purchase of land for relocation (but not exceeding the amount that would be incurred for the purchase of land of equivalent value to the land compulsorily acquired),

(e) financial costs reasonably incurred (or that might reasonably be incurred) by those persons in connection with the discharge of a mortgage and the execution of a new mortgage resulting from the relocation (but not exceeding the amount that would be incurred if the new mortgage secured the repayment of the balance owing in respect of the discharged mortgage),

(f) any other financial costs reasonably incurred (or that might reasonably be incurred), relating to the actual use of the land, as a direct and natural consequence of the acquisition.

70 Compensation for rescission of acquisition notice

(1) If an acquisition notice is rescinded (in whole or in part) under this Act, a person in whom the land is revested on that rescission is entitled to be compensated by the authority of the State for any financial costs or any damage actually incurred or suffered by that person as a direct consequence of the compulsory acquisition and its rescission.

(2) Compensation is not payable under this section in respect of any change in the value of the land.

MARKET VALUE

8 Valuation evidence was given for the applicant by a valuer Mr Owen Allsopp and a real estate agent Mr Robert Gates, and for the respondent by a valuer Mr Gabriel Longa. I viewed the site of the Ritz Arcade and most of the comparable properties referred to by the valuers.

9 The valuers’ primary valuation method was capitalisation of rents. Their secondary check valuation method was the traditional comparison of sales so as to derive a rate per square metre. In relation to the capitalisation of rents method, in Sheath v Valuer General (1963) 10 LGRA 20 at 26 Hardie J said that the most relevant consideration is the rents in fact being paid for the subject area and other comparable areas in the same building. In Western Australian Planning Commission v Arcus Shopfitters Pty Ltd [2003] WASCA 295 at [71] – [72] McLure J (Anderson and Steytler JJ agreeing) said: “The formation of an opinion on value has been likened, correctly in my view, to the exercise of judicial discretion. Rules affecting weight must be sufficiently generalised to allow for different methodologies and circumstances… It is not a requirement that a valuer identify the most important comparable sale. There may be no such sale. Further, there can be no requirement that a valuer quantify adjustments affecting value. Mr Elliott property declined to quantify particular adjustments where he had not done so as part of his analysis because of the lack of sales or empirical evidence to support a specific figure. As I understand his methodology, he considers and mentally processes all of the variables affecting value and makes a judgment as to the relativities of the comparison sales in his basket with the subject land and may after the collective analysis make a judgment based upon adjustment to arrive at an opinion on value. However, as a matter of principle, a valuer using conventional approach should explain the steps in his reasoning and analysis from his basket of sales evidence to his opinion as to value. The correct principle is, in my view, that the valuer must reveal as far as possible the process of reasoning actually employed so as to enable the Court to evaluate the evidence and the expert’s conclusions”.

10 In their joint reports, the valuers adopted a 6 percent net rent capitalisation rate. Subsequently, Mr Longa expressed the view that 6.5 percent should be adopted for Ms Ayton’s lot if it were to be treated as two shops. His reasoning was that the highest and best use of her lot was as one shop – that is, the highest rent would be commanded if it was let as one shop – and therefore a higher yield should apply if it was to be let as two shops. Mr Allsopp disagreed. He considered that overall the risk of vacancies should be less if there were two shops to let. I prefer Mr Allsopp’s view and propose to adopt a 6 percent net capitalisation rate.

11 The market values of the properties were disputed by the valuers. Their respective assessments of market value were as follows:

Name

Shop Area

Allsopp

Longa

Difference

Ayton

Lot 22 50m2

Comprising:

Shop 5 12m2

Shop 6 38m2

$364,500

$231,000

$133,500

Caruana

Lot 2 24m2

Lot 8 27m2

$205,000

$130,000

$75,000

SP 12292

Common property

$43,500

Nil

$43,500

12 The valuers adopted the following weekly rentals and rates per square metre:

Name

Shop No

Shop area

Allsopp rent pw

Allsopp m2

Gates

rent pw

Longa rent pw

Longa

Ayton

38 m2

12 m2

$330

$195

$451/m2

$845/m2

$330

$180

$365

(Lot 22)

$380/m2

(Lot 22)

Caruana

24 m2

$345

$748/m2

$320

$220

$475/m2

Caruana

27 m2

$335

$645/m2

$340

$220

$422/m2

However, Mr Allsopp modified his above weekly rentals for Caruana shops 2 and 8 as follows:

Caruana shop 2: $311

Caruana shop 8: $305

He did not make a corresponding adjustment to the rate per square metre for these shops. That is probably because he gave evidence, which I accept, that the market for such small shops was concerned with weekly or monthly rentals and not with rates per square metre.

13 In relation to comparable rentals and sales, Mr Allsopp generally favoured those in the Ritz Arcade itself as well as some street-front locations. Mr Longa generally favoured transactions in other arcades in Port Macquarie. They were the Dulhunty Arcade – which he thought was the most comparable – and the Village Arcade, which are both on the western side of Horton Street, and the more upmarket, better situated Peachtree Walk Arcade and Colonial Arcade on the eastern side of Horton Street. In my view, there was nothing else in Port Macquarie quite like the Ritz Arcade which was excellently located in close proximity to the CBD with a bus stop at the door. It catered for a budget type tenancy or small business. From my inspection, the photographic evidence and descriptions of the Ritz Arcade (now demolished) which showed that it was wider than most arcades, well-lit, and well-ventilated, I consider that it was superior in location and would have been similar in presentation to the Dulhunty and Village arcades if about $28,000 had been spent in renovating it (for which Mr Allsopp allowed); and that it was inferior in presentation although comparable in location to the Peachtree and Colonial Arcades. Mr Longa considered that the Dulhunty and Village Arcades had an advantage in that they were walk-through arcades, whereas the Ritz Arcade was not. I agree with Mr Allsopp that this was not an advantage given the location of the Ritz Arcade and the type of tenants which it attracted. In that regard, I accept Mrs Ayton’s evidence that business activity for a hairdresser is noticeably less at the Village Arcade and opposite the Port Building, located further west on Clarence Street, than it was in her shop 6 in the Ritz Arcade. I also accept her evidence that the location of her shop 6 at the rear of the Ritz Arcade was an attraction for a lot of the customers of her hairdressing salon compared with a streetfront location because they did not feel like they were in a goldfish bowl.

14 A shadow period of several years preceded the resumption when it was general knowledge that the Ritz Arcade building was at risk of resumption. The evidence in that regard included the following, which I accept. Mr Flanagan, a director of the corporate owner of shop 4, gave evidence that the impending resumption was general knowledge for at least four years. Mr Allsopp’s evidence was that it had been known locally for many years that the council was going to acquire the property. The evidence of Mr Richards, a real estate agent, was that a number of years ago he had been involved in auctioning shop 2, but interest in the property was disappointing and was no doubt affected by rumours of the council acquisition. Mr Thompson, who took over as strata manager of the Ritz Arcade in July 2003, gave evidence that no action was taken on badly needed upgrading and renovation in recent years because it was known that the council would be acquiring and demolishing the building. Mr Sinclair, a jeweller, was willing to lease shop 8 from Mr Caruana and Ms Simmons in early 2005 but decided not to proceed when he became aware of the pending acquisition of the building. The evidence of Mr Caruana and Mr Holland was that Mr Holland was willing to seriously consider purchasing Mr Caruana’s shoe repair business in 2004 but declined to do so due to the impending compulsory acquisition. On 18 August 2004 a letter was written by Mr Stan Woodrow, the tenant of another shop with a long established business in the Ritz Arcade, to the owner/lessor of that shop Mr Retallack indicating that he was reluctantly moving to new premises because it had become known that the building was to be compulsorily acquired by council. It appears from the evidence of Mr Allsopp, and other evidence, that the potential of resumption in those years resulted in the inclusion of demolition clauses in Ritz Arcade leases.

15 Mr Allsopp’s rental assessments for the subject shops were calculated on the basis of $27,306 being spent in renovating and upgrading the common area. He apportioned this cost between each ground floor shop. Mr Longa’s rental assessments were on the assumption that there had been no such renovations. I prefer Mr Allsopp’s approach.

16 The evidence of the valuers, which I accept, is that in the Port Macquarie area the usual annual rent escalation clause in leases was either by reference to the CPI or 4 percent.

Comparable Rentals

17 The applicants’ valuer Mr Allsopp relied on the following comparable rentals (exclusive of GST):

(i) Ritz Arcade shop 2, area 24m2: a 2004 offer by a Mr Holland to rent from Mr Caruana and Ms Simmons for $311 per week. Applying a 4 percent per annum increase equates to $323 per week in 2005. This supports Mr Allsopp’s assessment of $311 per week for this shop. The offeror did not proceed because of the respondent’s known intention to compulsorily acquire the property. Although only an offer and not a concluded contract, I consider that it should be taken into account as evidence of value for reasons which I explain below when considering the relevant case law. I consider that it should be accorded weight, although not as much as if it had been a concluded contract.

