A recent Supreme Court land valuation decision has potential implications for municipal valuations and may require a change of approach when valuing larger properties comprising multiple occupancies.
In Port of Melbourne Corporation v Melbourne City Council and Anor, the Court held that the Port of Melbourne (Port) should be valued as a single larger property for the purposes the Valuation of Land Act 1960 (Act). This was despite the Port extending across the Yarra river, over four separate municipalities and comprising upwards of 70 leased occupancies. The Court also held that the Port must be valued in the unimproved condition it was prior to development as a port some 140 years ago. As a result, the Port’s site value was reduced by over 70 percent.
The Court’s decision creates uncertainty for a range of properties that have been valued on an occupancy basis.
The primary issues before the Court were:
- whether the Port, comprising multiple leased properties, was a larger property and therefore must be valued as one
- the scope of the words ‘works relating to a port’, which are improvements under the Act for the purpose of assessing site value.
Although these questions are closely linked, only the first issue is of broader relevance to municipal valuations.
Rateable occupancy: no longer the starting point
In carrying out rating valuations, the long-standing practice has been to value land by occupancy. This observes the requirement of s 13DC(1) of the Act:
- In every valuation for the purposes of the Local Government Act 1989, each separate occupancy on rateable land must—
However, where land forms ‘part of a larger property’, s 2(3) of the Act directs a valuer to compute the value of each occupancy as a portion of the value of the larger property. Specifically, the larger property must be valued as one and the Site Value and Capital Improved Value of each occupancy is to be computed according to the proportion of the Estimated Annual Value (EAV) of each occupancy in proportion to the EAV of the larger property.
In support of the view that the Port was not a ‘larger property’, the Defendants argued that occupancy was the ‘starting point’ for any valuation under the Act. On this basis, they argued s 2(3) of the Act should apply only where ‘necessary’ for valuation of individual occupancies. That is, all occupancies are to be individually valued unless those occupancies are inseparably interdependent or it is not possible to fairly or accurately value them individually. Only in those circumstances, argued the Defendants, should a ‘larger property’ be valued as one.
The Court rejected this argument and, in doing so, held that the notion of ‘rateable occupancy’ was not the basic unit or ‘starting point’ of valuation under the Act. Of particular interest was the finding that s 13DC(1) (cited above) does not establish the primacy of occupancy as the basic unit of valuation. This had been a long held assumption by many valuers and lawyers.
In coming to this finding, the Court reviewed the history of rating and land tax legislation in Victoria and found that the actual ‘starting point’ was the unencumbered fee simple of land (as distinct from the notional fee simple of an occupancy). This was the requirement under the Land Tax Act 1910. Four years later, the Rating on Unimproved Values Act 1914 permitted councils to impose rates upon ‘unimproved capital value’ as an alternative to net annual value (which had been the original rating base). The 1914 Act provided a framework for the computation of the unimproved capital value of an occupancy where occupancy and title were not the same. The Court held s 2(3) of the Act continued this arrangement. However, the ‘starting point’ had not changed.
The Court therefore held that s 2(3):
… is a product of the need to adapt for rating purposes determinations made by the Commissioner for Taxes of the unimproved value of land on a single title.
The Court also held the legislative intent of s 2(3) was to apportion the value of ‘larger properties’ irrespective of whether individual occupancies could be valued individually. Rather than being engaged only where ‘necessary’, s 2(3) requires a valuer to first enquire whether rateable land forms part of a larger property. If it does, that larger property must be valued as one and the value of the individual occupancies then apportioned by EAV. If it does not, then the individual occupancies should be valued separately.
Importantly, the Court also found that valuing rateable land on an occupancy basis would in some cases be inconsistent with the requirement to value land according to its highest and best use. This is because valuing individual occupancies ignores the actual cost of developing the larger property. This includes all the surrounding improvements that enable any one occupancy to be put to its highest and best use. In the case of the Port, this included many decades of costly reclamation and infrastructure development. On this basis, valuing individual occupancies within a larger property would not be accurate or fair as these costs would be ignored and the occupancies would be consequently overvalued.
Larger property: a question of fact
The Court held that whether a property was a larger property for the purpose of s 2(3) was ultimately a question of fact, rather than law, and depends on all the circumstances of the particular case. In finding that the Port was ‘planned, managed, operated and used as a larger property’, the Court relied on the statutory, regulatory and policy framework supported the characterisation of the Port as a larger property. In particular:
- the Port of Melbourne Corporation (PoMC) was the owner of all but a very small part of the Port land
- legislation including the Port Management Act 1995 and Transport Management Act 2010 defined the ‘Port of Melbourne’
- the Port of Melbourne Planning Scheme compelled the use and development of the Port of Melbourne land and the waterways an integrated port
- PoMC managed the relevant land and waterways as one property to be reconfigured and altered to meet the constantly changing needs of the Port
- the highest and best use of the relevant land was as a port
- if sold, it is likely that the Port would be sold as one property.
The Court also accepted evidence that the Port was similar to a shopping complex such as Chadstone or an industrial estate. Relevant similarities were said to include:
- a common owner responsible for managing the undertaking, with the ability to undertake future developments that change the configuration of the site
- the presence of a number of separate occupancies, some of which are competitors
- a combination of large and small tenants
- the shared use of common areas, such as internal roads or walkways
- shared facilities, such as sewage, drainage and potentially electricity services
- a mix of activities, often in precincts.
What does this mean for municipal valuers?
When considering whether a group of occupancies form a larger property, valuers should consider the following questions:
- does the statutory, regulatory and policy framework support the characterisation of the property as a single, integrated whole? Specific legislation and planning scheme provisions may be relevant to this.
- is the property owned and/or managed by a single entity?
- is the property operated and/or used as an integrated whole?
- does the highest and best use for the occupancy rely on the integration of that occupancy with a larger whole?
- if the land sold, is it likely that it would it be sold as part of the larger property?
If this factual enquiry supports the characterisation of the property as a larger property under the Act, it should be valued as such, even if the individual occupancies making up the whole are capable of being separately valued.
The requirement to value land in accordance with the highest and best use of the land is also relevant to determining whether to value an occupancy individually or as part of a larger property. As the Court said:
… valuing the occupancy in isolation may not reflect the highest and best use of the land comprising the occupancy or the land of which it forms a part.
The implication of this is that, in order for occupancies within a larger property to be ‘fairly and accurately’ valued, the larger property must be valued as one. This might apply to shopping centres, entertainment venues, industrial estates and potentially developments of Crown land under private leases. However, the potential types of potential larger properties are not limited.
|Robert Stilling | Associate
Tel +61 3 9258 3514
|Nick Whittington | Associate
Tel +61 3 9258 3783
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 Section 2(3) provides:
If it is necessary to determine the capital improved value or site value of any rateable land in respect of which any person is liable to be rated, but which forms part of a larger property, the capital improved value and site value of each part are as nearly as practicable the sum which bears the same proportion to the capital improved value and site value of the whole property as the estimated annual value of the portion bears to the estimated annual value of the whole property.
 The Land Tax Act 1910 defined ‘unimproved value’ or ‘unimproved capital value’ of land as ‘the sum which the owner’s estate or interest therein if unencumbered by any mortgage or other charge thereon, might in ordinary circumstances be expected to realise at the time of valuation or assessment if offered for sale on such reasonable terms and conditions as a bona fide seller might be expected to require and assuming that the improvements (if any) had not been made’
 This was also because of the Court’s broad view of the meaning of ‘works relating to a port’ in s 2(2AA) of the Act. Disregarding these improvements in assessing site value of the Port as a larger property had the effect of dramatically lowering land values.
 At paragraph 155