Valuer-General Victoria Practice Note – October 2011
The Jam Factory decision
The meaning of 'unencumbered by a lease' under the Valuation of Land Act 1960
Challenger Property Asset Management Pty Ltd & Anor v Stonnington City Council &
Valuer General Victoria [2011] VSC 184 (the Jam Factory Decision)
Purpose
This practice note is designed to inform valuers undertaking valuations for rating and
valuation authorities in accordance with the Valuation of Land Act 1960 of the
Supreme Court decision of Challenger Property Asset Management Pty Ltd and
Challenger Listed Investments Pty Ltd v Stonnington City Council and ValuerGeneral Victoria [2011] VSC 184 (5 May 2011). The practice note is intended to be
a guide only and does not constitute legal advice.
Nature of the application
Challenger Property Asset Management Pty Ltd and Challenger Listed Investment
Ltd (Challenger) were the registered proprietors of 500 Chapel Street, South Yarra
generally known as the Jam Factory (subject property). The subject property was
situated in a Business 1 Zone and comprised a two-level retail and entertainment
complex and car park on a land area of approximately 19,200m2.
Challenger objected to the assessments of Site Value and Capital Improved Value
made by Stonnington City Council (Stonnington). Stonnington returned a Site Value
(SV) as at 1 January 2008 of $48,176,000 and Capital Improved Value (CIV) of
$103,855,000.
In December 2008 Stonnington disallowed the objection. Challenger appealed to the
Victorian Civil and Administrative Tribunal (VCAT). At VCAT, Valuer-General Victoria
(VGV) successfully applied to be joined as a party to the proceeding. Subsequently,
Challenger applied to have the proceeding heard by the Supreme Court of Victoria on
the basis that it raised a question of unusual difficulty or of general importance.
Summary
The Supreme Court
decision in
Challenger Property
Asset Management
Pty Ltd & Anor v
Stonnington City
Council & Valuer
General Victoria
[2011] VSC 184
provides a helpful
discussion of the
key principles that
apply in valuation
appeals. The Court
also rejected the
idea that a vacant to
let deduction should
be made when
assessing the
capital improved
value of land under
the Valuation of
Land Act 1960.
The position of the parties at trial was as follows:
1. Challenger contended a SV of $38,544,000 and CIV of $84,050,000 and relied upon the valuation
evidence of Mr Jackson.
2. Stonnington contended a SV of $58,000,000 and CIV of $103,855,000 and relied upon the valuation
evidence of Mr Fitzgerald.
3. VGV contended a SV of $53,500,000 and CIV of $104,000,000, and relied upon the valuation
evidence of Mr Cundall.
After a hearing of 20 days involving expert evidence by engineers, town planners and valuers, Croft J of the
Victorian Supreme Court accepted the evidence of VGV’s experts regarding the Jam Factory’s SV and CIV.
In arriving at its decision, the Court considered a number of the fundamental legal principles relevant to land
valuation law. For the purpose of this note, we briefly mention six of the general legal principles considered by the
Court. In addition to this, we look at the critical legal question relating to the 'vacant to let deduction'.
The decision is a lengthy one that looks at a number of other important matters and it is beyond the scope of this
practice note to cover all these issues. Some of the other matters include the assessment of evidence relating to
the Jam Factory’s development potential for the purposes of site value paragraphs [91]-[111], the use of GFA or
NLA analysis paragraphs [209]-[229], site value adjustments paragraphs [220]-[257] and comparable sales
paragraphs [258]-[284], rental evidence for the purposes of capital improved value paragraphs [288]-[305] and
capitalisation rates paragraphs [312]-[336]. The decision also contains comments on the role and independence of
the valuers, particularly paragraphs [159]-[187]. It is recommended valuers refer to the remarks of Croft J with
respect to these matters.
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General principles considered by the court
1.
The question of the onus of proof in land valuation appeals:
The court took the view that no onus of proof lies on the ratepayer (or VGV), but that the burden simply lies on
each party to establish the accuracy of its own valuation [para 16].
2.
The role of the court in land valuation appeals:
The court took the view that the role of the court is not 'to bring a third set of opinions into the arena'i or to
'piece together a valuation of [its] own'ii. However it is open for the court to accept the evidence of one valuer
on one issue and the evidence of another valuer on another, separate issue iii.
The court added that care needs to be taken by the court when it adjusts the evidence of valuers and
accepted the proposition in the 101 Collins Street case that:
Whilst I cannot piece together a valuation of my own (Brewarrana at 545), it appears to me that I am
entitled by reference to evidence of one valuer, to adjust on a number of aspects the valuation of another
valuer, provided that I make allowance for the fact that one variable in a component consisting of several
variables may in fact have been balanced in the latter valuer's valuation by one or more of the other
variables. In such a case it might, depending upon the circumstances, be necessary to refrain from
making the adjustment and to adopt the component in full or not at all. [at 83.]
3.
The role of the valuer in valuation appeals:
The court acknowledged that valuation practice is principally an art rather than a science, and is an art that
continues to evolve. However, the valuer is an expert and, as such, is required to reveal in his or her evidence
the factual and intellectual basis of an opinion.
