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Valuing a potential use - 21 November 2017

When land is resumed, and interests in the land are converted into a right to claim compensation, the central question is always - what is the highest and best use of the land? Often, there is no development approval in place at the date of a resumption (or, a development approval is outdated and no longer reflects current planning intentions) which means the highest and best use of resumed land is a hypothetical development. In such cases, there can be disputes over not only the development potential of the land, but also the appropriate valuation methodology to apply.

There is a number of valuation methodologies that can be used, each with their own particular advantages and disadvantages depending on the circumstances of the case. The direct comparison approach is typically preferred but there can be different bases for comparison – a rate per square metre of developable site area, or a rate per square metre of potential Gross Floor Area (GFA). When dealing with a potential use (a hypothetical development scenario), the Courts have tended to prefer a valuation methodology based on a rate per square metre of land.

This issue was considered in Mio Art Pty Ltd & Ors v Brisbane City Council [2009] QLC 177. The only development approval in place was outdated and all the parties agreed some other development scheme represented the highest and best use of the land. However, each party took a different position when considering the intensity of the development. The Council’s development concept involved four separate buildings, with a maximum height of 10 storeys, scaling down to six storeys, and a resultant GFA of 34,175m2. Mio Art’s development scheme showed three buildings, with a total height of 12 storeys and a resultant GFA of 66,579m2 .

The Council’s valuer used a rate per square metre of land to value the land. The other valuer preferred a rate per square metre of GFA. The Court concluded that, due to the uncertainty that can attach to a development approval process and, therefore, the development potential of the site, it would be “reasonable for the prudent purchaser to adopt a valuation methodology based on a rate per square metre of land because it provides a more reliable guide to the value of the subject land.”

The Land Court’s findings were upheld on appeal in Mio Art Pty Ltd v Brisbane City Council & Ors [2010] QLAC 7. The Land Appeal Court held that, “while it may be accepted that the GFA of a development which is achievable on a parcel of land is an important factor in determining its value, related to returns resulting from the development, its utility will be affected by the level of certainty attaching to an approval of such development.” Because there was no certainty about the development potential of the land, it was appropriate to value the land by reference to a rate per square metre of land area, rather than by reference to GFA.

More recently, the decision in Cupo v DTMR [2014] QLC 19 reinforced that a rate per square metre of land is to be preferred where a dispute over the development potential of the land occurs. The Land Court considered that a valuation approach based on a rate per square metre of GFA increased the possibility for error as it depended on an accurate assessment of the development potential - an issue that was very much in dispute.

The Land Court has also shown it prefers the rate per square metre of land area approach in a case concerning appeals against annual valuations under the Valuation of Land Act 1944. In Surfers Paradise Beach Resort Pty Ltd v DNRMW [2006] QLC 72, the Land Court concluded that a rate per square metre provided a more consistent basis for comparison.

These cases confirm that, when selecting a valuation methodology, it is essential to consider risk. With a development approval in place, GFA is known and quantified. Without a development approval in place, a potential purchaser does not have the same degree of certainty about the GFA. This reflects the core issue concerning uncertainty about the development potential of the land. If there is uncertainty about yield, then that uncertainty will also affect a valuation based on a rate per square metre of GFA. Care must therefore be taken in making and assessing a claim for compensation in order to select a valuation methodology that is appropriate in the particular circumstances of the case.

For more information or discussion, please contact HopgoodGanim Lawyers' Planning & Development team.


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