AUSTRALIAN CAPITAL TERRITORY ADMINISTRATIVE APPEALS TRIBUNAL

Re ACKERMANN and DEPARTMENT OF ENVIRONMENT, LAND AND PLANNING

L J Curtis, President

14 February 1996 - Canberra

L J Curtis, President

Background facts

The applicants in this case, Mr and Mrs Ackermann, sought review of a decision of the respondent dated 12 January 1995 to impose a betterment charge of $45,000 in respect of the variation of a residential lease over Block 11, Section 36 Division of Mawson. The subject property is located in Mawson Drive, in the suburb of Mawson. At present there is one house on the land. The existing lease, which was granted on 24 June 1967, is for residential purposes. It is subject to a requirement to commence "one building only" within six months of the commencement of the term of the lease and to complete the building within 12 months of the commencement of the term. The building to be erected was required to be in accordance with plans and specifications approved in writing by the Commonwealth or the Minister on behalf of the Commonwealth. A variation of the lease was sought under the provisions of the Land (Planning and Environment) Act 1991 (ACT) (the Land Act) to permit the development of five residential units on the land. Approval was given on 5 December 1994 to a variation on conditions which included the following conditions:

• a maximum of four units shall be permitted on the site;

• all development of this site is to be consistent with the requirements of the Territory Plan, in particular, Appendix III.2 (Residential Design and Siting Code for Multi-Dwelling Developments);

• that the lessee surrender the existing lease over the block and accept a new multi-unit lease over the property;

• that if a betterment levy is payable, the lessee will pay it within 28 days of being notified of the amount.

2 The Land Act vests a power in the Executive of the Territory to grant leases of land on behalf of the Commonwealth. Under the legislative scheme for variation of leases in the Act, the Executive of the Territory is prohibited from executing a variation of a lease unless ( s 184):

(b) where the variation of the lease would increase the market value of the lease, the lessee has paid the Executive an amount determined by the Executive as prescribed in respect of the increase in the value of the lease that would result from the variation.

3 The applicant for variation of the lease was informed that the decision might be reviewed by the Land and Planning Appeals Board. The applicant for variation was also informed that the matter was to be referred to the Australian Valuation Office (AVO) for advice as to whether the variation created any added value. A report was furnished by Mr Anthony Galvin, a valuer with the AVO, on 23 December 1994 and the betterment levy was calculated on the basis of this report. The amount of the betterment levy was notified to the applicants by letter dated 12 January 1995. Mr Galvin's report showed an "added value" attributable to the lease variation of $90,000. Under reg 14 of the Land (Planning and Environment) Regulations (the Land Regulations), there is a remission of 50 per cent of the betterment in the case of a "special residential lease" where the lease is more than 20 years old. A lease is classified as a special residential lease where the lease was granted for residential purposes and the variation of the lease would enable the land to be used for higher density residential purposes: see 14(3) of the Land Regulations.

4 The method of determining the increase in the value of the lease attributable to a variation of the lease for the purposes of s 184(b) of the Land Act is set out in regs 12, 13and 14 of the Land Regulations. The amount of betterment is to be the "added value", and the term "added value" is defined in 12(2) as follows:

(2) In regulations 13 and 14, unless the contrary intention appears -

"added value", in relation to a lease to which a variation is proposed, means the amount by which the value of the lease immediately after the variation would exceed the value of the lease immediately before the variation, it being assumed -
(a) that there are no improvements to or on the land comprised in the lease;

(b) that the rent payable throughout the term of the lease is a nominal rent; and

(c) in relation to the value of the lease immediately before the variation - that no variations of the lease would be agreed to during the remaining term of the lease.

5 Two of the assumptions required by that definition are important. The first is that the land is to be valued on the basis that there are no improvements on the land. The term "improvements" is not defined; it must therefore bear its ordinary meaning in relation to the task of valuation. The second important assumption is that, in determining the value of the lease before variation (the "before" value), there will be no variations of the lease during the term of the lease. This means that the land must be valued according to its existing use, not in terms of the highest and best use if that highest and best use would require a variation of the lease. It is also important to note that what is required to be valued is the lease as varied (the "after" value) compared with the lease immediately before the variation. This means that regard must be had to the terms of the lease or to any other restrictions on development of the lease as varied if they would add to the cost of development.