(ii) Ritz Arcade shop 8, area 27m2: an offer by a Ms Pawlowsky in about March or April 2005 to rent from Mr Caruana and Ms Simmons for $277 per week. She did not proceed because of uncertainty associated with the pending acquisition. This is closer to Mr Allsopp’s assessment of $305 per week for the same shop than to Mr Longa’s $220 per week. However, on the evidence, I do not think that the discussions between Mr Caruana and Ms Pawlowsky rose to the status of an offer. Mr Caruana’s evidence referred to “discussions”. Ms Pawlowsky’s evidence referred to “discussions” and to “seriously considering purchasing”. (This is in contrast to Mr Holland’s evidence in relation to shop 2 above where he referred to “offering”.) It is understandable that the discussions did not rise to the status of an offer in circumstances where the putative offeror acquired knowledge during those discussions of the looming resumption. Nevertheless, I do not think account should be taken of discussions which never rose to the status of an offer. Discussions relating to the rental of shop 8 also occurred in 2005 between Mr Caruana and Mr Sinclair. Mr Caruana and Mr Sinclair both gave evidence that in early 2005 the latter “was willing to lease” shop 8 for $350 per week (with no demolition clause) but did not proceed when he became aware of the pending acquisition of the building by the council. I am not satisfied that the general, descriptive words “was willing to lease” evidence an offer. Accordingly, I do not take this evidence into account.

(iii) Ritz Arcade shop 7, located towards the rear of the Ritz Arcade, area 42m2: rented in 1999 for $286 per week. The tenant vacated in August 2004. Adjusting for CPI of 20.5 percent, as advocated by Mr Allsopp, over the six years from September 1999 to September 2005 (when resumption occurred) the rent would be $345 per week. Mr Longa was critical of this comparable because it was quite old, but agreed that if it was to be adjusted for time then it was appropriate to apply the CPI. Although the 1999 rental is not proximate in time, I think that this is a fair comparable because it is in the Ritz Arcade itself and the tenant was still there in the latter half of 2004. It may be compared with Mr Allsopp’s assessment of $330 per week for Mrs Ayton’s shop 6 which was similar in area (38m2).

(iv) 1/3 Murray Street, Port Macquarie, to which the barber who had occupied shop 3 in the Ritz Arcade relocated following resumption. It has an area of 41m2 (comparable with Mrs Ayton’s shop 6 of 38m2). In December 2005 the rent was $300 per week. The location is secondary fringe retail, much inferior to the Ritz Arcade location. It is two streets further away from the CBD than the Ritz Arcade and well away from the bus stop. It has a street frontage and is close to a caravan park. This figure of $300 per week for an inferior location and 41m2 may be compared with Mr Allsopp’s assessment of $330 per week for Mrs Ayton’s similarly sized shop 6.

(v) Ritz Centre, Clarence Street, shop 6, area 21m2, rental of $516 per week. The Ritz Centre is located within 50m of the Ritz Arcade and closer to Horton Street. This shop has a main street frontage which is superior in position to the applicants’ shops. Mr Longa considered that as it has a street frontage and caters for a different type of tenancy to the applicants’ shops, it is not comparable. Mr Allsopp agreed that the Ritz Arcade was “worse” than the Ritz Centre but pointed out it was only 50 metres away and that the extent of adjustment required to make it comparable was a matter for judgement. I think that this comparable should be treated cautiously because of its different characteristics.

(vi) 2/24 Clarence Street, area 32m2, rented for $350 per week from 15 February 2006. The mobile phone retailer who had occupied the streetfront shop 1 in the Ritz Arcade relocated there consequent upon the resumption. The lease has a demolition clause which Mr Allsopp suggested, and I accept, was because the building was probably nearing a redevelopment situation. It has a main street frontage but is significantly further away from the centre of the CBD than the Ritz Arcade and is set back 2 metres from the street.

18 Mr Allsopp concluded from the above evidence that small fringe shops rented in the range of $300 to $350 while small, but prime, street front central CBD shops rented for about $500 per week (ignoring demolition clauses). I tend to agree.

19 Mr Longa relied on the following comparative rentals (exclusive of GST):

(i) Dulhunty Arcade, a walk-through arcade in Horton Street: shops 4 and 5 with a combined area of 32.8m2, towards the end of the arcade, were rented to a masseuse for $165 per week. As discussed earlier at [13], Mr Longa regarded the location of Dulhunty Arcade as comparable to that of the Ritz Arcade and considered that the improvements of the Dulhunty arcade were superior to those of the Ritz Arcade. In my opinion, however, the location of the Dulhunty Arcade was inferior to that of the Ritz Arcade and the presentation of the Ritz Arcade would have been similar to the Dulhunty Arcade had the $28,000 for which Mr Allsopp made allowance been spent renovating and upgrading the arcade. A comparison of this rental with the rental of $286 per week in 1999 for shop 7 in the Ritz Arcade with a similar area of 42m2 (see above), suggests that the Ritz Arcade commanded very much higher rentals than Dulhunty Arcade.

(iii) Village Arcade, a walk-through arcade in Horton Street: shop 3, area 59m2, rented for $200 per week. Mr Longa regarded the Village Arcade location as inferior to the Ritz Arcade, but considered that it had superior improvements and was superior in that it was a walk-through arcade. I agree that its location was inferior but I consider that its presentation would have been similar had the expenditure on the Ritz Arcade to which I have referred been made. Further, as I have said earlier, I do not think that a walk-through arcade in the location of the Village Arcade had advantages over a dead-end arcade in the location of the Ritz Centre for the type of tenant that it attracted. Mr Longa acknowledged that the Ritz Arcade was more valuable and that this comparable rental therefore required an upwards adjustment.

(iv) Village Arcade, shop 4, area 38m2, rented for $156 per week. The same comments apply as for (iii).

(v) Garrison Building in Clarence Street, a shop with an area of 51m2 rented for $400 per week. There was a five percent annual increase provision in the lease which meant that the rent in October 2005 (one month after resumption of the applicants’ properties) would move to $420 per week. The Garrison Building is located about a block further away from the CBD than the Ritz Arcade. It has a street-front location alongside the entrance to the Port Central Shopping Centre. Mr Allsopp, in oral evidence, conceded that this was a reasonable comparison with the Ayton shops, which had the same total area, whilst pointing out that it is located in a corner on a part of Hay Street that has been blocked off in a u-shaped area and is about 100 metres from a bus stop. Although the area of this shop is about the same as Mrs Ayton’s subject lot, Mr Allsopp considered, and I accept (contrary to Mr Longa’s views), that the use by Mrs Ayton of her lot as two shops was its highest and best use and that the total rent should be higher than if it was let as one shop. This conclusion tends to weigh against Mr Longa’s valuation of Mrs Ayton’s lot of $365 per week. On the other hand, the rental also does not support Mr Allsopp’s valuation of the lot at $525 per week.

(vi) Peachtree Arcade, a shop with an area of 60m2 rented from March 2004 at $420 per week. Applying a 4 percent annual increase, the rent as at the resumption date of the Ritz Arcade was about $438 per week. Mr Longa considered, and I agree, that Peachtree Arcade is a highly superior arcade. He also considered that it was an advantage that it was a walk-through arcade, a view with which Mr Allsopp disagreed. I am unconvinced that the fact that the Ritz Arcade was a dead end made a significant difference given the types of shops in the Ritz Arcade and its location.

(vii) Port Pacific building, shop 7, area 61m2, rented for $385 per week. Mr Longa considered, and I agree, that this was in an inferior commercial fringe location although it had a highly superior streetfront positioning.

20 The following comparable further rentals also came to be mentioned in the course of evidence:

(i) Mrs Ayton’s shop 5 in the Ritz Arcade with an area of 12m2 was leased in January 2003 for $120 per week with a demolition clause. In 2004, after the expiry of this lease and of the lease of shop 6 referred to below, Mrs Ayton was unable to lease either shop because of the known intention of the respondent to acquire the building. Mr Longa considered that shop 5 would be difficult to lease because of its small size and that the highest and best use of Mrs Ayton’s lot 22 (comprising shops 5 and 6) was therefore as one lot. However, I prefer Mr Allsopp’s view that small shops such as shop 5 suit many small operations that want to have a small presence in the town.

(ii) Mrs Ayton’s shop 6 in the Ritz Arcade, with an area of 38m2, was rented in April 2003 for $220 per week with a demolition clause. I accept the evidence that the rent was heavily discounted because of the demolition clause, which entitled the lessor to terminate the lease agreement by giving 30 days notice of intention to terminate. This is supported, as Mr Allsopp pointed out, by the fact that shop 7 in the Ritz Arcade, which had a similar area but no demolition clause, was rented back in 1999 for $286 per week.

(iii) Ritz Arcade shop 4, area 23m2, leased for four months commencing on 1 November 2003 at $115 per week. Applying a 4 percent per annum escalation factor, the rent at resumption would be about $120 per week. Mr Allsopp considered that this rent was far too low and that the likely reason was market knowledge of the council wanting to compulsorily acquire the Ritz Arcade. Mr Longa indicated that the rent was lower than he would expect and that the cloud of resumption was possibly responsible for this. I accept Mr Allsopp’s view.

