Mac's Pty Limited v Parramatta City Council [2012] NSWLEC 1356

Land and Environment Court New South Wales

Medium Neutral Citation: Mac's Pty Limited v Parramatta City Council [2012] NSWLEC 1356 Hearing dates: 3 to 6 December 2012 Decision date: 21 December 2012 Jurisdiction: Class 3 Before: Moore SC and Cowell AC Decision: The market value of the property as at the date of acquisition for the purposes of s 56(1) of the Land Acquisition (Just Terms Compensation) is $6,060,000 (rounded up). Catchwords: Market value; highest and best use; adjoining owner's premium; "anxious purchaser" [as used in s 56(1) of the Land Acquisition (Just Terms Compensation) Act 1991 Legislation Cited: Land Acquisition (Just Terms Compensation) Act 1991 Cases Cited: Spencer v Commonwealth [1907] HCA 82; (1907) 5 CLR 418 Category: Principal judgment Parties: Mac's Pty Limited (applicant) Parramatta City Council (respondent) Representation: Mr I Hemmings Mr M Seymour (applicant) Mr N Hutley SC Mr C Ireland (respondent) Ms M Peatman Hunt & Hunt (applicant) Ms J Radford Maddocks Lawyers (respondent) File Number(s): 30765 of 2011

Judgment

Introduction 1In mid-2002, Parramatta City Council (the council) prepared a plan for what became known as the Civic Place Project. The Civic Place Project reflected the council's vision for a joint public/private redevelopment of the precinct to the east of Church Street and adjacent to Darcy Street and Parramatta station. 2In October 2002, the original version of the council's Civic Place proposal was placed on public exhibition with the final version, one incorporating minor changes from that originally proposed, being adopted and coming into effect from mid-2003. 3For the council to give effect to this long-term redevelopment vision, a variety of properties needed to be acquired by the council with many of them acquired by private negotiation. The present proceedings concern the compensation to be paid for a property, 160 Church Street, not able to be acquired by private negotiation but which was acquired by compulsory acquisition. 4Although an earlier attempt at compulsory acquisition of 160 Church Street was held by the High Court to be invalid, the relevant acquisition enabling legislation, the Land Acquisition (Just Terms Compensation) Act 1989 (the Act), was subsequently amended to permit a compulsory acquisition in the circumstances envisaged by the council. As a consequence, on 8 July 2011, the council compulsorily acquired 160 Church Street (the property).

The property 5160 Church Street is located on the corner of Church Street and Darcy Street in the Parramatta Central Business District. It is immediately adjacent, across Darcy Street, from Parramatta Railway Station (and its northern bus interchange) and the main western railway line. 6The frontage of the property is to the southern end of the Church Street mall. Westfield Parramatta is some 50 m or so to the southwest, under a railway overbridge. A major entrance to Westfield Parramatta faces toward the property and this entrance is accessed on foot from the property by a pedestrian crossing across Argyle Street. 7The property is currently used as a Hungry Jack's hamburger restaurant. Hungry Jack's have been in occupation of the property since 1995 and, at the date of the council's compulsory acquisition the property was subject to a lease to Hungry Jack's entered into in August 2010 (with a commencement date of 29 March 2010) with an expiry date of 28 March 2025. 8The property is of two floors with a total site area of 252.9 m². The premises have a first floor area and also have the benefit of a right of carriageway having an area of 24.1 m² at the rear of the premises on its Darcy Street frontage. The right of carriageway is accessed through a roller door from Darcy Street and is used primarily for garbage storage and grease trap waste storage. The right of carriageway cannot directly be accessed from the remainder the property of which it forms part - a property owned by the council and known as the Connection Arcade.

The concept of "ant tracks" 9During the course of the hearing and in some of the written evidence, the expression "ant tracks" was used to describe patterns of pedestrian movement in the Parramatta central business district, particularly (but not exclusively) in the vicinity of the property. 10In this context, the expression "ant tracks" means the predictable, expected high volume pedestrian movement between locations. Although we do not have extensive statistical evidence on any of these "ant tracks", we have one snapshot of such pedestrian movement in the vicinity of the property and we accept that broad assumptions are appropriate to be made concerning these pedestrian patterns in Parramatta.

The compensation claim 11As earlier noted, the council compulsorily acquired the premises on 8 July 2011. The Valuer General's determination of compensation, dated 3 August 2011, set the land value (for the purposes of s 55 of the Act) at $5.5 million. The applicant's claim for compensation is for an amount a little in excess of $14.2 million. The applicant's claim is based on a calculation using the capitalisation of net market rental income with appropriate adjustments and the application of what is described as an uplift factor of 25% as an adjoining owner adjustment.

The relevant elements of the statutory framework 12For the purposes of our determination, the applicant is entitled to compensation for the acquisition of the land pursuant to the s 55 of the Act - subject to the caveat in s 56(1)(a) discussed below. 13Compensation elements attributable to disturbance are dealt with by s 59 of the Act. At the commencement of the hearing, all disturbance elements, other than stamp duty recompense for purchasing replacement property [s 59(d)], were agreed. 14In the final analysis, for our matters requiring determination, it is accepted by the council that the quantum of stamp duty reasonably incurred as a head of reimbursement attributable to disturbance in s 59(d) will fall out, in an agreed fashion, as a consequence of the market value of the property as determined by us.

The market value of the land 15The market value of the property is subject to the specific statutory provisions in s 56 of the Act. For the purposes of these proceedings, the provisions of s 56(1) in its introductory terms and in s 56(1)(a) are critical to the valuation process we are required to carry out. The relevant provisions are in the following terms: 56 Market value 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

Basis for valuation 16The valuation methodology to be adopted to determine the market value was agreed by the expert valuers, Mr Ellis and Mr Dempsey for the applicant, and Mr Blackall for the council, to be by determining the capitalisation of the appropriate net market rental income and make such adjustments as are appropriate to derive the market value.