6 The decision to vary the lease was the subject of an appeal to the Land and Planning Appeal Board (the Board). The Board by decision dated 28 September 1995 varied the decision in a number of respects. First, it allowed the development of only three units on the land instead of four. Secondly, it required that two of these units must be contained within the existing dwelling. Thirdly, it imposed requirements about trees and other vegetation on the land. These requirements were as follows:

• all mature eucalypts and all vegetation providing effective screening above the fence line along the eastern boundary are to be retained;

• all healthy mature trees along the southern boundary are to be retained with no interference to ground levels within the diameters of the crowns of the existing trees;

• all other healthy mature trees on the block (excluding the cypress species) are to be retained;

• a tree survey identifying all trees, their diameters and species is to be provided at the design and siting stage of any development.

Note: For the purposes of these conditions a mature tree is defined as one within a minimum diameter of 150mm trunk measured at 300mm height above existing ground level.

7 Following the decision of the Board and in accordance with a direction by the tribunal, a further valuation report was prepared by Mr Galvin. This report showed a difference of $40,000 between the "before" and "after" values, leading to a betterment charge of $20,000.

8 The new lease to be granted over the subject land to give effect to the approved variation has not yet been prepared. The tribunal was given a draft, but this draft does not give effect to all of the conditions imposed upon the proposed development by the Board. It does not contain provisions relating to the requirement that two of the units to be built must be within the existing building or to the requirements to maintain existing trees and other vegetation. Presumably these conditions are to be enforced by administrative requirements in the building plan approval process. Even though they are not conditions of the lease, account must be taken of them in determining the "after" value.

9 Of course, in the Territory limitations or conditions on the development of land may be given effect in a number of ways. They may appear as conditions or restrictions in the lease itself. Or they may be imposed as a condition of obtaining approval of building plans under the Building Act. In either case, they operate to restrict the capacity of a developer to develop a parcel of land to the fullest potential it would have if there were no such restrictions or conditions. Whether imposed by a lease, or whether enforced through the building plan approval process, relevant conditions and restrictions on development must be taken into account when determining the value of the subject land. In Re Rosnet and Comr for ACT Revenue (unreported), the tribunal said, in relation to the view put by a valuer witness in that case that regard should be had only to the terms of the relevant lease:

This approach ignores the practical reality that in dealing with leasehold land in the ACT, especially at the relevant time, the Territory equivalent of town planning controls was exercised not only through lease development conditions but also through the building approval process. It would be totally unrealistic for a purchaser of any of the subject land at 1 January 1988 to ignore the policy of the government that the land should be developed as an integral shopping centre. That factor would necessarily have to be taken into account by a prospective purchaser. As already noted, the same considerations would effectively nullify any additional value that those parcels subject to lease conditions requiring development for parking might have otherwise had through the prospect of a change of lease purpose.

10 Whether or not, therefore, the conditions imposed by the Board are given effect in the lease to be issued as a result of the variation, they must be taken into account in determining the "after" value for the purpose of calculating betterment. However, apart from the requirement that development be restricted to three units instead of four as decided by the respondent agency, the Board's conditions involve, in one way or another, improvements on the land. The existing house, within which two of the units must be contained, is plainly an improvement. An inspection of the land showed, and this was agreed between the parties, that the trees and other vegetation required to be maintained should also be considered to be improvements. None of them appeared to be natural to the land; they all appeared to have been planted.

11 The Land Regulations do not contain any definition of "unimproved" as does the Rates and Land Tax Act 1926. In valuing for the purposes of the Land Regulations 12 and 13, it must be assumed that there are no improvements to the subject land. But it must also be assumed that all of the surrounding context of the subject land is in place; that is, that it is located in the developed suburb of Mawson, with all of the utilities such as water, sewerage and telephone available for connection to the subject land.

12 Evidence as to value was given by Mr Galvin. The valuation evidence in this case was quite unsatisfactory. In determining the "before" and "after" values, Mr Galvin originally used only one comparative sale in the case of the "before" value and comparative sales in relation to the "after" value. They were described in his report of 16 December 1994 in the following terms:

In relation to the "before" value:

A recent sale occurred near to the subject site at 20 Mawson Driver for $175,000. It was located on the opposite side and in a slightly lower elevation than the subject block. The analysed land value was $85,000 while the land area was 914 square metres. This reflected an increase on the previous UCV on 1 January 1994 of 16 per cent.