4.
Valuation methodology:
The court set out the foundations of valuation methodology, noting that:

The essence of the valuation process is the assessment of comparable sales, making adjustments to
the extent necessary so that the process is one that involves, as nearly as possible, comparing ‘like
with like’.

Care needs to be exercised with respect to the process of adjusting for comparability, for two
reasons. First, the process of adjustment has an illusion of precision, which tends to obscure the
reality that the process is a matter of expert judgment; an art and not a science. Secondly,
comparability is a question of fact and degree and if adjustments are very extensive, one might be
inclined to the view that the extent of adjustments required indicates that the sales are not, in reality,
comparable.
Nevertheless, the fact that a sale is not to be treated as comparable does not mean that it must be excluded
from all considerations as it may be helpful in the process of checking the valuation, aspects of it, or its
underlying assumptions.
5.
The extent to which the use of post-valuation assessment date material may be relied upon (the
Falconer principleiv):
The court examined the operation of the Falconer principle and distilled it to the following proposition:
(a) All circumstances occurring after the date of valuation (which was, in the present case, 1 January 2008)
cannot be taken into account in valuing the site.
(b) Evidence of subsequent circumstances may only be used if it relates to a foresight, but may not be used
if it merely constitutes a hindsight.
(c) The amount to be assessed is what the hypothetical prudent purchaser would entertain if perfectly
acquainted with the land as at the relevant datev.
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6.
The concept of highest and best use:
The court also considered the concept of highest and best use, describing it as 'a fundamental principle of
valuation' and one which is, as would be expected, reflected in the provisions of Section 5A of the Valuation of
Land Act 1960. The court had regard to the following comment by Morris J in ISPT Pty Ltd v City of
Melbourne:
63. As Jacobs J pointed out in Adelaide Clinic Holdings v Minister for Water Resources, highest and best
use is not the value of land assuming there are no planning or like controls. Rather it is the most
profitable use having regard to the physical, economic and legal constraints on the use of the land vi.
The court took the view that it was not necessary for it to identify a precise highest and best use in any
particular circumstances. Rather, it was submitted that the court should identify the highest and best use in
terms of the types of use. The VCAT decision of Mirvac Funds Ltd v Moonee Valley City Council was also
cited in support of this proposition.
Capital Improved Value – the vacant to let deduction
The differences between the parties on CIV stemmed substantially from each party's interpretation of the
requirements of the definition of ‘capital improved value’ in Section 2(1) of the Valuation of Land Act 1960 (the Act)
and, in particular, whether the definition requires the valuer to make a vacant to let deduction.
The Act defines CIV as:
…the sum which land, if it were held for an estate in fee simple unencumbered by any lease, mortgage or
other charge, might be expected to realise at the time of valuation if offered for sale on any reasonable
terms and conditions which a genuine seller might in ordinary circumstances be expected to require…
Challenger submitted that the Supreme Court of Victoria in Shell Co of Australia Ltd v City of Melbournevii had
determined that the words 'unencumbered by any lease' as they appear in the definition of CIV to mean
'unaffected by', 'not subject to' or 'without' any lease. Consequently, it was said that the Shell case was to be taken
as establishing that the existence of all leases is to be disregarded for valuation purposes.
Mr Grant Jackson, the expert valuer for Challenger, interpreted the definition of CIV to require him to assume that
the Jam Factory was vacant of tenants as at the date of assessment. His valuation of CIV was adjusted in order to
allow for the fact that a period of time would be needed for the property to be re-let. Accordingly he made the
following allowance associated with letting the property to new tenants:
(a)
(b)
(c)
(d)
(e)
letting up period
marketing and start–up promotions
legal fees
letting fees/commissions
risk.
By contrast, VGV took the view that the Shell case should not be treated as authority for this proposition. It also
referred to the South Australian Supreme Court decision of Trust Company of Australia Ltd v Valuer-General
(2008) 101 SASR 110, which did not accept the construction of the term 'unencumbered by a lease' pursued by
Challenger.
The court accepted the positions put by the VGV. In relation to the position put by Challenger Croft J commented
that it:
Equates the reference to the fee simple estate in the statutory definition as a fee simple estate in actual
possession of the land, rather than also including the possibility of the fee simple owner being in receipt
of the rents and profits, rather than in actual physical possession of the land. In my view, this produces
the sort of artificial result referred to by the judges in the South Australian Supreme Court in the Trust
Company (No 2) case at first instance and on appeal.
His Honour went on to state that:
…I am fortified in this view by other provisions of the Act, such as s 5A and, particularly, the statements
made by the judges in the trust Company cases in South Australia which indicate and reaffirm that the
Act, and legislation lie it, is intended to be interpreted having regard to practical realities and not to be
interpreted in favour of artificial concepts and restrictions, particularly where the language of the
legislation does not expressly require it…
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…This means that the fact that the land is leased is a matter to be taken into account in the valuation
process, and allowance made so as to neutralise the effect on the value of the estate to be valued as a
result of an unusually beneficial and above market rent prevailing under the then subsisting lease.