The claim for an uplift described as "an adjoining owner adjustment" 17As discussed in more detail later, the applicant claims, in addition to the market value of the property determined by the capitalisation of the net market rental income, an uplift of 25% representing what is said to be a necessary adjustment as an adjoining owner's premium for acquisition. This premium is said to derive as a result of: * what is claimed by the applicant to be at an uplift of approximately 22.5% demonstrated by the acquisition by the council of the Connection Arcade in 2003, an acquisition discussed in more detail later; or * a general principle to require an adjoining owner uplift demonstrated for the Parramatta Central Business District by two transactions that took place several blocks to the north in Church Street at about the time of the council's acquisition of the property.

The site inspection 18At the commencement of the hearing, we inspected the property and then undertook a walk along Church Street to the north of the property as far as the intersection with Phillip Street returning to inspect the exterior of the HSBC bank premises directly opposite the property on Church Street. We then proceeded to cross Argyle Street at the pedestrian crossing earlier noted in front of the access to Westfield Parramatta and walked further south along Church Street to where we could observe the most southern of the properties cited as comparable rental premises in the valuation evidence.

The effect on the market value of the Hungry Jack's lease 19The fundamental starting dispute between the parties is what role, if any, should be given to the Hungry Jack's lease operating as at the date of acquisition as a consequence of the terms of s 56(1)(a) of the Act. 20The position adopted by Mr Hemmings, for the applicant, is that the lease should be disregarded in its entirety. 21Mr Hutley SC, on behalf of the council, submitted that the appropriate exercise was not to disregard the lease in its entirety but was to enquire what might, relevantly, be any decrease in the value of the property caused by the proposal to carry out the public purpose for which the land was acquired. His fundamental proposition was that such a decrease could be calculated, precisely (and indeed had been appropriately quantified by the relevant valuation experts). Having done this, he said, the market value was mandated to be calculated based on the notionally unimpacted rental in the Hungry Jack's lease after appropriate adjustments had been made.

The joint expert agreement about the current use 22In the joint expert statement of Mr Ellis and Mr Blackall (Exhibit 5), they set out the following relevant areas of agreement: * Current market gross rental value of the ground floor of the property as at the date of acquisition, assuming the current use to be the highest and best use is $1000/m2 pa gross or $242,900 per annum; * Current market gross rental value of the first floor at the relevant date was $400/m2 or $94,920 per annum; * The gross market rental value of the property on the basis that the current use of the property was the highest and best use at the date of compulsory acquisition was $337,820 per annum.