Having regard to this sale it is considered the current value of the subject site is $110,000, on the assumption that no lease purpose clause change will occur during the course of the lease.

In relation to the "after" value:

The "after" value of the site has been obtained by comparison with the recent auction of a medium density site in Mawson and the analysed unit land value of a complex of 12 units in an adjoining suburb known as Block 1, Section 15 or "Pearce Park Estate", Pearce.

The medium density site in Mawson known as Block 20, Section 47, Mawson sold for $3,600,000 which shows $36,000 per unit site for a maximum of 100 units. The block size is 3.165 hectares.

The unit plan development in Pearce Park Estate reflected a land value of $46,000. This site is considered to be in a slightly more valuable location however the development comprises 12 units compared with the proposed development on the subject block of four units.

Based on the above evidence which reflects unit values of $36,000 and $46,000 for large unit developments it is considered that the subject property would show a unit value in the order of $50,000 per unit for the four unit development.

The "after" value of this site subject to a new lease allowing for single unit private dwellings which equals to approximately 460 square metres of land area for each site is considered to be $200,000 or $50,000 per unit site.

13 In the case of the sale used to determine the "before" value, the report did not disclose the basis for determining the unimproved value. Furthermore, reliance on a single sale is unsafe. The valuation was done before the decision of the Board, and so took no account of the restrictions on development imposed by that decision.

14 The respondent was accordingly directed by the tribunal to lodge a further valuer's report, to take account of the Board's decision. The further report was to be based on a wider range of sales than were shown in the first report, and to include the basis for the valuer's calculation on analysed land value in the case of each comparative sale of improved land. In response to this direction, a further report by Mr Galvin dated 21 November 1995 was lodged with the tribunal. The further report referred to four comparative sales of residential premises in Mawson for the purpose of determining the "before" value, and set out the calculations showing in each case how the deduced land value was derived from the sale price. The report referred to four sales in support of the "after" value. In two cases the sales were of undeveloped land and in the other two cases of developed land. In the case of the latter two sales, the report set out the calculations by which the deduced value of the land concerned was reached.

The "before" value

15 The four comparative sales used by Mr Galvin all took place in the second half of 1994, ranging from 9 August 1994 to 23 December 1994. The period to which they relate is at least nine months prior to the date at which the values have to be determined for the purposes of the Land Regulations. The relevance of these sales was questioned by Mrs Ackermann on the ground that sales were now sluggish in Mawson and prices asked were being brought down because houses were not selling readily. This was answered by Mr Galvin who said that, in his experience, prices in Mawson had not moved very much in that nine month period. An inspection from the street was made of all of the properties used for the purposes of comparative sales by Mr Galvin. Nothing emerged from the tribunal's inspection, or from Mr Galvin's evidence itself, to cast any doubt upon his evidence as to the "before" value. No evidence was produced by the applicants, apart from the statement by Mrs Ackermann that she had said was based on what she had been told by the Real Estate Institute, to suggest that the values were wrong. The tribunal accordingly accepts the "before" value determined by Mr Galvin as being the correct value.

The "after" value

16 The determination of the "after" value raises a number of issues. Mr Galvin's evidence in support of his conclusion as to "after" value was not nearly so convincing. He used sales which occurred in the period June 1993 to November 1994. The earliest of these sales was therefore at least 15 months before the date of the Board's decision. Further, the properties sold differed considerably from the subject land. In the subject case, we are concerned with the value of a block of land on which three residential units are to be built. They are to be built within the confines of an ordinary suburban residential block, and the development is to be subject to the constraints already discussed in some detail.

17 One of the comparative sales was in the suburb of Mawson, not very far away from the subject land. It was the sale of vacant land of 3.105 ha in area, on which there was to be a development of a maximum of 100 units. Presumably the development would be a multi-story development in order to accommodate 100 units on the site. The sale price was $3.6 million, leading to an assumed value per unit of $36,000. Mr Galvin's report showed that he considered this to be less valuable on a per unit basis than the subject land.

18 Another of the comparative sales was of vacant land in the suburb of O'Malley. This land, comprising 1.668 ha, was sold in an unimproved state for $1.9 million. The lease required that there be a maximum development of 22 units. This development would be of townhouses, each with its own garden area. The suburb of O'Malley is a prestige suburb, and inspection showed the land to be amongst large single residences and townhouse developments of well above average character. On a per unity basis, the price paid corresponded to $86,363 per unit.