(iv) Ritz Arcade shop 2, area 24m2, was rented as at March 2004 for $120 per week. Mr Longa said he had not relied on that rental in assessing the properties. The commencement date of the lease is unknown and the information concerning the rental was derived from a discussion between Mr Longa and the owner. Mr Allsopp, having regard to those considerations, thought it would be fairly unreliable to rely on this comparable and commented that it may well have been negotiated in the atmosphere of a blight over the property (being the pending acquisition). Having regard to the evidence, I do not propose to give significant weight to this comparable.

21 Mr Robert Gates is an experienced real estate agent practising in the Port Macquarie area. He referred to “larger” shops than the Ritz Arcade in the Port Building, the Colonial Arcade and Peachtree Walk which had leased between $320 and $450 per square metre depending upon position and size, in or around September 2005. He also referred to two “larger” shops in the Garrison building which were rented for $550 per square metre gross. He said that the much smaller shops in the Ritz Arcade attached much higher rates per square metre due to availability and size. He considered the Village Arcade to be a much inferior location to the Ritz Arcade and therefore he did not use it as a comparable. Mr Gates considered that the Ritz Arcade was superior in location to the Peachtree and Colonial Arcades, although not in fitout. He said that the Ritz Arcade attracted a budget type tenant as opposed to the style of tenant in the Peachtree and Colonial Arcades. I generally accept Mr Gates’ evidence.

Legal principles re offers

22 Is it permissible to take into account Mr Holland’s offer to rent shop 2 from Mr Caruana as evidence of market rental value? The relevant case law is concerned with offers to purchase or sell property rather than to rent it, but I think that the principles are the same.

23 The rationale for the historical principle that evidence of offers to purchase or sell property are generally not admissible to determine the value of that property was expressed by Isaacs J in McDonald v Deputy Federal Commissioner of Land Tax (NSW) [1915] HCA 54; (1915) 20 CLR 231 at 239-240:

It is true that from a logical standpoint, a bona fide offer of £1,000 is just as good evidence the moment before acceptance as the moment after. Why, then, should one be received, and the other rejected? The answer is found in the same principle, namely, the better service to justice on the whole… But if the negotiations do not end in a concluded bargain, the field is at once open to a multitude of other considerations before the same point of opinion is reached. Excursions into the realm of collateral circumstances would be endless. They would so add to the cost, delay and uncertainty of litigation as on the whole to render a great disservice to the cause of justice. The Court might have to inquire whether the owner or the other party really terminated the negotiations, and, if so, for what reason. Had either of the parties discovered the true worth of the property or been misinformed by some means as to its real value? Did the owner mistrust the ability of the purchaser, or did the latter find an adverse claimant to the property, or did his circumstances change, or was there a personal quarrel? Or did he learn of a still better bargain? Or, again, was the offer a sham on either side, or both sides? Such inquiries would render litigation intolerable, and defeat the purpose for which they were permitted.

24 In McDonald the question for determination was the value, for land tax purposes, of pastoral property. The appellant, the owner of the land, objected that the rate per acre adopted by the respondent was excessive. At the hearing of his objection, counsel for the appellant tendered a letter written by the appellant’s agent to a prospective purchaser some time before the valuation date. The letter conveyed an offer to sell the property at a stated price. That offer was not accepted. The trial judge, regarding himself as bound by authority to do so, rejected the tender. The High Court also thought the letter was inadmissible and upheld its rejection.

25 Whilst the danger of admitting evidence of offers identified in McDonald by Isaacs J remains a valid consideration, more recent case law has rejected the proposition that McDonald (and cases following it) authoritatively establish the proposition that evidence of an offer is never admissible in a valuation case: see especially Goold & Rootsey v Commonwealth [1993] FCA 157; (1993) 42 FCR 51 at 59-60 referred to with approval in Henderson v Amadio Pty Ltd (No 1) [1995] FCA 1300; (1995) 62 FCR 1 at 122 and Stockl v Rigura Pty Ltd [2004] ANZ ConvR 265 at 270.

26 Goold concerned compensation claims under the Lands Acquisition Act 1989 (Cth). A pre-acquisition declaration was made under s 22 that the Minister was considering the acquisition by an acquiring authority of an interest in two parcels of land. Two and a half months later, an offer was made to purchase each property for $500,000. The question then arose whether that offer could be taken into consideration in determining the market value of the acquired properties. The prospective purchaser gave evidence that at the time of making the offer, he was not aware of the pending acquisition. Wilcox J undertook a detailed examination of the previous authorities concerning the admissibility of offers, including McDonald. His Honour noted three Australian cases in which evidence of an offer to purchase the land in question had been admitted: Blefari v The Minister (1962) 8 LGRA 1 at 5, Hustlers Pty Ltd v Valuer General (1967) 14 LGRA 269 at 277 and Phillipou v Housing Commission (1969) 18 LGRA 254. In none of those cases, however, was the offer used as direct evidence of the value of the land. His Honour observed (at 59) how the evidence of the offer was treated in each of those cases:

In none of these cases was the offer treated as direct evidence of value. In Blefari Else-Mitchell J pronounced himself conscious that evidence of such a character may not be properly admissible in determining the market value of land. But he thought that, under some circumstances, an offer may have probative value; although it had very little in the case then under consideration. In Hustlers Else-Mitchell J used evidence of earlier offers as a basis for finding that later sales were not forced sales. In Phillipou an adjoining owner, a Church, had twice offered to acquire the subject land – first at a price of $25,000, later at $25,800. Barber J held that the Land Valuation Board of Review had rightly refused to treat those offers as evidence of the value of the land, but that it had correctly taken them into account; the offer demonstrated the existence of a person, the Church, who might pay more than ordinary market price. His Honour summarised the position, at 259, in this way:

The board rightly took into account the potentiality of the land, the likelihood of the Church authorities buying it, and being willing to pay something more than the market value because of its position, but just how much additional value should be allowed for this factor was a question of fact for the board. The contention that the value must necessarily be $25,800 because of the offers made to the Church was rightly rejected.

As Barber J demonstrated, his conclusion flows inexorably from the reasoning adopted in two fundamental valuation cases: Inland Revenue Commissioners v Clay [1914] 3 KB 466 and Raja Vyricherla v Vizagapatam Revenue Divisional Officer [1939] AC 302 (a decision of the Judicial Committee of the Privy Council).

27 Based on those authorities, Wilcox J considered that it would be “anomalous and unjust for the courts to adopt a blanket rule excluding offer evidence” as “such a rule might exclude cogent evidence of the interest of a particular purchaser in the land being valued, a person who was willing to pay more than ordinary market price”. His Honour concluded that a genuine offer by an arm’s length party to purchase the land under valuation could be taken into account by a judicial valuer in considering the possibility of a sale price different to that indicated by conventional evidence: at 60. Even if it satisfied those criteria, however, such an offer could not be used as direct evidence of value, but was rather “something that the judicial valuer ought to take into account in considering the possibility of a sale at a price different from that indicated by conventional evidence, such as an analysis of comparable sales, or of a hypothetical development, or a calculation of the capitalised value of the rental return.” His Honour went on to say that the weight to be given to such an offer is to be determined by reference to the facts of the particular case and that “in some cases, the appropriate weight may be minimal; in others considerable”. After considering the evidence given by the prospective purchaser, however, Wilcox J was not satisfied that his offers were “genuine” and was therefore not willing to draw from them a conclusion that the offeror was willing to pay more than market value for the properties.

28 McDonald is distinguishable on a number of grounds. First, McDonald was not concerned with the test of market value in a statute such as the Just Terms Act with which I am concerned. McDonald was concerned with the Land Tax Assessment Act 1910 (Cth) and the test of unimproved value in s 3, namely, the capital sum which the fee simple might be expected to realise “if offered for sale on such reasonable terms and conditions as a bona fide seller would require”. In McDonald at 237, Isaacs J said that what that statute requires is “the price which a willing buyer would give, supposing a seller announced reasonable conditions”. A “bona fide seller” stipulating reasonable terms and conditions is not the “willing but not anxious seller“ in s 55 of the Just Terms Act, which reflects the classic test in Spencer v Commonwealth [1907] HCA 82; (1907) 5 CLR 418. Accordingly, McDonald is not an authority on the admissibility of an offer to rent in a case such as the present in which market value must be determined: MMAL Rentals Pty Ltd v Bruning [2004] NSWCA 451; (2004) 63 NSWLR 167 at [90].

29 Second, the critical part of the reasoning in McDonald does not apply with respect to the very land in issue, as in the present case. Although the offer in question in McDonald was an offer to sell the land in issue, the question which the High Court’s reasoning addressed was framed in respect of offers relating to land other than the subject land. In MMAL at 184 Spigelman CJ (with whom Mason P and Hodgson JA agreed) observed that Isaac J’s judgment “focuses on the degree of inconvenience that may be associated with investigating the comparable nature of land the subject of the offer.” His Honour continued: “That critical part of the reasoning would not apply to an offer with respect to the very land or property in issue. In such a case I would have thought that the relevance of the offer is sufficient to make it admissible, although its weight will depend on surrounding circumstances”. That dictum seems to me to be applicable to the case before me.