The history of the earlier Hungry Jack's leases 23Evidence was given about the history of leasing arrangements between Hungry Jack's (or a franchisee - Gotocity Proprietary Limited ["Gotocity"] - of the company) and the applicant. Mr Steven McMahon, the New South Wales and ACT Development Manager for Hungry Jack's, gave this evidence. His evidence was given on behalf of the council. The applicant did not call any evidence concerning matters relating to the lease, generally, or any matter that might otherwise have assisted us with respect to our understanding of what impact, if any, might have arisen from the proposed public purpose on any of the aspects of the Hungry Jack's lease. 24Mr McMahon was responsible for negotiating the current lease between Hungry Jack's and the applicant and he also provided the factual evidence concerning earlier leases. The various earlier leases were attached as exhibits to his affidavit of 19 November 2012. It was Mr McMahon's evidence that: The site was first leased to Hungry Jack's on 16 October 1995 and operated by Gotocity Proprietary Limited, a franchisee to Hungry Jack's Proprietary Limited. The lease was for a term of five years, terminating on 15 October 2000, with three options to renew each for a period of five years. 25This 1995 lease [Exhibit 1 to Mr McMahon's affidavit] included a covenant that: The lessee will not use the demised premises or any part thereof otherwise than for the purpose of restaurant for dining in and takeaway for sale of hamburgers, carbonated drinks, ice cream, softserve and associated menu lines; 26This covenant was incorporated as one of the essential terms of the lease by cl 10 of the lease. 27The first option period for renewal was subject to the requirement that, relevantly for the purposes of our consideration, subject to the same terms and conditions as contained in the then existing lease (subject to nominated exceptions not relevant to our consideration) - cl 12 of the 1995 lease; rental adjustment during the first option period was subject to a review and adjustment process set out in cl 13 which included, amongst the assumption that for the relevant portions of the review and reassessment process: * The demised premises are available to let by a willing landlord to a willing tenant as a whole with vacant possession and subject to the provisions of this lease, having regard to the length of the lease and the period of time until the review - cl 13.2(d)(iii); * The covenants herein contained on the part of the lessee have been fully performed and observed - cl 13.2(d)(iv); and * Having regard to the rental values of comparable premises and all matters relevant for the rental review - cl 13.2(d)(v). 28Similar provisions were incorporated in the 1995 lease for the rental adjustment process during the second (cll 14 and 15) and third (cll 16 and 17) option periods. 29The first option to renew was exercised with a fresh lease dated 16 October 2000 with two options to renew for further periods of five years each. This lease was between the applicant and Gotocity rather than Hungry Jack's itself. This 2000 lease was Exhibit 2 to Mr McMahon's affidavit 30This 2000 lease contained the same covenant as to use, cl 5, and provisions concerning this lease's first option, the second option is similar to the original, at cll 14 and 15 and for the second option, the third option in the original lease, at cll 16 and 17. 31For reasons not relevant to these proceedings, in late 2004, the 2000 lease to Gotocity was transferred to Hungry Jack's. 32A new lease pursuant to the second option to renew contained in the 1995 lease was executed between Hungry Jack's and the applicant with a commencement date of 16 October 2005. This 2005 lease was Exhibit 4 to Mr McMahon's affidavit 33This 2005 lease contained the same covenants as the original lease at cl 5 and the same identification of that covenant dealing with the use of the premises as being an essential term of the lease at cl12. 34The provision of an option period, described as the second option period in this lease, is provided for in cll 16 and 17 in the same terms as those in the original 1995 lease. 35Mr McMahon gave evidence concerning consideration being given by Hungry Jack's: * to undertaking an upgrade of the fit out of the property; * the costs of doing so; and * Hungry Jack's desire to obtain a new lease on terms satisfactory to them to account for undertaking such an upgrade. 36His affidavit evidence concerning this is set out in full below: Plans to upgrade the restaurant fit-out 14 During the 2005 to 2010 lease period, Hungry Jacks decided that the fit-out of the store needed to be upgraded. In around April 2009 I was involved in discussions concerning the potential upgrade. The site had operated as a Hungry Jacks restaurant for almost 15 years and was tired and no longer reflected the fit-out design for Hungry Jacks' restaurants. The new fit-out would be more modern and would reflect the fit-outs that Hungry Jacks was rolling out across many of its other stores such as Pitt Street, Hoyts (505 George Street) and 640 George Street, Sydney, stores. 15 The proposed upgrade required substantial works. Initial estimates of the costs were in the order of $500,000 to $750,000. As there was only one option of 5 years commencing in October 2010 left on our lease there was not sufficient time to recover the costs of the proposed upgrade. Hungry Jacks decided that we would seek to negotiate a longer term lease of the site in order to do the fit-out works. Knowledge of the initial compulsory acquisition proposal 16 I was aware that Council issued proposed acquisition notices for the site in 2007. 17 I was also aware that Macs Pty Ltd challenged the acquisition and I followed the progress of this matter as it went to the Land and Environment Court, the NSW Court of Appeal and the High Court. 18 On or about 2 April 2009 I learned that Macs Pty Ltd had succeeded in its High Court appeal. I understood that the High Court had found that Parramatta City Council did not have the power to acquire the site. Immediately after the High Court decision I thought the issue was probably over. At that time, I believed that the compulsory acquisition of the site would not proceed. 37Mr McMahon was cross-examined on these matters and his oral evidence was entirely consistent with the above extract of his affidavit in this regard. 38Mr McMahon's affidavit also dealt with the question of whether or not the third option, for the period 2010 to 2015 would have been exercised if a fresh, long-term lease had not been entered into in 2010. The relevant portion of his affidavit said: Exercise of the 2010 - 2015 option period 37 In 2010 the restaurant was a profitable restaurant for Hungry Jacks which benefited from an "ant trail" of pedestrians entering and existing Parramatta Station, and the Westfield Shopping Centre. The first floor of the site also operates as the NSW/ACT operational, administrative and training headquarters. 38 At the time of negotiating the current lease, the company objective was to secure a lease long enough to give us time to recoup any upgrade monies we spent. A 15 year lease of the site achieved this. 39 If, for any reason, Macs Pty Ltd had not agreed to the new 15 year lease, we would have arranged for Hungry Jacks to exercise its remaining option for a 5 year term commencing on 16 October 2010 and ending on 16 October 2015. I understood that the option needed to be exercised between 16 April 2010 and 16 July 2010. 40 There were no plans to relocate the restaurant to another location. In the 10 years I have worked for Hungry Jacks I have never seen Hungry Jacks fail to exercise an option on a profitable restaurant. I have been involved in exercising approximately 10+ options on behalf of Hungry Jacks. 41 The 5 year option would not have allowed Hungry Jacks to undertake the proposed major fit out works. However, we could have arranged minor upgrades of the Kitchen and to some extent the building to assist the restaurant to continue to trade profitably during the 5 year term. I would then have sought to negotiate with Macs Pty Ltd for a new lease at the end of the 5 year term 39Mr McMahon was also cross-examined on these matters and his oral evidence was entirely consistent with the above extract of his affidavit in this regard. The 2010 Hungry Jack's lease Commencement of negotiations for the current 2010 - 2025 lease 19 In April 2009 I asked Khoury and Partners if Macs Pty Ltd (the Lessor) would bring the negotiations forward on the renewal of our lease. 20 In May 2009 the Lessor said he would consider an early renewal and advise us in the near future. 21 On 10 June 2009 we put forward a proposal for a new lease deal for 10 years and 2x5 year options and requested a capital contribution of $400,000 for the fit-out works. In my experience, Hungry Jacks often requests a capital contribution when negotiating leases. A copy of my email setting out this proposal is attached at Annexure 'A'. Amendments to the Just Terms Act 22 On 15 June 2009 I received an email from an industry contact, Gino Gigliotti, who forwarded an email from Ray Fazzolari regarding amendments to the Just Terms Act. From this email I understood that the Act may be amended in such a way as to allow Council to compulsorily acquire the site. The email attached a briefing paper prepared by Maureen Peatman of Hunt and Hunt for the NSW Parliament in relation to the amendments. A copy of this email is attached at Annexure 'B'. 23 Hungry Jacks decided to proceed with negotiations for the renewal of the lease for the longer term and to monitor the acquisition process, but to hold off on the proposed upgrade to the fit-out. There was no certainty that the acquisition would proceed and I did not know whether Council still proposed to acquire the site. 24 Hungry Jacks were made aware by its valuer that it would be compensated as part of the compulsory acquisition process should it proceed. The valuer advised that any capital upgrade we carried out would not be part of the acquisition compensation as the compensation would be based on a multiple of EBITDA. Further negotiations for the current 2010-2025 lease 25 On 24 June 2009 Anthony Khoury sent me by email a new lease proposal for a 10 year initial term and 1x5 year option, including a fit-out contribution of $400,000. The proposal provided for an initial annual rental of $310,000, plus an annual payment of $55,115.52 to account for the capital contribution, giving a total rental of $365,115.52. This email forms part of Annexure A. 26 On 25 June 2009 I sent an email to Anthony Khoury with an Excel attachment showing what we would accept as additional rental to compensate the Lessor for the fit-out contribution. A copy of my email is attached at Annexure 'C'. 27 In February 2010 the Lessor advised that its offer to lease was to change from a 10 year initial term with a 1 x 5 year option and a $400,000 contribution to a 15 year term with no option and no contribution. The Lessor proposed an annual rental of $315,000. 28 I am aware that Hungry Jacks agreed to the new terms, but requested an amendment of the net rental from $315,000 to $310,000. This reduction was requested on the basis that both parties had previously agreed to an initial annual rental of $310,000, absent an up-front contribution. The Lessor agreed to the change. 29 I accepted the amended offer of a 15 year lease at an initial net rental of $310K on behalf of Hungry Jacks. A copy of my email of 2 March 2010 agreeing to the terms of the lease is at Annexure 'D'. 30 The Lessor's Solicitor, Alfred J Morgan & Son, prepared the lease for a term of 15 years. 31 I understand that the lease was signed at the end of June 2010 by John Victor Butler of Hungry Jacks. A copy of the registered lease is exhibited at Exhibit 5. 32 Of the discussions I had with Michael Winston Smith or Mr Khoury during the course of the lease negotiations about the possibility that the compulsory acquisition might proceed I was always left with the understanding that the Lessor was going to do everything in its power to stop the acquisition of the site. 33 In my opinion, the negotiations between Hungry Jacks and the Lessor were amicable. 34 I am aware that it is Hungry Jacks' policy not to accept a demolition clause in a lease. I do not recall any discussion concerning a demolition clause with Mr Khoury. I also do not recall that a demolition clause was proposed. Where a demolition clause is proposed I always request its removal on the basis of Hungry Jacks' standard policy. 35 Hungry Jacks agreed to the annual rental of $310,000 for the site as it was market value. No valuations of the property were undertaken by either party. 36 The annual rental represented an increase of $15,000 above the annual rental of =$295,000 paid immediately prior to the new lease under the previous lease (AC165281). 40The 2010 lease terms generally replicate the relevant terms of the earlier leases but are not presented in the same drafting layout (the covenant as to use as a hamburger restaurant, for example, is contained in item 17 of the reference schedule rather than in the main body of the lease as in the earlier iterations). Nothing of substance turns on this in our opinion.