19 The third sale considered was of a developed unit in a block of 12 units already constructed in Pearce on land of 2,639 m². The sale price, in August 1994, was $155,000 from which Mr Galvin calculated a deduced land value of $46,000. The fourth sale was of a unit in the same development as the third sale. It took place in June 1993, and the sale price was $194,000. Mr Galvin gave a deduced value of $46,000, on the basis that this was a larger unit than the one the subject of the third sale, having one bedroom more. The land on which this development had taken place had previously been a service station site. Mr Galvin had not inspected the interior of either of these units and was therefore not able to offer any assistance as to such matters as quality of finish or other matters affecting the value of the building to be taken into account in deducing the land value.

20 It was from these four sales that Mr Galvin arrived at a value of $50,000 per unit or a total of $150,000 for the subject land.

21 The evidence as to "after" value was still unsatisfactory in a number of respects. The comparative sales used all referred to developments of a much larger scale. The first, third and fourth sales referred to are developments of a different character. The second sale was in a suburb of quite different character to the suburb of Mawson. There was nothing before the tribunal to suggest that, apart from the constraints exercised by the maximum number of units allowed in each case, the development of the other areas was subject to any further constraints which might prevent the land being developed to its maximum potential.

22 Mr Galvin told the tribunal that there were no other comparative sales which might be used to determine the "after" value. Frankly, the tribunal does not accept this statement. The tribunal can properly take notice of the fact that there are many sales of townhouse types dwellings where the residence has a courtyard or garden, and these sales seem to be more relevant to the development proposed on the subject block than the first, third and fourth of the sales used by Mr Galvin. It is not for the tribunal to attempt to deduce values based on those sales; to do so would be to assume the role of valuer, which it is not for the tribunal to do. But the tribunal was entitled to an explanation why such sales were not considered relevant, when sales relating to developments of a different character or, in the case of the O'Malley sale, in an area of quite different character were considered relevant. It did not get that explanation.

The problem of the improvements

23 The legislation requires the "after" value to be determined on the basis of the unimproved value of the varied lease. In this case, the value of the varied lease to a purchaser is affected by the conditions required by the Board's decision. Those conditions, as already discussed, relate to improvements on the land. The land is to be valued as if they were not there, but subject to a lease which assumes that they are there. The valuation task to be performed is of Gilbertian proportions. The only way to make sense of it is to ignore any value which the existing improvements would add to the land if it were put on the market, but to take account of any added cost of development resulting from the need to comply with the Board's conditions over and above the cost of development if those conditions had not been imposed.

24 Mr Galvin was expressly asked whether he took into account the restrictions on development imposed by the Board's conditions as to two of the units being within the existing house and the preservation of trees and other vegetation. One of the trees required to be preserved was a large tree approximately in the middle of the back yard of the present house. Another was on the edge of the driveway which went by the side of the present house, and would cause difficulties in access for large vehicles and heavy machinery to the rear of the house. It is clear that he did not regard these restrictions as imposing any serious cost penalty on development. I was left with the impression that Mr Galvin had fixed on the value of $50,000 per unit site in his report of 22 December 1994 and had given little thought to whether it should be changed. The comparative sales he used for the later report were, with the exception of the O'Malley sale, the same as he used for the 1994 report. He had not made any real effort to bring the sales evidence up to date. If the value of $50,000 per unit was appropriate when no restriction was placed on the way in which the units might be developed on the block, thus allowing the developer to exploit its maximum potential, it does not seem appropriate to the development as now required, in particular, the requirement that the existing house be converted into two of the three units. Nor does one require expert evidence to show that there is a significant cost penalty in converting an existing house into two separate units, compared with building two new units.

The type of lease to be granted

25 The proposed new lease would provide for the building on the land of not more than three residential units. It is what was described during the hearing as a "multi-unit" lease. In order to sell each of the three units separately, it would be necessary for the developer to apply for separate titles under the Unit Titles Act 1970 . While it may be assumed that separate titles would be granted under that Act, there is a cost involved in making the application. The developer would incur legal fees and other costs. These would be taken into account by a developer in working out the costs of development and therefore the price which might be paid for the land.

