The decision of Sydney Water Corporation v Caruso  NSWCA 391 is authority for the general principle that, in determining compensation payable to a dispossessed owner, doubts should be resolved in favour of a more liberal estimate. It is a principle which is frequently relied upon by applicants, misapplied in many instances and occasionally adopted by the Land and Environment Court. The recent decisions of Carlewie Pty Ltd v Roads and Maritime Services  NSWLEC 78 and Qasabian Family Investments Pty Ltd v Roads and Maritime Services; Fishing Station Pty Ltd v Roads and Maritime Services  NSWLEC 73 provide further examples of the Court’s approach to when Caruso may or may not be engaged.
Qasabian Family Investments Pty Ltd v Roads and Maritime Services; Fishing Station Pty Ltd v Roads and Maritime Services  NSWLEC 73
The Applicant was the former owner of the property known as 461 Warringah Road, to the west of what was the Bantry Bay Road shopping complex. The property was compulsorily acquired by the RMS as part of the road upgrading works associated with the new Northern Beaches Hospital. The Applicant ultimately rejected the determination of compensation awarded by the Valuer-General, and commenced class 3 proceedings in the Land and Environment Court.
In the usual way, in preparation for hearing, the respective valuation consultants met and prepared a joint valuation report, which was ultimately tendered as evidence. Both the Applicant’s and the Respondent’s valuation consultants agreed that the preferred valuation methodology was the capitalisation of net rent approach. The Applicant’s valuer relied upon a capitalisation rate of 3.8% while the Respondent’s valuer relied upon a rate of 4.25%. The respective experts noted in the joint report that “the difference in our valuations is purely in the yield variance of 3.8% and 4.25%.” Thereafter, the experts adopted an agreed “midpoint” yield, expressed in the following way:
[Para.27 Joint Report] The midpoint of this range is 4.025%. We agree that if the passing net rental income were to be capitalised at 4.025%, a capital value of 4,707,975 [sic] would be derived. For practical purposes we have rounded this some down to $4,700,000 which is equivalent to a capitalisation rate of 4.03%. In our opinion, a capitalisation rate of 4.03% and capital value of $4,700,000 is within an acceptable margin of error and it is our joint opinion that the market value of the subject property as at 21 August 2015, assessed in accordance with the Just Terms Act is $4,700,000.
At hearing, the Applicant contended that the correct approach was for the Court to adopt a yield rate of 3.8%, based on the opinion advanced by the Applicant’s valuation consultant at first instance, as set out in the joint report, and must ignore the “bargain” struck by the valuers, whether couched as an agreement or otherwise.
The Applicant made a number of submissions in support of the argument, briefly stated:
- the approach adopted by the valuers, as set out in para 27 of the joint report, can only mean that there was doubt about the correct capitalisation rate. In such circumstances, having regard to the principles set out in Caruso, it was appropriate for the doubt to be resolved by the Court in favour of the more liberal estimate – the 3.8% rate adopted by the Applicant’s valuer.
- the valuers struck a bargain at a mid-point which was “not the expression of their ultimate opinion”. They both remained of the view that their percentage was correct. They go on to accept that, because the difference is so fine and the adjustments subjective, either of those points in the range are within an acceptable margin of error, and so they choose a mid-point. That was an acknowledgement of doubt, which doubt they decided to resolve themselves.
- put differently, the experts agreed to “split the difference”. And because the difference between them was nevertheless within “an acceptable margin of error”, the Court would not simply adopt the mid-point; rather the Court would resolve doubts in favour of a more liberal estimate in accordance with the principles set out in Caruso.
- the resolving of doubt, in the circumstances, was not the function of the experts. The resolving of doubt was the role of the Court, in favour of the more liberal estimate.
In summary, the Applicant contended that the Court was not obliged to “split the difference” or accept their approach to the “resolution of doubt”.