An allowance for structural repairs to the first floor? 41Some time about mid-2012, approximately 12 months after the council acquired the property, defects in the structure supporting the floor of the first floor office space were discovered. We have been provided with a document prepared by Mammoth Projects (Exhibit 1 tab 7) containing an interim condition and costing report concerning these defects. 42In his valuation calculations attached to the Supplementary Joint Expert Report of Mr Dempsey and Mr Blackall (Exhibit 7), Mr Blackall proposes that a specific allowance should be made for these structural repairs. The allowance that he proposes includes three weeks loss of rental for the floor, consultants' fees and the estimated cost of the works in the Mammoth Projects report. He totals this to $36,476. 43Mr Dempsey did not agree with such an allowance being made as, in his opinion, the time between the acquisition and the discovery of the defects meant that, although the defect may have been present at the time of acquisition, the council was not aware of and had not been influenced in its decision to acquire as a consequence of this defect. It was also Mr Dempsey's oral evidence that Mr Blackall had made an appropriate provisions for structural repairs and maintenance of $3000 per annum which would establish a notional sinking fund that would accommodate the necessity for repairs such as those that are discussed in the Mammoth Projects' report. 44We are satisfied that Mr Dempsey's position on this point is to be preferred. The purpose for allowing provision for a sinking fund for structural repairs and maintenance is, over time, to make provision for precisely the sorts of defects discussed in the Mammoth Projects' report. Indeed, to permit an allowance for such a sinking fund as well as to permit a specific project allowance for these later discovered structural defects would, in our opinion, constitute a double dipping - something impermissible in such a process.

Conclusion concerning the Hungry Jack's 2010 lease market value 45We are satisfied that the market value for the purposes of s 56(1) of the Act, as a matter of correct statutory interpretation, can only be the sum derived from the net capitalisation of the rent for the property to be derived from the 2010 Hungry Jack's lease that was on foot at the time of acquisition. We are unpersuaded that there can be any proper statutory foundation to disregard the Hungry Jack's 2010 lease in its entirety. 46The only rental adjustment required by s 56(1)(a) to be undertaken is that which arises as a consequence of the minor decrease in this rental that arose as a consequence of the proposal to carry out a public purpose (as agreed by the valuers Mr Blackall and Mr Ellis). 47As a consequence, we set out below a table showing the calculation of the market value on this basis: 160 Church St. Parramatta

Area Rate Rent Ground floor 242.9 @ 1,000.00 242,900 Level 1 237.3 @ 400.00 94,920 Total 480.2 Gross Market Income 337,820

Less Outgoings Statuory + Insur 64,222 Management 7,000 Repair & M 3,000 74,222 Net Rent 263,598