30 Third, McDonald is a decision about the admissibility of evidence: MMAL at [93]. In the present proceedings, the rules of evidence do not apply: Land and Environment Court Act 1979, s 38(2); although the principles of fairness on which they are based inform the discretion as to whether an offer should be taken into account. Fourth, Isaacs J decided that evidence of an offer to sell the land the subject of the proceedings was not admissible. His Honour did not have to decide whether an offer to purchase such land was admissible.

31 English, New Zealand and Canadian courts have accepted that evidence of an offer may be admitted as evidence of value: see the authorities collected in MMAL at 182. Although there are authorities such as Cordelia Holdings Pty Ltd v Newkey Investments Pty Ltd [2004] FCAFC 48 which suggest a general rule that evidence of an offer is not permissible as direct evidence of value, the Court of Appeal in MMAL found it unnecessary to decide whether that was so, stating at [95]: “If there be any such general rule, the present case falls within a recognised exception to it” and approving the dictum in Goold at 59 – 60 that it would be anomalous and unjust to adopt a blanket rule excluding offer evidence. The Court of Appeal did not suggest that the exceptions to any such general rule (if it exists) are closed. The exception with which the Court of Appeal was concerned in MMAL is where a particular purchaser has manifested its intention to acquire the particular property in a context where, on normal valuation principles based on maintainable earnings, it may appear that the value is nil: at [98]. This is analogous to the recognition that evidence of an offer is admissible where there is no other evidence of value: Chen v Karandonis [2002] NSWCA 412.

32 An offer to purchase part of the land the subject of a later compensation claim under the Just Terms Act was admitted into evidence in Mir Bros Unit Constructions Pty v Roads and Traffic Authority of New South Wales [2004] NSWLEC 612 which was decided three months before MMAL. In Mir, pre-acquisition offers were made to purchase the land the subject of those proceedings. McClellan CJ, having regard to the discussion of Wilcox J in Goold, considered that the offer was genuine and made at arm’s length and therefore allowed its existence and details to be admitted into evidence: at [46]. His Honour did not, in the particular circumstances of that case, consider the offer to be of great significance in the resolution of the problem before him.

33 In my opinion, in a resumption case where a genuine offer to rent relates to the very land in issue and the offeror does not proceed because of the impending resumption, that offer should be admitted as evidence of rental value, even though its weight may not be as great as if a contract had been concluded. McDonald is not authority against that proposition because it is distinguishable for the reasons discussed earlier. No contrary authority is binding on me. The doors opened in MMAL, I think, permit the proposition and Mir is consistent with it. Further, if there be a general rule that offers to rent are not admissible as direct evidence of value, then I consider that this is an exception which is consistent with the interests of justice.

34 In the present case, there is no suggestion that the offer by Mr Holland to rent Mr Caruana’s shop 2 was not genuine, nor that it was not at arm’s length. He did not proceed beyond the offer because of the shadow of the respondent’s known intention to compulsorily acquire the Ritz Arcade. Mr Holland’s statement of evidence as to the offer was tendered in evidence and he was available for cross-examination. Mr Caruana was also available for cross-examination on his evidence as to that offer. In these circumstances, I admit evidence of the offer as evidence of the market rental and give it weight, albeit not as much weight as if it had been a concluded contract.

Comparable sales

35 The valuers’ secondary check methodology was to consider comparable sales so as to deduce a rate per square metre by dividing market value by floor area. In the case of the Ayton lot (area 50m2), Mr Longa showed $4,620/m2 by dividing his market value by the floor area. In the case of Caruana, Mr Longa showed $5,417/m2 for Lot 2 (24m2) and $4,815/m2 for Lot 8 (27m2) by dividing his market value by the floor area.

36 Mr Longa referred to the following seven sales, which were also analysed in reply by Mr Allsopp whose analysis I substantially accept:

(i) Peachtree Arcade, a bridal shop with an area of 60m2 was sold by contract dated 21 December 2004 for a price equivalent to $4,333/m2. The Ritz Arcade location is equal but its quality is inferior to that of the Peachtree Arcade. The area of this shop is substantially larger than the subject shops.

(ii) Ritz Arcade, Caruana lots 2 (24m2) and 8 (27m2) sold on 24 March 2004 for $98,000 each, that is, $4,083/m2 for lot 2 and $3,630/m2 for lot 8. These sales, as Mr Allsopp pointed out, occurred with knowledge of the council’s intended acquisition. I therefore do not give them significant weight.

(iii) Colonial Arcade, a gift shop, area 44m2 (excluding the car space), sold on 4 March 2005 for a price equivalent to $5,568/m2 excluding the car space. This figure was predicated on the basis that the car space contributed $10,000 to the sale price, a figure which was eventually agreed by the valuers. This is the only one of the non-Ritz Arcade sales which is comparable in area to the resumed shops in the Ritz Arcade. This is significant because the valuers agreed, and I accept, that for smaller shops, the purchase price and the rent per square metre is proportionately higher than for larger shops. This is illustrated by the fact that the square metre value of this Colonial Arcade shop with an area of 44m2 was 28 percent higher than for sale (i) with an area of 60m2. This sale provides a reasonable check on the values of the subject shops derived by the capitalisation of rents approach. It tends to support Mr Allsopp’s valuation of the similarly sized Ayton shop 6 (38m2).

(iv) Colonial Arcade, a shop of 84m2 was sold on 9 November 2004 for a price equivalent to $4,167/m2, excluding two car spaces in respect of which the valuers agreed that $20,000 of the sale price should be attributed. It may be noted that sale (iii) with a smaller area of 44m2 commanded a rate per square metre which was 33.6 percent higher.

(v) Port Pacific building, a shop with an area of 61m2 (excluding the car space) was sold on 24 February 2005 for a price equivalent to $3,197/m2. A value of $10,000 was attributed by the valuers to the car space.

(vi) Port Pacific building, a shop with an area of 109m2 (excluding the car space) was sold in September 2005 for a price equivalent to $2,981/m2. $10,000 of the purchase price was once again attributed to the car space.

(vii) Peachtree Arcade, a shop with an area of 64m2 was sold on 3 March 2005 for a price equivalent to $4,687/m2. This is comparable with sale (i) above.

37 The valuers and Mr Gates agreed that as the area of the shop becomes smaller, the rate per square metre paid to purchase or rent it becomes proportionately higher than for larger shops. There is therefore difficulty, if not danger (as Mr Allsopp said), in comparing the rates per square metre achieved on sales of shops with substantially larger areas. This point was illustrated by Mr Allsopp by reference to the sales evidence in this case. Mr Longa’s sales (i) and (iv) above had areas of, respectively, 60m2 and 84m2 and achieved similar rates per square metre of respectively $4,333 and $4,167. But sale (iii) with a substantially smaller area of 44m2 – much closer to the area of the subject lots – achieved a much higher rate per square metre of $5,568. Consequently, I consider that the sales comparisons in the present case are very much a secondary or subsidiary method compared with the capitalisation of rents method. Mr Allsopp considered that the above sales tended to indicate that his assessments were reasonable. After putting aside Mr Longa’s sale (ii) which occurred with knowledge of the pending acquisition and after taking into account that higher rentals per square metre are commanded for smaller shops such as in the Ritz Arcade, I tend to agree.

Conclusion

38 In my view, the most comparable rental evidence is that relied upon by Mr Allsopp to the extent to which I have indicated that I will take it into account, together with that of the Garrison building shop. I consider that the Village Arcade, and, to a lesser extent, the Dulhunty Arcade are inferior to the Ritz Arcade and that Mr Longa’s reliance upon them (albeit qualified) has led him to valuations which are too low. On the other hand, I consider that Mr Allsopp did not give sufficient weight to the comparable Garrison building shop with an area of 51m2. This, together with my rejection of his comparable rental evidence in respect of shop 8 in the Ritz Arcade, suggests that some discount to his valuations is appropriate. I consider that the comparable sales discussed earlier are of significantly less assistance than the comparable rentals and do not diminish the weight which otherwise should be given to Mr Allsopp’s comparable rental assessments, after discounting. Accordingly, I propose to adopt Mr Allsopp’s valuations and weekly rentals set out earlier, but to discount them by 10 percent. This produces the following results:

Caruana shops 2 and 8:

Market value shop 2 $184,500

Market value shop 8 $184,500

Weekly rental shop 2 $280

Weekly rental shop 8 $275

Ayton Lot 22

Market value lot 22 (shops 5 and 6) $328,050

Weekly Rental shop 6 $297

Weekly Rental shop 5 $176

DISTURBANCE

Ayton

39 The quantum of Mrs Ayton’s disturbance claim is agreed except for the items for pre-acquisition lost rentals for:

(i) the lease of shop 5 from 21 July 2004, when the lease expired, to 2 September 2005 (the resumption date), that is, 58 weeks x $195 p/w

$11,310

(ii) the lease of shop 6 which finished on 30 June 2004, when the lease expired, to 2 September 2005, that is, 60 weeks x $330 p/w

TOTAL

$19,800

$31,110

Mr Allsopp erroneously referred to the period in paragraph (i) as 57 weeks.