Correspondingly adjustment the other way may be required where the then prevailing current lease
imposes burdensome conditions, whether by way of a below market rent or burdensome conditions of
some other kind; perhaps for example, in relation to use of the premises or the ability to assign or sub-let.
Consequently, on the basis of this consideration of the authorities, and for the reasons indicated, I accept
the submission of the Valuer-General that the correct approach in assessing capital improved value is on
the basis that:
(a) the value of the land is to be assessed by reference to a hypothetical sale of a fee simple interest in
the land and on the basis that the fee simple interest is not affected by any actual lease;
(b) the hypothetical sale should assume the actual physical state of the land;
(c) the hypothetical sale should assume the occupation of the land;
(d) the hypothetical sale should take into account the likely future occupation of the land;
(e) the hypothetical sale should assume that the occupation of the land is at market rates; and
(f)
the rentals being paid under actual leases are likely to be a guide to actual market rates for
occupation.
Assessing CIV
The decision of the Supreme Court in Challenger provides important guidance as to how valuers should assess
CIV under the Valuation of Land Act 1960. VGV’s view is that CIV should be assessed by treating the estate in
fee simple of the subject land as being the ‘highest estate known to law’, regardless of whether the actual estate in
fee simple in which the land is held is subject to a ‘lease, mortgage or other charge’.
While the assessment needs to be a hypothetical one which disregards the terms of any lease mortgage or other
charge, the estate in fee simple of the ‘subject land’ must be assessed in the state in which it existed at the return
date. The valuation exercise can have regard to the existing market rentals and circumstances. However, if these
rentals are not at market then the beneficial or burdensome impact of this should be ignored and levels in line with
market should be adopted.
Practical application of considerations for CIV
Croft J dealt with the issue of vacant to let in paragraphs [48] – [90] and [337] – [342] of the Jam Factory decision.
VGV encourages valuers to read these parts of the Challenger decision.
In order to assist rating authorities in assessing CIV, the VGV believes that the six considerations identified by
Croft J can be elaborated as follows:
(a)
the value of the land is to be assessed by reference to a hypothetical sale of a fee simple interest
in the land and on the basis that the fee simple interest is not affected by any actual lease;
*Practical note – The valuer is undertaking a hypothetical exercise when valuing the fee simple estate. If
the actual estate is subject to a lease, the existing lease is ignored (qualifies the interest being valued).
Therefore, the interest being valued is unrestricted and the valuation of the ‘full bundle of rights’ is
undertaken according to market.
(b)
the hypothetical sale should assume the actual physical state of the land;
*Practical note – The assessment is undertaken on the existing physical state of the land at the date the
valuation is returned. The usual valuation considerations in determining the value of the land such as
location, condition, size, shape, topography etc. should be taken into consideration.
(c)
the hypothetical sale should assume the occupation of the land;
*Practical note – The valuer should have regard to the fact that the land is occupied at the date the
valuation is returned. The existing tenants can be regarded still to be in occupation and the centre in
operation with businesses trading with fit-out and fittings in place.
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(d)
the hypothetical sale should take into account the likely future occupation of the land;
*Practical note – The valuer should have regard to the existing occupancy profile as well as any
variation to the occupancy profile. The highest and best use of the land should be ascertained in
accordance with the usual valuation considerations such as zoning, planning controls etc.
(e)
the hypothetical sale should assume that the occupation of the land is at market rates; and
*Practical note – The valuer should have regard to the terms and conditions one would expect the
market to provide for the land when compared with similar land. This means that the valuer should
assess a market rental in-line with prevailing market lease terms and conditions. The valuer can have
regard to comparable evidence including new lettings, options, rent reviews and passing rents.
(f)
the rentals being paid under actual leases are likely to be a guide to actual market rates for
occupation.
*Practical note – The valuer should have regard to the actual rentals, lease terms and conditions in the
pool of evidence. If necessary, the valuer can exercise expertise and judgment in adjusting passing rents
to be in-line with analysed market levels.
* These practical notes are comments only and do not form part of the judgement.
As a result of the decision of the Supreme Court and the considerations above there is no allowance made to the
capitalisation rate adopted for vacant to let allowances on the premise that there are no leases in place.
Final comment
The Challenger decision should provide valuers with guidance in assessing CIV and valuers should ensure that
they familiarise themselves with this important ruling.
Challenger has not appealed against the court decision. The question of costs remains unresolved, and is likely to
be the subject of a further hearing in the near future.
i
Applying the views of Wells J in Brewarrana Pty Ltd v Commissioner of Highways (No2) (1973) 6 SAFR 541, 544-5.
101 Collins Street Pty Ltd v City of Melbourne (Unreported, Supreme Court of Vic, Batt J, 2 April 1996) 83.
iii
Ibid at 81.
iv
Housing Commission of New South Wales v Falconer [1981] 1 NSWLR 547
v
[41].
vi
[2007] VCAT 652, Morris J.
vii
[1997] 2 VR 615 (Batt J).
ii
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