Capitalisation Rate 4.35%

Market Value 6,059,724

Allowance for repairs -

Value allowing for repairs 6,059,724

Adjoining Owner Uplift 0% -

Total 6,059,724

The broader restaurant use valuation basis advanced by the applicant 48As earlier noted, the applicant's primary contention was that the 2010 lease (and other, earlier leases) to Hungry Jack's should be disregarded in their entirety. In lieu, the applicant proposed that the highest and best use of the property was as a bank/financial services premises with a notional rent to be based on that of the HSBC bank premises directly opposite to the west and fronting Church Street, 49As an alternative valuation methodology if this was not accepted, it was submitted that the provisions of cl 9(6) of the current Hungry Jack's lease required the valuation to be based not on the rent actually arising under that lease but on the basis of a broader notional restaurant use derived from three other food premises in Parramatta. 50The rates that it was said that should be considered to derive a higher notional value for the use of the ground floor of the property for this broader, non-hamburger/fast food restaurant use are: * Mad Mex - $1,740 per m2 gross * Cocu Cubano - $1,193 per m2 gross * Grill'd - $882per m2 gross 51Mr Ellis's evidence concerning similar to restaurant style uses is set out in on pages 22, 23 and 24 and his analysis is set out on page 28 of his statement of evidence (Court Book volume 3 tab 22). For each of the three restaurants for which he has information, we have been provided with the address, the name of the tenant, the area of the restaurant portion of the premises on the ground floor and the gross rental rate per square metre for each premises. A short notation of 10 words or so is also provided for each. Each of these restaurant uses is said to be the Parramatta outlet of the relevant national restaurant chain. 52No additional information concerning any of these premises that would assist us with drawing any relevant comparable conclusion is obtained from the joint report of Mr Ellis and Mr Blackall (Exhibit 5). We have no evidence with respect to any of these three food outlets as to what is the nature of to be dining market segment targeted; whether or not to any one or more of these premises are intended to be a fast food outlets or are for a more leisurely dining experience; and whether or not any of them takes bookings and might be regarded as a restaurant destination rather than more impulse purchase driven consumption; no trading hours and patterns; and the extent to which relevant "ant tracks" might contribute to or be essential for any aspect of the economic viability of any of these premises. 53We have considered whether we, as statutory valuers in these proceedings for the purposes of the Act, could have any satisfactorily credible basis for adjusting the rentals for the three restaurants upon which reliance is placed by the applicant to justify some higher restaurant use rental rates for the property. Absent the range of information that would be required as earlier discussed, purporting to undertake such an adjustment process would be purely speculative and, we consider, entirely without any proper evidentiary foundation. 54As a consequence, even if it were appropriate to consider some possibility of a broader restaurant use for the property than that of the style of restaurant operated by Hungry Jack's (and mandated to be the restaurant style operated on the property as a consequence of the earlier series of terms in successive Hungry Jack's leases as set out above), we do not consider that we have any basis upon which we could found any higher restaurant use rental than that which has earlier been described as the agreed valuation to apply to a restaurant of the current style but with a generic operator rather than if Hungry Jack's were to be in occupation. 55We have, therefore, concluded that, even if we were wrong in our view that the mandated statutory basis for assessing the market value was to be derived, purely and simply, from the proper consideration of the 2010 Hungry Jack's lease that was on foot at the date of acquisition, we have no proper evidentiary basis upon which we could establish any higher restaurant rental.

The "highest and best use" for banking/financial services premises 56The proposition that is advanced on behalf of the applicant that would lead to consideration of a rental value, based on the "highest and best use" of the premises being for banking/financial services use on a similar basis to that of the HSBC Bank branch immediately opposite, is that the Hungry Jack's lease should be disregarded in its entirety. For the reasons we have set out earlier in this decision, such a proposition is, in our view, untenable. 57However, against the eventuality that we might have committed an error in so concluding, we turn to consider what might be the appropriate rental value for the property if a banking/financial services use were to be the appropriate foundation for such assessment. 58Mr Blackall provided evidence in a schedule attached to Exhibit 5 that summarised information concerning 10 banking/financial services premises within the Parramatta central business district along Church Street and to the north and south of the railway overbridge. 59The applicant relies upon the rental paid by the HSBC Bank branch for the premises directly opposite of $1575 per square metre per annum as the relevant platform from which to derive a "highest and best use" banking/financial services premises notional rent for the ground floor of the property. This is said to arise because of the similar "ant track" pattern for both the property and the HSBC Bank branch premises opposite - with the property having a slightly more advantageous position as a consequence of the pedestrian flow from the railway station and the bus interchange moving westward along Darcy Street before turning across the face of the property into the Church Street mall. 60It was Mr Blackall's evidence that the HSBC Bank branch rental was so out of kilter with other banking/financial service premises that it should be disregarded in its entirety. This, he said, was necessary because of the very high percentage variation between the ground floor rental rate for the HSBC Bank branch premises and the next closest ground floor rental rate for similar banking/financial service premises. 61We do not accept the proposition that, if there were to be any such process undertaken for deriving a rental for the property, the HSBC Bank branch lease should be disregarded in its entirety. The appropriate approach, in our opinion, is to consider the circumstances of the lease (to the extent that we have evidence relating to it) and to make appropriate allowance for any special circumstances that might apply. Specifically, we reject his opinion that the large variation alone is a basis to reject this transaction. Similar variations of scale arise between other rentals for banking/financial service premises that Mr Blackall does rely on and he offered no explanation as to why the HSBC Bank branch lease, on a statistical basis, should be disregarded if the others were to be included. 62Mr Ellis has a commercial relationship with the HSBC Bank that has permitted him to obtain some information from this Bank - this was provided as part of his earlier cited expert report. This is not noted in any sense adverse to Mr Ellis but merely as a recording of the factual basis upon which the information was obtained. 63We accept, on the basis of this information that, had the property been available for rental at the time the HSBC Bank entered into a lease for the vacant premises opposite the property, there would have been a significant degree of interest in leasing the property in the alternative to that which was actually leased. However, although we accept that the property might have some features that were a little more desirable than that of the property actually leased for the HSBC Bank branch opposite, the property was not, as a matter of fact, available so this opinion, in our view, is significantly speculative and of no assistance. 64Indeed, it was Mr Ellis's oral evidence that, at the time the HSBC Bank was seeking a high exposure property that was near but not in Westfield Parramatta, the premises that the HSBC Bank actually leased, opposite the property, was the only one available at that time with the characteristics that were regarded by the HSBC Bank branch as essential/desirable for its branch location, including having high volume "ant tracks" passing it. 65We are satisfied that the fact that the premises actually leased by the HSBC Bank was the only one available that met the characteristics that this Bank required means that the Bank was prepared to pay a significant scarcity premium to obtain those premises with a tenure that was satisfactory to it. 66Of the various other banking/financial premises that were inspected, from the outside, during the course of the site inspection, we are satisfied that those occupied by the Bendigo Bank, at 198 Church Street, on the north-eastern corner of Church and Macquarie Streets, are the most appropriately comparable to any possible banking/financial services use that might be envisaged for the property if it were permissible to do so in this statutory valuation process, a proposition we have already rejected. 67In the valuation evidence that we have concerning the Bendigo Bank premises, there is no derivation of what adjustments might be required in a conventional valuation analysis to render the Bendigo Bank premises comparable to the property (if the property were to be used for banking/financial services). As a consequence, although we consider this step to be unnecessary in light of our findings concerning the Hungry Jack's lease, we have undertaken our own analysis to provide an appropriate rental from which to value the property on this comparable basis (should this be required). 68Although the major "High Street banking" focus is in the section of Church Street to the north of Macquarie Street corner (where the Bendigo Bank is located), we have no information about retail or commercial banking patterns in Parramatta that would permit us to determine whether any adjustment should be made for banking desirability (whether in favour of the property or in favour of the Bendigo Bank site). 69Similarly, we have no knowledge of what difference, if any, might arise from the fact that the Bendigo Bank is in a franchise-based corporate structure compared to major banks and their directly owned and operated branches, Therefore, we are unable to consider whether any adjustment should be made as a consequence of this and, if needing to be made, how it should fall. 70Both the property and the Bendigo Bank premises are corner premises and thus share (what the evidence discloses) is this desirable feature. To the extent that there are differences between the two locations, these have been dealt with in the specific adjustment factors that we have identified below. 71As a result, we are required to calculate a rental rate for the ground floor of the property on the basis of adjustments to that of the Bendigo Bank premises., This results in the following valuation table making the necessary adjustments to the overall derived rental for the property: Adjustment factor %