40 The council conceded the above claim from 18 January 2005, being the date of the first compulsory acquisition notice which was later rescinded. Mr Longa allowed a total of only $11,315 for lost rental income, which he calculated from the date of the initial void acquisition notice, 18 January 2005 to 2 September 2005, that is, 31 weeks at his assessed weekly rental for shops 5 and 6 combined of $365 per week. I have earlier rejected his weekly rental assessment. Further, his calculation of 31 weeks was erroneous and should have been 32 weeks.

41 The lost rental claim flows from Mrs Ayton’s evidence, which I accept, that: “After my tenants had moved out I went back to see staff at Raine & Horne about getting new tenants for both premises. They said it was nearly impossible to find anyone willing to take on a lease under the circumstances as the publicity in the Port Macquarie News about Council’s intentions had damaged the chances of finding anyone willing to rent property that was under the threat of acquisition and demolition. This was in 2004”. The last tenant vacated her shop 5 on 21 July 2004. The last tenant vacated her shop 6 on 30 June 2004. That new tenancies were frustrated by knowledge of the impending acquisition is supported by evidence that the business operating in shop 7 for over 30 years, known as Retallacks Sewing Centre, reluctantly moved out of the Ritz Arcade in about September 2004 because of knowledge that the building was to be resumed and demolished by the respondent.

42 The two issues are, first, whether the lost rentals are recoverable for the period prior to 18 January 2005; and secondly, the quantum of rentals attributable to the shops, which I have dealt with earlier. The claim for lost rentals is based on the definition of disturbance in s 59(f) of the Just Terms Act, or alternatively is brought under s 70(1) as a claim for compensation for financial costs or damage incurred as a consequence of rescission of the first compulsory acquisition notice. Sections 59(f) and 70(1) provide:

59 Loss attributable to disturbance

In this Act:

loss attributable to disturbance of land means any of the following:

…

(f) any other financial costs reasonably incurred (or that might reasonably be incurred), relating to the actual use of the land, as a direct and natural consequence of the acquisition.

70 Compensation for rescission of acquisition notice

43 There is a notable shift in language between paragraphs (a) to (e) of the s 59 definition (set out at [7] above) and paragraph (f). Paragraphs (a) to (e) concern reasonable costs of specified types incurred (or, under (d) and (e) that might reasonably be incurred) “in connection with” the compulsory acquisition of land, relocation, the purchase of land before relocation, or the discharge of a mortgage or execution of a new mortgage resulting from relocation. In contrast, s 59(f) is concerned with other financial costs reasonably incurred (or that might reasonably be incurred) relating to the actual use of the land “as a direct and natural consequence of the acquisition”.

44 The words “in connection with” have been held to have a “wide scope”: State Bank of NSW v Blacktown City Council (NSWLEC 30 September 1994 unreported). Waddell AJ allowed the cost of obtaining advice from senior counsel prior to the lodgement of the claim for compensation under s 59(a) of the Just Terms Act. Pre-acquisition legal and valuation costs were allowed under s 59(a) and (b) in Overton Investments Pty Ltd v Minister Administering the Environmental Planning and Assessment Act (NSWLEC unreported 24 December 1998 Sheahan J). After considering State Bank (his Honour said at [19] that it was a decision under s 59(f) but in fact it was under s 59(a) and (b)) and the cases of Fitzgerald, Stephenson and King referred to below, his Honour concluded that the broad principles that emerged from those cases was that: a claim for disturbance is an equitable claim, the validity of which depends on the particular circumstances of each case; there is no general rule that the costs incurred must follow in time the acquisition; there must, however, be some sort of a causal connection between the costs claimed and the acquisition; and that connection must not be too remote (an appeal on other grounds was dismissed: [2001] NSWCA 137; (2001) 113 LGERA 439).

45 It has been said that s 59(f) is a “catch-all” provision: Fitzpatrick Investments Pty Ltd v Blacktown City Council (No 2) [2000] NSWLEC 139; (2000) 108 LGERA 417 at [20] per Lloyd J, but that it does not open the floodgates because the financial costs to which it refers “must relate to the actual use of the land, as a direct and natural consequence of the acquisition”.

46 There is tension in the authorities as to the circumstances in which pre-acquisition costs are recoverable under s 59(f). In Fitzgerald v Blacktown City Council (NSWLEC, 28 March 1994, unreported) Talbot J held that s 59(c) and (f) should not be construed narrowly to restrict the ambit of a claim provided that a reasonable relationship between the acquisition and the incurring of the costs can be established. His Honour allowed pre-acquisition relocation costs under s 59(c). His Honour also allowed financial costs under s 59(f), stating “All those costs are recoverable notwithstanding that they were incurred prior to the actual date of acquisition”. The nature and circumstances of those costs allowed under s 59(f) are not apparent from the judgment.

47 However, lost rents prior to compulsory acquisition and other pre-acquisition costs were disallowed under s 59(f) by Talbot J in N Stephenson Pty Ltd v Roads and Traffic Authority of New South Wales (1994) 83 LGERA 248. That case was decided a few months after Fitzgerald. In Stephenson at 260 Talbot J said of s 59(f): “The use of the expression “a direct and natural consequence” suggests a temporal as well as a causal link to the acquisition. “Consequence”, when used in the ordinary sense, is generally to be regarded as a result of something that has already occurred. Part of the applicant’s claim for disturbance relates to costs incurred before the date of acquisition”. His Honour said at 264: “It was not necessary to rely on s 59(f) in Fitzgerald, although its meaning was fully argued and discussed” (in fact, reliance was placed on s 59(f) in Fitzgerald as appears from the above quotation from that case). His Honour continued at 264: “As a general rule, costs incurred prior to acquisition are not compensable… Section 59(f) assumes that the act has already occurred. All the pre-acquisition costs were incurred by the respondent [sic applicant] as a consequence of the delay in implementing the acquisition and the uncertainty brought about by the unspecified nature of the proposed works. They are not financial costs that would have been incurred as a direct and natural consequence of the acquisition if the applicant had deferred incurring them until after the date of acquisition. The claim for compensation under s 59(f) in respect of costs incurred prior to the acquisition is disallowed”. In Walker Corporation Pty Ltd v Sydney Harbour Foreshore Authority [2004] NSWLEC 535; (2004) 136 LGERA 164 at [37] Talbot J commented that “in Stephenson there were special circumstances that deprived the applicant of the right to recover the financial costs claimed but nevertheless the effect of s 59(f) was clearly recognised, namely, that although costs incurred prior to acquisition are not compensable as a general rule it is not imperative that costs be deferred until acquisition occurs”.

48 An illuminating and different guide, which I propose to follow, concerning the application of a provision similar to s 55(f) to pre-acquisition costs, is provided by Lord Nicholls’ judgment for the majority of the Privy Council in Director of Buildings and Lands v Shun Fung Ironworks Ltd [1995] 2 AC 111. Talbot J in his earlier decision in Stephenson did not have the benefit of Lord Nicholls’ judgment. Shun Fung was concerned with the interpretation of s 10(1) of the Crown Lands Resumption Ordinance of Hong Kong, which provided: “The tribunal shall determine the amount of compensation (if any) payable in respect of a claim submitted to it… on the basis of the loss or damage suffered by the claimant due to the resumption of the land specified in the claim”. Lord Nicholls, in essence, explained that to be compensable a loss must be (a) caused by the resumption, (b) not too remote and (c) reasonably incurred: at 126. As to the third condition his Lordship said at 126: “The law expects those who claim recompense to behave reasonably. If a reasonable person in the position of the claimant would have taken steps to eliminate or reduce the loss, and the claimant failed to do so, he cannot fairly expect to be compensated for the loss or the unreasonable part of it. Likewise if a reasonable person in the position of the claimant would not have incurred, or would not incur, the expenditure being claimed, fairness does not require that the authority should be responsible for such expenditure. Expressed in other words, losses or expenditure incurred unreasonably cannot sensibly be said to be caused by, or be the consequence of, or be due to the resumption”. Lord Nicholls held at 135 – 138:

This claim raises the question whether a loss occurring before resumption can be regarded, for compensation purposes, as a loss caused by the resumption. At first sight the question seems to admit of only one answer. Cause must precede effect. That is a truism. A loss which precedes resumption cannot be caused by it. Hence, it is said with seemingly ineluctable logic, a pre-resumption loss cannot be the subject of compensation. The difficulty with this approach is that it leads to practical results from which one instinctively recoils… if business losses arising in the period post-inception of the scheme and pre-resumption are to be left out of account, a claimant will not receive compensation for those losses although they are attributable to the scheme. If the threat of resumption drives away customers who need long term assurance of supply, on resumption no compensation would be payable for this loss of profits. Future losses of profits would be recoverable, but not the losses already incurred…

The starting point for a consideration of this conundrum must be to remind oneself that, far from furthering the legislative purpose of providing fair compensation, the Crown’s contention would have the opposite effect. It would stultify fulfilment of that purpose. Coming events may cast their shadows before them, and resumption is such an event. A compensation line drawn at the place submitted by the Crown would be highly artificial, for it would have no relation to what actually happens. That cannot be a proper basis for assessing compensation for loss which is in fact sustained…

So where can the boundary be drawn sensibly? If the line contended by the Crown is rejected, as it must be for the reasons already spelled out, there is no sensible stopping place short of recognising that losses incurred in anticipation of resumption and because of the threat which resumption presented are to be regarded as losses caused by the resumption as much as losses arising after resumption. This involves giving the concept of causal connection an extended meaning, wide enough to embrace all such losses. To qualify for compensation a loss suffered post-resumption must satisfy the three conditions of being causally connected, not too remote, and not a loss which a reasonable person would have avoided. A loss sustained post-scheme and pre-resumption will not fail for lack of causal connection by reason only that the loss arose before resumption, provided it arose in anticipation of resumption and because of the threat which resumption presented. In the terms of the Resumption Ordinance, a pre-resumption loss which satisfies these criteria is as much ‘due to’ the resumption of the land as a post-resumption loss…

In everyday terms, loss caused by the threat of an act which later eventuates would normally be regarded as loss caused by the act just as much as loss incurred after the act has happened.

