10 Jun 2021

"Extortionate valuation" and witness independence questioned in Queensland mining lease compensation case

By Mark Geritz, Patrick Cranley and Matthew Hales

The authoritative valuation methodology for compensation has been reaffirmed by the Land Court of Queensland in a recent decision that also raised concerns about an expert witness' capacity to give independent advice to the court.

Delivered on 27 May 2021 by Member Stilgoe OAM, Hail Creek Coal Holding Pty Limited & Ors v Michelmore [2021] QLC 19 was a determination of compensation payable for the grant of a mining lease under the Mineral Resources Act 1989 (Qld) (MRA) that turned on the methodologies, and credibility, of the parties' respective valuation experts. The decision has important takeaways for both mining lease applicants and landholders who cannot amicably determine their own compensation valuations.

One piece of land, two different expert valuations

Hail Creek Coal Holding Pty Limited (the applicant) manages Hail Creek Mine in the Bowen Basin on a mining lease adjacent to the subject land. The respondent's subject land, which includes a 1,056 room mining camp, was originally leased to a prior mining lease holder and which continues until 2023. The applicant, together with its joint venture participants, lodged an application for a 20 year mining lease over the subject land, but it and the respondent could not agree on compensation.

The applicant's expert valuation witness says the value of the subject land is $530,530; the respondent's, $7 million.

Expert capacity and independence

Before considering the competing methods of valuating the compensation payable to the respondent, Member Stilgoe OAM noted issues with the respondent's expert valuation evidence. Evidence produced in the course of the hearing included an historical invoice issued by the respondent's valuer for work not done by the respondent's valuer, and therefore not payable to the respondent's valuer. The invoice was issued to the respondent just before the respondent submitted his claim for compensation for loss and expense under section 281(3)(a)(vi) of the MRA. The Court noted the situation regarding the invoice was "odd" and "concerning", and it led the Court to take the unusual step of cautioning the respondent's valuation expert witness of the potential ramifications of certain answers relating to the invoice, leading to the expert choosing to claim privilege.

As a result, the Court raised concerns about the capacity of the particular expert to give the Court independent advice and determined it would give "little or no weight" to his evidence in determining the compensation. Further, the Court reiterated that experts occupy a special position as witnesses in such matters, and that their primary duty is to the Court rather than any party or the person paying their fee or expenses.

Preferred valuation method

Notwithstanding the issue of the weight given to the expert valuation evidence, the Court did consider both experts' position on their differing approaches to valuation. The applicant relied upon the direct comparison approach, summarised by the Land Appeal Court decision WM & TJ Fischer v Valuer General (1983) 9 QLCR 44:

"It has been consistently held by courts, the decision of which are binding on this court, that the best test of value is to be found in sales of comparable properties, preferably unimproved or lightly improved, in the open market as close as possible to the date of valuation".

Although both valuation experts agreed that the direct comparison method was generally preferred, the unique characteristics of the subject land (dearth of comparable sales with a similar demand for accommodation, existing mining camp facilities or existing development approval) created difficulties for reaching consensus. Whether demand to purchase the site would be derived from anyone other than the operator of the mine (given the proximity of Hail Creek Mine and its existing accommodation purpose as the mining camp) would relevantly impact value. The observation was also made that most of the comparable sales were made during the mining boom.

Departing from the direct comparison approach method, the respondent's expert sought to rely on two alternative approaches. The first was the methodology articulated in Vyicherla Naryana Gajapatirajup Bahadur Garu v Revenue Divisional Officer, Vizagapatam [1939] AC 302 (Raja approach): "the potentiality in the acquired land, which can be taken to fruition only by the acquiring authority, is to be considered in valuing that land for the purposes of assessing compensation". This approach would greatly increase the value of the land as the location of the mining camp is likely only of value to the applicant in a form other than grazing land. This Raja approach was not accepted beyond its general principle, which the court noted is already contemplated by the direct comparison method.

The respondent also sought to value the land using the net present value of the potential rent (NPV approach), which was also rejected by the Court because it would not ameliorate the issues of the direct comparison method, and would ultimately "mirror and amplify" the deficiencies caused by the lack of satisfactorily comparable sales.

Applying the direct comparison method

The highest and best use of the land as an accommodation village is inherently far more lucrative than its only other alternative as grazing land, the valuation of the latter for which was agreed between parties to be $189,475. The Court outlined that there are a range of risks that should be considered when determining the present valuation of compensation:

  • there will not be a mine camp for the full term of the mining lease;
  • the camp may not have the predicted occupancy;
  • the camp will not produce the predicted revenue stream;
  • no other entity will be interested in acquiring the camp; and
  • the current development approval will not meet the needs of a different operator.

The applicant's valuation expert looked at comparable sales of land and submitted that a premium of between 100% and 250% over the land's value as grazing land was satisfactory. Adopting the 250% premium, the applicant's valuer submitted that compensation should be determined to be $482,230 at $3,500/ha. Including the 10% uplift fee legislated by the MRA, this value arrived at $530,530.

When the Court asked the respondent's valuation expert to use the approach taken by the applicant's valuation expert in relation to the premium to be applied, the respondent's valuation expert suggested he would assign a premium of 500% to the value of the grazing land, however in order to arrive at a valuation of $7 million, the Court noted the respondent's valuation expert would have to apply a premium of 3,694%, which it called "grossly overstated".

The respondent's valuation expert applied the direct comparison approach differently, using the methodology to formulate a $/ha rate, arriving at a value of $200,000/ha. The Court found that the applicant's valuation expert's approach of assessing the premium a purchaser will pay for the prospect of developing mining accommodation is a more accurate assessment of the decision-making process a hypothetical purchase is likely to undertake, and this approach "does not suffer from an attempt to draw comparable values from incomparable sales".

The Court preferred this latter approach, and pointedly remarked that the applicant being the only purchaser "does not justify an extortionate valuation".

When coming to this view, the Court reiterated the classic definition of value taken from the High Court case Spencer v The Commonwealth (1907) 5 CLR 418, namely that it is "a sale by voluntary bargaining between the vendor and the purchaser, willing to trade but neither of them so anxious to do so that he would overlook any ordinary business consideration".

Valuation methodology for mining lease compensation: key takeaways

  • The direct comparison method remains the authoritative approach to compensation valuation before the Land Court of Queensland, even in situations where there is a dearth of comparable sales for valuation experts to rely upon when making their assessments.
  • Valuations should not attempt to draw comparable values from incomparable sales, and an alternative approach is to assess comparable premiums being paid above the agreed market value.
  • Practitioners and expert witnesses should be aware of their obligations under Part 5 of the Land Court Rules 2000 (Qld) and the relevant Practice Directions, which set out the duties of expert witnesses. Specifically, anyone appearing in these proceedings as an expert is to assist the court, and this duty overrides any obligation they may have to the party or person paying their fee or expenses.
  • Remember that with all mining lease compensation matters, an uplift fee of not less than 10% is added to the compensation payable, per section 281(4)(e) of the MRA, so mining lease holders should factor in this fee when calculating compensation.
  • A decision in April underscored the importance of landowners disclosing information that may materially affect the quantum of compensation claimed in compensation proceedings under the Mineral and Energy Resources (Common Provisions) Act 2014 (Qld).

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.