The Court rejected the Applicant’s reliance upon Caruso, on the grounds that, as submitted by the Respondent, there was no “doubt” to resolve. The Court observed that there was agreement between the respective valuers as to what the market value of the land was. That agreement was “not couched in terms of compromise or doubt”, as contended by the Applicant. The existence of a range of rates did not, of itself, represent doubt. And the decision of the experts, in their expert opinion, to agree on a number within the range, represented their opinion of market value.
The Court held that it would be improper to interfere in the joint finding of the valuation experts. The Court went on to say that for the Caruso approach to be engaged, there must be some uncertainty – some range or ambiguity to be addressed by the decision-maker. In these circumstances, the Court found that the joint expert report disclosed “no uncertainty, nor ambiguity”.
Carlewie Pty Ltd v Roads and Maritime Services  NSWLEC 78
The Applicant in this case was the former owner of large industrial property at St Peters, compulsorily acquired by the RMS as part of the St Peters Interchange component of the “WestConnex” motorway project. Having rejected the Valuer-General’s determination of compensation, the Applicant commenced class 3 proceedings in the Land and Environment Court.
Amongst a litany of issues canvassed in the proceedings, the Applicant made a number of submissions regarding the expert valuation evidence tendered in the proceedings, and how the Court should approach the differing expert opinions. The Applicant contended that, where there is competing evidence as to the advice that a hypothetical purchaser would be given on a particular topic, then “provided that each competing expert’s view cannot be said to be unreasonable”, the correct approach is to assume that:
- there are multiple hypothetical purchasers;
- each of whom would retain only one of the competing experts;
- with the result that the hypothetical purchaser notionally in receipt of the advice most favourable to a higher value would “beat” the other hypothetical purchaser by offering the most for the property, thus establishing the “market price”.
The Applicant relied upon the principles set out in Caruso, arguing that “in a case of compensation doubts are resolved in favour of a more liberal estimate, in a revenue case, of a more conservative estimate”.
The Respondent, in reply, contended that the effect of the Applicant’s position on this issue was that, on any question between experts called by an applicant and a respondent, provided that the undemanding hurdle of reasonableness is overcome, the Court would be “required to proceed as a matter of law on the basis of the position that is most favourable to the Applicant.”
The Respondent contended that the Applicant’s submission ignored the fact that the function of expert evidence in valuation proceedings, as to the advice that would be given to a hypothetical purchaser, “is to enable the Court to make a determination as to the content of the advice that would be given.” Where there is a contest or difference of opinion “the proper function of the Court is to determine what the content of the advice provided to the hypothetical purchaser would be.”
The Respondent further contended that the decision of Caruso was not authority for the proposition that the Court should embark upon the exercise of identifying “all the evidence that is not unreasonable or obviously wrong”, and then apply the evidence that is most favourable to the Applicant. Such an approach would be “revolutionary” and would render “irrelevant any expert evidence other than the most advantageous for the Applicant’s claim.”
The Court agreed with the Respondent:
 In our opinion, the Respondent is right to criticize the Applicant’s approach to resolving differences between advice that the expert witnesses would have given to the hypothetical parties. The approach adopted by the Applicant in the materials and submissions to which it referred is clearly wrong.
Differences of expert opinion will not, in and of itself, engage Caruso, nor will acknowledgment that a range of possible rates exist. There must be genuine and, arguably, unresolvable doubt on the evidence of the respective experts. When that occurs, the principle set out in Caruso may be engaged. As explained in Caruso, if – upon engagement and assessment – the judicial valuer finds that the reasoning of both valuers was not fallacious, that none took into account irrelevant considerations and that no errors otherwise appeared, the proper conclusion might be that there are “simply two open views on the relevant issue”. It is in these circumstances that applying the general principle of Caruso would be uncontentious. Arguably, for example, had the respective valuation experts in the decision of Qasabian Family Investments maintained their respective capitalisation rates (and not reached agreement), the judicial valuer would have been required to engage and assess the respective rates. If, upon coming to the view that either capitalisation rate was available on the evidence, the principle of Caruso may have been engaged.