If the line is drawn in this way the result is fair and sensible. Had there been no scheme, the losses in question would not have arisen. The result is coherent because it accords with the established Pointe Gourde principle. It also means that compensation is not depending on whether the acquiring authority acts speedily or tardily in carrying through the process culminating in resumption. Losses arising after the inception of this scheme will attract compensation, however short or long the shadow period, provided they satisfy the criteria mentioned above.

Their Lordships have in mind that, at the outset of a shadow period, there may be no certainty that resumption will take place. As time passes, and the scheme proceeds, the likelihood of resumption increases, until the Governor makes a resumption order. At that stage, but not before, there is a legal commitment. Their Lordships can see no sound reason for attempting to draw a spurious line somewhere along this penumbra of gradually darkening shadow. One of the conditions for compensation is that the loss must have been incurred reasonably. If a reasonable person would have continued to trade normally the landowner cannot claim compensation for losses incurred by his refusal to accept any more orders. He cannot simply let his business run down, and then seek to recover compensation for his losses. The less certain the prospect of resumption, the greater will be the burden of showing that he acted reasonably in running down his business and that the losses were caused by the prospect of resumption. This provides also the answer to the floodgates argument.

Of course, many schemes involving resumption or compulsory acquisition do not come to fruition. Meanwhile properties may be unsaleable, and no compensation will ever be payable unless special blight provisions apply… The existence of this type of loss, for which the landowner may be without remedy if resumption does not take place, is not a sound reason, when resumption does take place, for drawing the compensation boundary in such a way as to exclude all pre-resumption loss.

49 The legislation considered in Shun Fung is sufficiently similar to s 59(f) as to make that decision authoritative as to the interpretation of s 59(f), subject to making allowance for the adjectives “direct and natural” in s 59(f). That interpretation is encouraged by the legislative mandate in s 54(1) of the Just Terms Act that “The amount of compensation to which a person is entitled under this Part is such amount as, having regard to all relevant matters under this Part, will justly compensate the person for the acquisition of the land.”

50 In Peter Croke Holdings Pty Ltd v Roads and Traffic Authority of NSW (1998) 101 LGERA 30 at 63 Bignold J allowed pre-acquisition losses under s 59(f), citing Shun Fung and declining to follow Stephenson.

51 Pre-acquisition professional fees were allowed under similar Victorian legislation in King v Minister for Planning and Housing (1991) 76 LGERA 288. There s 41(1)(f) of the Land Acquisition and Compensation Act 1986 (Vic) provided that, in assessing compensation, regard must be had to “any legal, valuation and other professional expenses necessarily incurred by the claimant by reason of the acquisition of the interest”. Gobbo J in the Supreme Court of Victoria allowed legal, valuation, surveying and other professional fees incurred to assist in negotiations with the statutory authority in order to persuade it to acquire the subject land. At the time that they were incurred, the statutory authority had commenced the acquisition process in a general sense but was not obliged to acquire it. Gobbo J held that these pre-acquisition expenses could be regarded as “necessarily incurred by reason of the acquisition”. One of his reasons was that the legislation should not be read restrictively (at 310). His Honour also decided that a claim for “any loss attributable to disturbance” under s 41(1)(d) extended to expenses incurred prior to the service of a notice of intention to acquire land. The decision was made having regard to the s 40 definition of “loss attributable to disturbance” which relevantly stated that any pecuniary loss suffered by a claimant as “the natural, direct and reasonable consequence of (a) the service upon the claimant of a notice of intention to acquire…; and (b) the fact that an interest of the claimant in that land has been divested or diminished, being a pecuniary loss for which provision is not otherwise made in this Part”. King is consistent with Shun Fung, both of which were applied in Brimbank City Council v Keilor Homes Pty Ltd [2006] VSC 222; (2006) 148 LGERA 24 (SC/Vic Osborn J).

52 The words “direct and natural” in s 59(f) is the language of causation designed to limit compensation by reference to causal considerations: March v Stramare [1991] HCA 12; (1991) 171 CLR 506 at 509 – 510 per Mason ACJ. In Palmer Bruyn & Parker Pty Ltd v Parsons [2001] HCA 69; (2001) 185 ALR 280 at [79] Gleeson CJ said that “It may be, as was said in a New Zealand case, that ‘consequences that are direct and natural are generally foreseeable’”. In Lasermax Engineering Pty Ltd v QBE Insurance (Aust) Ltd [2005] NSWCA 66 the NSW Court of Appeal held that the expression “directly caused” in an insurance policy was to be equated with “proximate cause”. It was also held that the primary judge fell into error in relying upon the dictionary definition of “directly” at the expense of looking at words in context. It was said that the Court applies common sense standards in determining what is proximate cause, and that causation is to be understood as the man in the street, not a scientist or a metaphysician, would understand it.

53 In my opinion, in accordance with the Shun Fung principles and other principles discussed above, the disputed pre-acquisition rental losses constitute, within the meaning of s 59(f), financial costs reasonably incurred, relating to the actual use of the land, as a direct and natural consequence of the acquisition. The respondent submitted that the applicant did not act reasonably in waiting until the tenants had moved out before she saw the real-estate agent about getting new tenants. In the circumstances of the resumption shadow which existed throughout 2004, I do not think that it would have made any difference if the applicant had approached the real-estate agent earlier.

54 I have previously at [38] discounted Mr Allsopp’s assessment of weekly rentals by 10 percent. I therefore assess this disturbance claim as follows:

(i) Lease of shop 5 from 21 July 2004 to

2 September 2005, 58 weeks at $176 pw $10,208

(ii) Lease of Shop 6 from 30 June 2004 to

2 September 2005, 60 weeks at $297 pw $17,820

TOTAL $28,028

Caruana

55 Mr Caruana and Ms Simmons’ claim for disturbance is agreed except for the following items:

(a) Loss of the shop 2 shoe repair/key-cutting business for which they claim $58,785. The respondent admits to $36,000.

(b) Loss of the shop 8 ladies’ boutique business for which they claim $20,000. The respondent allows nothing.

56 Mr Caruana was unable to buy or rent suitable premises for the relocation of his businesses after acquisition. He attempted to continue the business from home but he was unable to do so. It was not contested that the businesses were lost as a result of the resumption and that the applicants are entitled to compensation for their value. The contest is over quantum.

Shop 2 shoe repair/key-cutting business

57 In relation to the shop 2 shoe repair/key-cutting business, Mr Allsopp based his valuation of $58,785 on an offer in 2004 to purchase that business for $60,000 to $70,000 on the basis of a 3 x 3 year lease agreement at a stipulated rental, which did not proceed because of the anticipated compulsory acquisition. Mr Allsopp adopted $60,000 less the fire sale value of the plant and equipment of $1,215 – a figure supported by an independent valuation by Mr Anthony Crowe – to arrive at a value for the business of $58,785. I accept that that fire sale value is justified in this analysis. One relevant consideration in determining that value was the difficulty that Mr Caruana would have faced in selling the machinery, given that occupational health and safety standards would not allow use of such larger machines in most shopping centres.

58 Mr Longa adopted two different approaches. First, he multiplied the average of the last three years profit of the business as outlined in a letter of Harrison & Siepen Accountants, i.e. $17,703, by two to arrive at a valuation of $36,000. Secondly, he analysed the sale of a laundromat business in Port Macquarie in June 2006. Its sale price was $65,000, of which the goodwill component was $33,000 (the balance was plant and equipment). By dividing the business goodwill by the net operating profit he determined that the sale price was a multiplier of 1.25 on net operating profit, plus the value of the plant and equipment. He applied the multiplier to what he put forward as the shoe repair business’ net operating profit of $17,703 to arrive at a value of $22,129 for goodwill. To this he added $10,000 for the value of the plant and equipment on a going concern basis to arrive at a total of $32,000.