Adjustments in favour of the property

The property's relative proximity to Westfield Parramatta 2.5 Likely significantly higher pedestrian volumes along the "ant tracks" past the property compared to the splitting and dispersal of those "ant tracks" at the Cathedral Square at Macquarie Street or along the opposite side of Church Street to the Bendigo Bank 5.0 The property has a larger floor area at each of the ground and first floors -2.5 The property benefits from the right of carriageway at its rear. The right of carriageway is 9.5% of the land area. As the right of carriageway has a restricted use, we have applied 75%of the unrestricted value 7.14 Accessibility of the property as a consequence of its proximity to the railway station and bus interchange 1.0 Although both premises have significant opportunities for signage on their southern, long facades, signage opportunities for the property are superior (as any signage will be able to be viewed at least to a limited extent, from the nearby entrance to Westfield Parramatta; the property's southern facades signage will also be able to be viewed from some passing trains and will also be readily visible from the commercial elements of Church Street to the south of Westfield Parramatta) 2.5

Resulting total adjustment in favour of the property 15.64%

Adopted rate for the ground floor for the property $1,150 per m2 pa

72The first floor of the Bendigo Bank premises is considered somewhat superior to that of the property due to the Bendigo Bank's superior outlook and absence of noise impacts from passing trains. However, as both valuers agreed on a rate of $400 per m2 pa for the first floor areas of both premises, we have adopted that figure. 73Applying the above position to the calculation matrix earlier set produces: 160 Church St. Parramatta

Area Rate Rent Ground floor 242.9 @ 1,150.00 279,335 Level 1 237.3 @ 400.00 94,920 Total 480.2 Gross Market Income 374,255

Less Outgoings Statuory + Insur 64,222 Management 7,000 Repair & M 3,000 74,222 Net Rent 300,033

Capitalisation Rate 4.35%

Market Value 6,897,310

Allowance for repairs -

Value allowing for repairs 6,897,310

Adjoining Owner Uplift 0% -

Total 6,897,310

74As a consequence, the valuation for the property for the purposes of s 56(1) of the Act on the basis of the highest and best use for the property as banking/financial services premises is $6,900,000. 75Although this does not equate to parity with the rental for the HSBC bank premises opposite, for the reasons earlier set out we consider that the process for deriving a value by adjustment to the Bendigo Bank premises provides a more accurate methodology. The fact that, on the basis of this use, there would be a premium albeit not as high a premium as for the HSBC bank premises, does provide validation for portion of the high rent paid by the HSBC bank. The scarcity factor of supply cited by Mr Ellis may well account for the balance (although it is not necessary for us to draw this conclusion).

The concept of an adjoining owner's uplift 76The proposition advanced on behalf the applicant is that there can be circumstances in which it is appropriate to determine a market value that requires an increase as a consequence of an additional sum or premium that would be paid by the owner of a property that adjoined the property being considered. 77Whilst Mr Blackall agreed that there might be circumstances where such a premium could be appropriate, he did not consider that those circumstances arose with respect to the present acquisition. Mr Dempsey, on the other hand, agreed that there were circumstances when an adjoining owner's uplift might be appropriate but was also of the opinion that the necessary circumstances giving rise to such a premium existed in this instance. He drew this conclusion from his analysis of the council's 2003 acquisition of the Connection Arcade and/or an examination of two transactions that happened in a generally contemporaneous timeframe to the acquisition by the council of the property that is the subject of these proceedings. We later discuss these transactions as the "chocolate shop" transactions. 78The premium that is said to be evidenced by the Connection Arcade transaction is 22.5% whilst that said to be evidenced by the chocolate shop transactions in Church Street to the north of the property is said to be of the order of 10%. A more general "rule of thumb" of 10% was also proposed as a minimum rate for an adjoining owner's premium.