The tribunal's assessment of value

26 The tribunal is therefore left to make the best assessment it can of the "after" value, based on the material before it, and taking into account all of the qualifications which must be made to that material. Assuming that it is a correct approach to derive the "after" value from the sum of the values of the three areas into which the lease would be subdivided to permit of each of the units being sold separately with its own title, it is plain that not all would be of the same value. The restrictions on development must result in the land values attributable to the two units constructed within the existing house having a substantially lower value than would be the case if the whole block could have been subdivided into the most advantageous configuration. It may mean that the third block would be larger than would otherwise-have been the case, but this is to some extent speculation since there was no evidence before the tribunal on how the existing parcel might be split up if there were no restrictions. Nevertheless, the need to retain existing trees and vegetation imposes some restriction, especially the requirement to retain the large tree in the middle of the block. If $50,000 was the appropriate value to be placed on the land component of each unit at a time when no restrictions on development were imposed - the original valuation - then each of the two blocks relating to the units to be provided within the existing house would seem to be of a lesser value. $40,000 would therefore seem to be an appropriate value for these blocks. I would adopt Mr Galvin's figure of $50,000 for the rear portion in the absence of any other evidence. This results in a total "after" value of $130,000 in place of the $150,000 reported by Mr Galvin, leading to a betterment charge of $10,000 instead of $20,000 which would have resulted from Mr Galvin's valuations.

An increase in the market value of the lease - the pre-condition for betterment

27 Betterment is not payable unless the approved variation of a lease would result in an increase in the market value of the lease - s 184 of the Land Act. The term "market value" is defined in s 159(4) of the Land Act as follows:

(4) A reference in this Part to the market value of a lease is a reference to the amount that could be expected to be paid for the lease on the open market if it were sold by a willing but not anxious seller to a willing but not anxious buyer.

28 Two points must be noted about this definition. The market value is not defined in terms of the unimproved value. The market value of the lease is the value of the lease with such improvements on the land and subject to the terms and conditions of the lease at the date at which it is to be valued. The second point to note is that the restriction in the definition of "before" value in reg 12 of the Land Regulations, that any possibility of variation of the lease during its current term is to be ignored, does not apply. The ordinary principle that the value is to be determined according to the highest and best use of the land is to be applied in determining whether the variation of the lease has resulted in an increase in the market value of the lease. The market value of the lease before variation must therefore take into account the possibility of variation, because the market will factor that possibility into the price which original the lease might yield on the open market.

29 Although betterment only becomes an issue if the approved lease variation does result in an increase in the market value, the T documents do not show that the decision maker took this into account in imposing a betterment charge. Nor does the statement of reasons supplied by the decision maker under s 37 of the Administrative Appeals Tribunal Act 1989 (ACT) documents refer to any material on which the decision maker based a conclusion that the lease variation did result in an increase in the market value of the lease. Nor was there any evidence specifically before the tribunal on this point.

30 The tribunal must, however, consider for itself whether the pre-condition for the imposition of a betterment charge has been fulfilled. In the present case, the tribunal has enough material before it to reach the conclusion that the variation of the lease in accordance with the decision of the Board would result in some increase in the market value of the lease. The original lease restricted the building development on the land to one building, with usual outbuildings. The varied lease will permit up to three separate residential units to be built on the land. The market would no doubt take account of the possibility that the original lease might be varied to a multi-unit lease. But it would also take account of the costs of obtaining such a variation, including the possibility of an appeal to the Board. The market value of the lease as varied would take into account that these costs had already been incurred, and would not have to be paid by the purchaser if the purchaser wished to develop the lease for more than one residential unit. The difference in market values might not be nearly so great as the difference in the "before" and "after" values determined in accordance with the Land Regulations, but there would be some difference.

31 The legal representative of the respondent before the tribunal submitted that the market value after variation must be higher because the market would assume, before variation, that betterment would have to be paid and, after variation, that betterment would already have been paid and would be factored into the price to be paid for the varied lease. The argument is ingenious, but is not in accordance with the terms of s 184 of the Land Act. Since s 184 requires that betterment is only payable where there is an increase in the market value the issue of betterment cannot be considered until it has been established that the market value of the varied lease would be greater than the market value of the original lease.

32 Although the tribunal has been prepared to assume in this case that there has been some increase in the market value for the purposes of s 184, there will be cases where such an assumption might not be possible without direct evidence. Furthermore, it may be expected that the tribunal will take the view in the future that statements provided under s 37 of the Act in betterment cases are inadequate unless the decision maker addresses the issue of increased market value and refers to the material on which any finding of increased market value is based.