59 The following points may be made about Mr Longa’s analysis. First, his assessment of the profit of the shoe repair business for the purpose of his analysis was, I think, too low. The net operating profit of the shoe repair/key-cutting business on a year-by-year basis was:

2003 $12,690

2004 $18,498

2005 $21,922

after adding back certain non recurring items and items which may have contained a substantial private benefit. Mr Longa’s net operating profit of $17,703 (referred to above) is the average of these three years’ profits. However, it is significant to note that the profits over those three years showed a marked upwards trend. I agree with Mr Allsopp that the historical average net profit of $17,703 adopted by Mr Longa is too low because it does not adequately reflect that trend. I also accept Mr Allsopp’s view that a hypothetical purchaser would have paid a price, based on that growth, calculated on at least the previous year’s net profit of about $22,000 or, more likely, an anticipated net profit of, say, $24,000. Although Mr Longa suggested at one point that the profit growth was reflected in his multiplier of two used to arrive at his calculation of $36,000, I do not think that that is adequate.

60 Secondly, an independent valuation of the plant and equipment is in evidence and indicates that its going concern value was, in total, $16,390. A total of $22,265 was put to Mr Longa in cross-examination but that was erroneous as a matter of arithmetic, and was no doubt the reason that Mr Longa told the cross-examiner that he did not think it was worth that much. The independent valuation itself, however, was not otherwise challenged and I adopt it. Therefore, if I were minded to follow Mr Longa’s laundromat basis approach, I would add the independent valuation figure of $16,390, not Mr Longa’s $10,000.

61 Thirdly, Mr Allsopp showed that Mr Longa’s laundromat comparable substantially supported Mr Allsopp’s valuation if Mr Longa’s first valuation approach were to be adopted. Mr Allsopp calculated that the sale price of the Laundromat business divided by the net profit gave a multiplier of 2.4528 (i.e. sale price of $65,000 divided by the net operating profit of $26,500). He applied this multiplier to the Caruana shoe repair/key-cutting business’ previous year’s profit of about $22,000 to show a market value for that business of $53,961. He also applied that multiplier to the said anticipated net profit of $24,000 to show a market value of $58,867. This is close enough to Mr Allsopp’s valuation of $60,000.

62 I am therefore satisfied that Mr Allsopp’s valuation of $58,785 should be adopted.

Shop 8 ladies’ boutique business

63 Mr Allsopp based his valuation of $20,000 for the Caruana shop 8 ladies boutique business on what was said to be an offer of $20,000 to purchase it in March or April 2005.

64 Mr Longa attributed no value to this business because it showed a net operating loss and had operated for only a short period, since 2004. In contrast, the shoe repair/key-cutting business had operated since 1998. The ladies’ boutique business showed a loss in 2004 of $1,474 and in 2005 of $9,607, after adding back non-recurring items and items which may have contained a substantial private benefit.

65 The unchallenged evidence from the alleged “offeror”, Ms Pawlowsky, was that she was “seriously considering” purchasing the business for $20,000 and had had discussions about the purchase with Mr Caruana. Her evidence was that the sale did not proceed because of the uncertainty in relation to demolition clauses and acquisition. The unchallenged evidence from Mr Caruana was, similarly, that he had such discussions in March or April 2005, that the purchase price discussed was $20,000 (plus a certain sum for the lease) and that Ms Pawlowsky went elsewhere because of the need for a demolition clause in the lease and council’s intention to take over the whole building.

66 In my view, this evidence does not elevate the discussions to the status of an offer. Further, it is reasonable to infer that someone “seriously interested” in purchasing a business would at some stage have looked at the financial records. So far as the evidence discloses, Ms Pawlowsky had not reached that stage. If she had looked at the losses made by the business, it is likely that that would have affected her decision whether or not to proceed with the purchase of the business. I am not satisfied that I should attribute any value to this new business based on the sparse evidence on which the applicant relies and having regard to its increasing losses over its short life.

Owners of Strata Plan 12292

67 The claim of the applicant Strata Plan 12292, the proprietor of the common property in the Ritz Arcade building, is for disturbance. The quantum of the claim is agreed except for the following two items.

Potential to lease common property

68 The first concerns the potential to lease out various parts of the common property. Mr Allsopp assessed that value at $43,500 by reference to rental income that could potentially be derived from leasing three parts of the common property, as follows:

(i) outdoor seating licence $4,200 per annum

(ii) aerial space on the roof $300 per annum

(iii) signage/advertising $4,200 per annum

TOTAL $8,700 per annum

69 Mr Allsopp deducted 50 percent of this total for vacancies, to reduce it to $4,350 (net) which he capitalised at 10 percent per annum to arrive at a valuation of $43,500. Mr Longa, the respondent’s valuer, allowed nothing for this claim.

70 This claim is largely dependent on the evidence of Mr Thompson, the strata manager, that he had a number of new ideas for the management of arcades such as the Ritz Arcade that he had implemented in other arcades, but that he did not bother implementing those ideas because by the time his company took over as strata manager in July 2003, the council had already made it clear that it intended to acquire and demolish the Ritz Arcade. He therefore considered that there was no point in changing anything. His examples of those ideas for generating income in other arcades included the installation of advertising signage on the roof, wall advertising, outdoor seating or other uses of common areas and rooftop antennas. He provided evidence of the amount of income that had been generated utilising the concepts of rooftop advertising, outdoor seating and rooftop antennas in other arcades. He also said that the Ritz Arcade had been badly in need of upgrading and renovation in past years but that no action had been taken because it was known that the council would be acquiring and demolishing the building so that there was no point in the owners expending the money.

71 As regards the outdoor seating licence, Mr Allsopp’s reasoning was that the Ritz Arcade was unusually wide – which is true – and that therefore there existed the potential to lease some of the tiled arcade area to a café/fast food outlet/coffee shop or similar. He noted that he had been advised that the owner of the Garrison café was paying $9,504 per annum on 2005 for his outdoor dining license, that is, $792 per month. On that basis, Mr Allsopp adopted $350 per month (exclusive of GST) for the potential income from the granting of an outdoor seating license within the common property in the Ritz Arcade, which he multiplied by 12 months, to arrive at $4,200 per annum. However, he conceded that the Garrison café’s outdoor seating was not in an arcade, whereas his proposal was for internal seating inside the Ritz Arcade itself. He envisaged that there would be an associated café in the Ritz Arcade, preferably on the streetfront, but acknowledged that it could not spill onto the footpath.

72 As regards aerial space on top of the building, Mr Allsopp adopted $300 per annum (exclusive of GST) on the basis of Mr Thompson’s evidence that in another arcade he had achieved $300 per annum for a small aerial to be constructed on the rooftop. He conceded, however, that such antennas were not usually found on low-set buildings such as the Ritz Arcade.

73 As evidence that signage and advertising had once occurred in the common area, Mr Allsopp pointed to minutes of the owners’ corporation meeting on 28 August 1979 which recorded that the owners’ corporation leased part of the common property described as “space in arcade plus roof of Cascade Salon” for $20 per week. In his initial report, he said that he adopted a rental of $350 per month (exclusive of GST), that is $4,200 per annum. The Cascade Salon occupied shop 6 in the Ritz Arcade. In oral evidence Mr Allsopp was unable to say what was meant by the reference to the “roof” in the minutes. In a subsequent joint report he based this quantum upon an assertion that in the Peachtree Arcade a wall space is leased at $300 per annum for an area of about 400mm x 2.0m. In oral evidence Mr Longa said that he did not think that the types of businesses within the Ritz Arcade would be able to afford, or would want to pay for, such signage. I accept his view. Mr Allsopp did not disagree with that view but indicated that he had in mind advertising by third parties. Mr Longa said that such advertising could be a possibility. A letter in evidence from the Peachtree Arcade strata manager casts light on the matter. It states that signage boards will be available to “proprietors” to advertise their businesses at a cost of $300 per annum in the first year and $200 per annum thereafter (CPI adjusted). This undermines Mr Allsopp’s reliance on the Peachtree Arcade as a precedent for advertising by third parties. The 1979 minutes are so old and unclear as to be of little assistance.

74 Mr Longa allowed nothing for the value of these areas of the common property. He made the following points. First, he considered that the value of the common property was inherent in the value of the lots within the strata plan. Consequently, if the amounts for which Mr Allsopp contended had a proper basis, then he (Mr Longa) would allocate them to the owners of the individual lots rather than to the owner of the common property. I disagree. In my view it is the owner of the common property that would derive income from any such use of the common property and, therefore, any value attributable to that potentiality should be ascribed to the owner of the common property.

75 Secondly, Mr Longa said that there was no evidence of any development approvals in the building for such uses prior to the acquisition to substantiate a claim for income from those sources. Mr Allsopp conceded that development consent would be required for the establishment of aerial space on the roof, outdoor seating within the arcade and also for a cafe. I accept that that is so.

76 Thirdly, Mr Longa pointed out that at the date of acquisition no revenue was being received for any of these areas of the common property and that there was no evidence that it had been received in the past, except for the 1979 meeting minutes. He considered that those minutes had no relevance to the market for space in the Ritz Arcade as at the date of resumption. I agree that the absence of historical revenue from these sources (apart from what is recorded in the 1979 minutes) is a significant factor to be taken into account when considering the potentiality of the use of the common property. On the other hand, the strata manager, Mr Thompson, has indicated that he would have promoted such uses when he became strata manager in 2003, had the shadow of the council’s impending acquisition and demolition of the arcade not been present. However, it is not known whether, or to what extent, any potential for use of the common areas would have been realised.