Is there a statutory basis here for adding such a premium? 79We accept that there are likely to be circumstances where the owner of a property would be prepared to pay a premium in order to acquire an adjoining property for reasons, for example, such as the increase in the development potential that would result from a consolidation of the two properties or to provide access to what might otherwise be a landlocked allotment. 80In this instance, the first matter that we need to determine is whether such a premium has a place requiring its incorporation in the market value of that adjoining property when such market value is established in the statutory fashion set out in s 56(1) of the Act. 81For the present proceedings, it is convenient to undertake this statutory analysis in the context of the council's acquisition of the Connection Arcade, a private treaty purchase, and the council's subsequent compulsory acquisition of the property. These two transactions are illustrative of the two alternative bases upon which the applicant asks us to consider such an uplift being appropriate (with only one of these arising in the context of the chocolate shop transactions, to the extent that we are able to understand them, further to the north in Church Street). 82Mr Hemmings submitted to us that the evidence established that the council had acquired the Connection Arcade for two separate and independently supportable reasons. The first was that the Connection Arcade was acquired in anticipation of its incorporation in the proposed Civic Place redevelopment scheme. The second, said to be an independent reason, was the economic viability of the Connection Arcade as a reasonably prudent commercial investment by the council (whether or not the Civic Place project were to proceed after its purchase). 83We consider it appropriate to test each of these propositions against s 56 of the Act on the assumption that such dual and separate natures of the transaction are correct. Given our conclusions concerning each of these suggested bases for the transaction, it is unnecessary for us to determine whether or not the duality of purpose approach proposed on behalf of the applicant is the correct one. 84We first consider the circumstances where the council might wish to acquire the property having regard to the proposed future public purpose of the Civic Place project. 85We are satisfied, on the basis of the evidence concerning the preparation and finalisation of the draft proposal that was displayed toward the end of 2002 and the council processes that followed (leading to the finalisation of the proposal in mid-2003), that at least a motivating factor in the council's acquisition of the Connection Arcade was the proposed public purpose. 86This is evidenced, particularly, we are satisfied, by the fact that the offer to purchase was, in its initial form on 5 March 2003 made to representatives of the then owner of the arcade by the leader of the council's Civic Place project development team. We are further fortified in this conclusion by the fact that the valuation work undertaken by Mr Carrapetta relating to validation of some of the information underpinning this was together with the additional valuation work, of a broader nature, undertaken by Michael Collins & Associates was provided to the Civic Place development project team within the council rather than through more mainstream financial or accounting assessment structures of the council. 87As a consequence, we are satisfied that any aspect of an adjoining owner's uplift that might be derived from this reason for acquisition, taking the applicant's propositions uncritically as we have earlier indicated, must necessarily be set aside as a consequence of s 56(1)(a) of the Act. 88With respect to the second proposition, namely that a separate, independent reason for acquisition of the Connection Arcade was its potential investment value and that this resulted in an adjoining owner premium being paid because of council ownership of other adjacent property and, as a consequence, such premium should be translated to the market value for the compulsory acquisition of the property, we have concluded that this fails a broader test that arises from the introductory element to s 56(1) of the Act. 89We have concluded that the very long line of authority that has followed from the decision of the High Court in Spencer v Commonwealth [1907] HCA 82; (1907) 5 CLR 418 means that when a premium is paid for some special commercial reason applicable only because the purchaser is the owner of an adjoining property, such purchaser falls outside the concept of a willing but not anxious purchaser. We are of the view that a purchase for anything more than that which would be the ordinary market price that any willing but not anxious purchaser would agree to may demonstrate some degree of anxiety on behalf of the purchaser paying the premium above a generally determined market price under ordinary circumstances. We are of the view that the higher the premium being offered by the adjoining owner, the greater the potential degree of anxiety evidence by that premium. 90In this instance, where the adjoining owners premium, on the applicant's case, is 22.5%, we are satisfied as a matter of fact that, setting aside any desire to acquire as a consequence of the proposed public purpose, the underlying (and separate, on the applicant's case), commercial imperative can only be regarded as demonstrating a sufficient degree of anxiety so as to warrant disregarding the Connection Arcade transaction as being infected by anxiety and thus outside the scope of consideration for any determination of market value pursuant to s 56(1) of the Act.

The facts concerning the Connection Arcade transaction 91The council committed to its purchase of the Connection Arcade using a put and call contract that was executed by it on 2 July 2003. The threads of the council process from initial offer to contract execution are set out in the table below to provide a context to the claims for an adjoining owner's premium for the present compulsory acquisition of the property. The table interweaves the matters said by the applicant from the interaction between a potential private purchaser of the arcade (using real estate agents Khoury & partners as intermediaries) and the then owner of the arcade to establish an adjoining owner's premium arising from the Connection Arcade transaction. The relevant timeline from February to July 2003 is set out in the table below: Date Event

13 February Khoury & Partners fax to Mr Bayni (for the owner of the Connection Arcade) an offer at $17.5M from an undisclosed purchaser and seeks an "Open Selling Agency Agreement from the owner 13 February Mr Bayni replies requiring identification of potential purchaser 21 February Letter from Khoury & Partners confirming understood fee rates and seeking "Open Agreement" 4 March Khoury & Partners fax to Quantum (potential purchaser) setting out that Khoury & Partners understands that owner's representative has accepted "in principle" an offer at $18.25M 5 March Khoury & Partners advise Quantum vendor wants to hold off further negotiations Council Civic Place project group meets (later in afternoon) and discusses value range from Michael Collins & Associates of $20M to $22M 6 March Mr Carrapetta was advised council had made an offer to purchase the arcade "last night" and that "The offer was at the top of the range". Draft Michael Collins & Associates advice letter circulated for meeting participants to consider Khoury & Partners fax to Quantum outlining proposed sale price of $18.5M 10 March Khoury & Partners fax to Mr Bayni seeking urgent instructions in response to offer from Quantum Khoury & Partners fax to Quantum indicating no agreement on selling price on Quantum offer 11 March Michael Collins & Associates advice letter finalised with minor changes and sent to council's General Manager. It attached detailed valuation calculations showing a valuation range of $19.4M to 21.9M. 12 March Khoury & Partners fax to Quantum advising that minimum vendor would accept is $18.5M 13 March Mr Khoury meets vendor 14 March Khoury & Partners fax to Quantum seeking written confirmation of offer of $18.4M 25 March Letter from Quantum to vendor offering $18.4M 27 March Letter from council's General Manager to vendor offering $22.5M 2 April Khoury & Partners fax to vendor seeking response to Quantum offer and seeking urgent reply Khoury & Partners fax to vendor's representative seeking response to earlier fax to vendor 9 April Khoury & Partners fax to vendor offering to assist with future sale if the opportunity arose 24 April Michael Collins & Associates further advice letter that concludes, inter alia, that "we are of the view that the purchase of the property by Council for the price of $22,500,000 is commercially reasonable having regard to the matters discussed in this letter of advice." 9 May Michael Collins & Associates third advice letter, after completing due diligence. This letter includes the following paragraph: The agreed purchase price of $22,500,000 reflects the upper limit of our assessed market value range. In this regard we reiterate the advice in our letter of 11 March 2003. However, we consider that the acquisition of the property will greatly assist with Council's ability to deliver the Civic Place Master Plan including delivering on its financial objectives as a substantial Civic Place landowner. We consider that the purchase price at the upper end of our assessed range is justified when regard is had to the strategic importance of the property to the delivery of the Council's objectives, as a significant Civic Place landowner, arising from the Civic Place Master Plan project. 2 July Council executes contract for purchase of the Connection Arcade for $22.5M

92In light of that which is set out in the table above, we make the following findings of fact: * The owner of the Connection Arcade was aware, from 5 March 2003, that the council will was prepared to purchase the arcade at a purchase price of about $22.5 million; * There were commercial contingency benefits to the owner of the Connection Arcade if that owner was: able, truthfully, to indicate to the council that there was a second party interested in purchasing the arcade; and retaining the interest of that second party as a fallback option should a sale to the council not proceed; * Although there were several, modestly increasing, offers made by the second prospective purchaser to the owner of the arcade, at no stage did the owner of the arcade purport to accept any of those offers or to indicate a concluded intention to be prepared to accept any of those offers; * Valuation advice given to the council about the appropriateness of a $22.5 million council purchase price was that this was modestly above the upper end of the valuation range initially provided but, nonetheless, represented a commercially justifiable purchase price under all circumstances. 93It necessarily follows from the timeline and from these findings of fact that, contrary to the propositions advanced on behalf of the applicant, the council's purchase of the Connection Arcade did not involve the payment of an adjoining owner's premium and was a purchase which was, on the council's own professional valuation advice, one at a commercially responsible valuation. 94Even if, for some reason that we are unable to ascertain from the facts relating to the period discussed in the timeline, some adjoining owner's premium should be imputed as a matter of general principle rather than on the specifics of this evidentiary trail, the mere fact of an unresponded to offer, an offer clearly being pressed despite the 2 April implication of disinterest on behalf of the owner of the arcade (demonstrated by the Khoury company's facsimile correspondence of that day), means that there is no rational evidentiary starting point, in our view, for calculating any adjoining owner's premium had there been (or if there remains as a consequence of some error in our reasoning), any rational starting point for determining the quantum of such a premium. 95It therefore follows, if we are wrong in our initial conclusion that there is no evidentiary basis whatsoever for using the Connection Arcade transaction as a basis for establishing an adjoining owners premium, there is no evidentiary basis arising from that transaction that would permit calculation of what might be such a premium.

The chocolate shop transactions 96We now turn to consider the purchases of 287 and 289 Church Street. Interests associated with the proprietors of the Crniti restaurant operating at 289 and 291 Church Street contracted to purchase 289 Church Street (of which they were the lessee) in August 2009. Those interests subsequently purchased 287 Church Street, currently operating as a chocolate shop, at a price that is said to incorporate an adjoining owners premium when compared to the price paid for 289 Church Street. The contract for the purchase of the chocolate shop premises was subject to an extended, deferred settlement period and was, subsequently, subject to further deferrals of settlement. Mr Dempsey conceded, in his oral evidence, that it was not appropriate to pay any heed to the subsequent further settlement deferrals as they were not in contemplation at the time of the entry into the initial contract to purchase. He agreed that it was appropriate to have regard to the original extended, deferred settlement period provided for in that contract. 97Taken as purely an analysis of raw figures, these two transactions do provide some comfort for the proposition that there might have been an adjoining owner's premium of up to some 10% paid in the chocolate shop purchase transaction. However, to adopt such a proposition as a concluded outcome would, we are satisfied, be a step too far. We have reached this conclusion because we have simply no evidence concerning the negotiations for this transaction and, in particular, the reasons for and value assignable to the extended deferred settlement period in this contract. Concluding that there had been an adjoining owners premium paid, let alone concluding that such a premium was of the order of 10%, does not have any sufficient evidentiary foundation.

Conclusion concerning the adjoining owners premium claim 98For the reasons we have set out concerning the Connection Arcade purchase by the council and the chocolate shop purchase by its adjoining owner, we are unable to conclude that there is any basis upon which any upward adjustment should be made to the market value earlier derived on the basis of a net capitalisation of rents (with appropriate adjustments).

Overall conclusion 99The overall result of our consideration of all matters pressed by the parties is that the market value of the property as at the date of acquisition for the purposes of s 56(1) of the Act is $6,060,000 (rounded up).

Direction to finalise proceedings 100The parties are to file, by the close of business on 31 December 2012, Short Minutes of Order to give effect to this decision. Tim Moore Senior Commissioner Russell Cowell Acting Commissioner of the Court DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 21 December 2012