77 Fourthly, Mr Longa commented that Mr Allsopp’s capitalisation rate of 10 percent had been arrived at by looking at two freehold property sales and that a freehold property is not the same as a common area. However, he did not suggest what other capitalisation rates should be adopted. In this state of the evidence, I would accept Mr Allsopp’s capitalisation rate of 10 percent.

78 Fifthly, Mr Longa said that Mr Allsopp’s discount of the net annual income by 50 percent for vacancies had not been explained. Mr Allsopp thereupon explained that the adoption of that figure was a matter of value judgement. Mr Longa did not express a view as to an appropriate vacancy rate. However, in my view, bearing in mind all the factors bearing on the potential use of these common areas in the ways proposed, I would think that a much higher vacancy rate of 90 percent should be adopted.

79 I accept that there was some potential to use the common areas in the three ways proposed; that that potential was not explored by the strata manager since it took over in 2003 because it was aware that the respondent would be acquiring and demolishing the building; and that there are precedents for such uses. However, the factors discussed above which weigh against the realisation of the potential or which bear on the vacancy rate are so weighty that I cannot accept the values which Mr Allsopp ascribed. The respondent did not suggest any method of assessment other than the vacancy rate method proposed by Mr Allsopp, if I were minded to award a sum for this claim. Consequently, I am prepared to adopt that method and to assume Mr Allsopp’s total starting point of $8,700. In light of all the adverse factors to which I have referred, I will adopt a vacancy rate of 90 percent, capitalised at 10 percent. Accordingly, I assess this claim at $8,700.

Pre-acquisition legal and valuation costs

80 The second disturbance item in contest is the body corporate’s claim of $5,573 for legal and valuation expenses incurred prior to the date of the first acquisition notice. This claim is brought under s 59(a) and (b) of the Just Terms Act which define loss attributable to disturbance of land as including:

(a) legal costs reasonably incurred by the persons entitled to compensation in connection with the compulsory acquisition of the land,

(b) valuation fees reasonably incurred by those persons in connection with the compulsory acquisition of the land.

81 The applicant’s claim, as initially formulated (it was later amended), comprised the following items:

(i) 25 March 2003 $2,807 for legal advice

(ii) 24 September 2003 $1,100 for valuation advice

(iii) 21 January 2004 $3,231 for legal advice

TOTAL $7,138

82 A number of business records were tendered in support of this claim. They are annexed to an affidavit of Mr Thompson, the strata manager, and are in exhibit 14.

83 The issues are whether the legal and valuation fees in contest were “in connection with” the compulsory acquisition and, if so, whether they were “reasonably incurred”.

84 The first item, the March 2003 expenditure of $2,807 for legal advice relates to fire safety issues and discussions with the respondent council regarding a possible acquisition of the Ritz Arcade building. The bill for this legal work is in evidence. The applicant concedes that insofar as this legal work relates to fire safety issues, it is not recoverable. The bill does not provide itemised entries for the costs of each part of the narrative so it is difficult to apportion the costs in the bill between the two issues. It is fairly clear that the acquisition issue was a reasonably substantial part of the work undertaken by the solicitors. On this basis the applicant submits that a reasonable apportionment of the bill would be 50 percent. Consequently, the applicant reduced this item to $1,404.

85 The second item, the September 2003 valuation advice, related solely to negotiations with the respondent council towards possible acquisition of the Ritz building by agreement. Consequently, the applicant claims the full amount.

86 The third item, the January 2004 legal advice, related to both fire safety and acquisition issues. Although the bill of costs relating to this work (annexure C to Mr Thompson’s affidavit) does not mention the fire safety issue, it is referred to in the letter of instructions dated 27 October 2003, a letter to the solicitors dated 29 October 2003 from the strata manager advising that the latter was taking care of the fire safety issue aspect, and a subsequent facsimile of 4 November 2003. The applicant submits that the strong impression is that the fire safety issue was a very minor aspect and that an appropriate allowance would be about 5 percent. It therefore submits that these costs should be apportioned 95 percent to the acquisition.

87 The applicant’s amended claim in final submissions as a result of the above adjustments is as follows:

(i) 31 March 2003 $1,404 legal advice

(ii) 24 September 2003 $1,100 valuation advice

(iii) 21 January 2004 $3,069 legal advice

TOTAL $5,573

88 The respondent submits that nothing should be allowed for these items. It submits that it is clear on the face of the documents relating to them that they all relate to private negotiations for the sale of the building some 24 months prior to compulsory acquisition, as well as to fire safety issues and advice in relation to the council’s development application on land adjoining the Ritz Arcade. Those negotiations did not result in the sale of the building and, the respondent submits, were so far in advance of the compulsory acquisition that it cannot be said they were “in connection with” the compulsory acquisition as required by s 59(a) of the Just Terms Act. In that regard the respondent emphasises that the first compulsory acquisition notice (later rescinded) was not published until February 2005.

89 It is true that the documents relate to negotiations for the sale of the building to the council at a time substantially prior to the compulsory acquisition. However, those negotiations were conducted against the background of an impending compulsory acquisition if there was no private agreement. The question is whether expenditure in relation to such negotiations is, within the meaning of s 59(a) and (b), “in connection with” a compulsory acquisition which occurs later.

90 In my opinion, the words “in connection with” in s 59(a) and (b) should be widely construed and may include pre-acquisition costs: see the analysis above at [44]. The Just Terms Act encourages authorities of the State to acquire land by agreement rather than by compulsory process. Thus s 11(2) provides: “The authority of the State is not prevented from acquiring the land by agreement after giving the proposed acquisition notice”. Section 63 provides ”An authority of the State and an owner of land may agree on the amount of compensation to which the owner will be entitled (or on any matter affecting the amount of any such compensation) if the land is acquired by compulsory process within a time (or in the circumstances) specified in the agreement”. Section 68(1) provides that (after an objection and appeal to the Land and Environment Court) “Payment of compensation in respect of matters before the Land and Environment Court is to be made in accordance with any agreement reached during the proceedings or, if no such agreement is reached, in accordance with the decision of the Court”. Section 38 requires an authority of the State “to take into account, in connection with any proposed acquisition by agreement of land not available for public sale, the same matters as are required to be taken into account under this Part in determining the compensation payable for an acquisition by compulsory process”. Section 38 suggests that if agreement had been reached, then the legal and valuation costs now claimed would have been recoverable. It seems likely, in the context of just compensation legislation such as this, that Parliament would have intended that such costs would be recoverable if the parties were unable to reach agreement and a compulsory acquisition followed. The reasoning of Lord Nicholls in Director of Buildings and Lands v Shun Fung Ironworks Ltd [1995] 2 AC 111 at 135 – 138 (set out at [48] above) supports this conclusion.

91 I hold that, in the circumstances of the present case, there was sufficient nexus between the subject costs and fees incurred by the applicant and the compulsory acquisition of the land as to make the incurring of those costs and fees “in connection with” the compulsory acquisition. There has to be an apportionment of the amounts for which the applicant was billed so as to make allowance for the unrelated matters to which I have referred. I accept the applicant’s submission that there should be a 50 percent apportionment of the March 2003 legal advice, and that there should be no apportionment for the September 2003 valuation advice. I do not accept the applicant’s submission that there should only be a discount of 5 percent for the January 2004 legal advice. The applicant bears the onus of showing what proportion of that expenditure related to acquisition rather than fire safety and the position in that regard is, I think, less clear on the evidence than the applicant suggested. Accordingly, I propose to allow only 50 percent of that item also. In the result, my assessment is as follows:

(i) 31 March 2003 $1,404 legal advice

(ii) 24 September 2003 $1,100 valuation advice

(iii) 21 January 2004 $1,615 legal advice

TOTAL $4,119

SUMMARY

92 In summary, my assessment of compensation is as follows:

Caruana and Simmons

Market value shop 2 $184,500

Market value shop 8 $184,500

Disturbance shop 2 $58,785

Disturbance shop 8 Nil

Other disturbance items agreed by the parties:

Legal costs and valuation fees s 59(a) & (b) $15,087

Business broker $1,237

Business broker $550

Accountant $814

Removalist $1,150

Reports $1,000

Financial costs $500

Mortgage loss payout $2,900

Stamp duty and legals on relocation (to be consistent with judgment)

Ayton

Market value lot 22 (shops 5 and 6) $328,050

Disturbance $28,028

Other disturbance items agreed between the parties:

Legal costs and valuation fees s 59(a) and (b) $10,426

Wasted fitout $1,000

Valuation report $1,000

Accountancy fees $880

Stamp duty and legals on relocation (to be consistent with judgment)

Owners of SP 12292

Disturbance:

Potential to lease common property $8,700

Pre-acquisition legal and valuation expenses $4,119

Other disturbance items agreed between the parties:

Valuation fees and legal costs

s 59(a) and (b) $3,539

Other costs $2,470

93 I direct the parties to bring in short minutes of order to reflect my conclusions. The proceedings will be re-listed before me on 12 March 2007 at 9.30am for the purpose of making final orders. I will deal with costs on that occasion unless costs are agreed in the meantime.

1800 454 622

1800 454 622

Caruana v Port Macquarie Hastings Council

Liability limited by a scheme approved under Professional Standards Legislation