Valuation report concerning land rejected as expert opinion

Introduction

The New South Wales Court of Appeal in Rolleston v Insurance Australia Ltd [2017] NSWCA 168 has upheld the decision of a judge at first instance to reject a valuation report concerning certain land as expert opinion. The judge had rejected the valuation report on the basis that it did not satisfy s 79 of the Evidence Act 1995 (NSW) and that, if it had satisfied that provision, he would have excluded it under s 135 of the Evidence Act.

Relevant provisions

Section 79 of the Evidence Act is an exception to the opinion rule contained in s 76 of the same Act which provides that evidence of an opinion is not admissible to prove the existence of a fact about the existence of which the opinion was expressed. Section 79 deals with expert opinion and provides that, if a person has specialised knowledge based on the person’s training, study or experience, the opinion rule does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge.

Section 135 of the Evidence Act confers on the court a general discretion to exclude evidence. It provides that the court may refuse to admit evidence if its probative value is substantially outweighed by the danger that the evidence might be unfairly prejudicial to a party, might be misleading or confusing, or might cause or result in undue waste of time.

Background

The valuation report was tendered as evidence in proceedings brought by an insured person against an insurer. The insured had been the owner of property on which a residential building was being constructed when a fire broke out and caused substantial damage to the building. The property had been insured against fire for an agreed sum of $4.2 million with the insurer but the insurer had refused the insured’s claim under the policy on various grounds. The insured had sold the property in its damaged state and then brought proceedings against the insurer in the Supreme Court of New South Wales seeking loss and damage arising from the fire damage to the property that had adversely affected its market value. He claimed an amount of around $3.4 million, representing the difference between what he asserted would have been the value of the property on the date of its sale if the fire damage had been fully rectified, said to be $7.5 million, and the amount realised by him when he sold the property in its damaged state on that date, being $4,068,000.

Valuation report

The valuation report was the only evidence relating to the value of the property adduced by the insured. The valuation report, amongst other things:

• set out the valuer’s instructions which were to give his opinion as to what the market value of the property would have been as at the date of sale, on the assumption that the fire damage to the property had been fully rectified prior to that time;
• indicated that a series of sales had been inspected, a selection of which was set out, and then described seven properties in the same area as the subject property that had been sold in the period of about 16 months leading up to the date of sale of the subject property for prices ranging from $5.25 million to $11.06 million;
• indicated that a “direct comparison approach” had been adopted which involved comparing the subject property with sales of “other relatively comparable properties”, making adjustments for points of difference, having regard to various factors;
• explained that variation in the values of the seven properties reflected various characteristics such as location, land size, views and the like and said that the most comparable properties were four of the seven properties which were then described and which ranged in value between $6.7 million and $11.06 million;
• stated that the most comparable sales ranged in value between $6.7 million and $9.25 million, referring to three of the four properties;
• expressed the view that Property 1 was “broadly comparable overall”, Property 2 was “superior overall”, Property 3 was “inferior overall”, and Property 4 was “far superior overall”;
• concluded that, on a direct comparison basis, the sales evidence supported a valuation assessment for the subject property of $7.5 million; and
• stated that the market value of the subject property, assuming that the fire damage had been fully rectified prior to sale, was $7.5 million.

Decision at first instance

At first instance, the trial judge made the following points in relation to the valuation report:

• There was no identified reasoning to show how the sales data identified by the valuer supported the figure of $7.5 million.
• There was a substantial amount of work to be done to finish the construction and bring the building on the subject property into a state where it would be fit for sale but there was nothing in the valuation report which showed why the subject property was considered to be worth more, in its incomplete state, than Property 1 which had been sold for $7.35 million some five months earlier and which was identified as being “broadly comparable”.
• No data had been provided to support an assertion made by the valuer in relation to some of the properties that “local residential market having improved post this transaction”.
• The valuation report did not show that the conclusion expressed by the valuer was based on, or the result of, the application of his specialised knowledge to the facts stated in the valuation report.

Accordingly, the trial judge rejected the valuation report on the basis that it did not satisfy s 79 of the Evidence Act. His Honour then went on to say that, in any event, if the valuation report had satisfied s 79, he would have excluded it under s135 of the Evidence Act because it would have been wholly unfair to the insurer to expect it to elucidate the valuer’s reasoning process in the course of cross-examination and then to challenge that process without the opportunity to reflect on it.

In the result, the trial judge found that the insurer was liable under the policy and awarded the insured the amount of $991,946 together with interest. The amount of $991,946 was the cost of the rectification of the fire damage to the building which had been agreed upon by the parties for the purpose of the proceedings.

The insured appealed to the Court of Appeal on the basis that the trial judge had erred in rejecting the valuation report.

Decision on appeal

The Court of Appeal dismissed the appeal.

Emmett AJA (Beazley P and Meagher JA agreeing) summarized the relevant principles in relation to s 79 of the Evidence Act as follows (at [32]-[34]). References to the cases have been omitted.

• The requirement in s 79 that the opinion be based on specialised knowledge would normally be satisfied by the person who expresses the opinion demonstrating the reasoning process by which the opinion was reached, provided that it exposes the author’s reasoning in a way that shows that the opinion is based on particular specialised knowledge.
• Evidence not satisfying this might be inadmissible as being irrelevant; as not complying with s 79; or on discretionary grounds under s 135.
• Before s 79 will be satisfied, the evidence must explain how the field of specialised knowledge in which the person is expert applies to the facts assumed or observed so as to produce the opinion expressed. If that matter is not made explicit, the court cannot be sure whether the opinion is based wholly or substantially on the specialised knowledge of the person and so the evidence will be, strictly speaking, not admissible.
• The requirement that the opinion be based wholly or substantially on specialised knowledge is an explicit precondition of admissibility and must be established by the party tendering the evidence in examination-in-chief either during the trial or on the voir dire. As s 79 requires the opinion to be wholly or substantially based on the person’s specialised knowledge, the person’s opinion should be confined to this. Otherwise, the person may invest the “opinion” with a spurious appearance of authority, with the result that legitimate processes of fact finding may be subverted.

Emmett AJA made the following comments about the valuation report (at [22]-[24]):

• Although the valuer considered Property 4, which was sold for $11.06 million two months before the date of sale of the subject property to be one of the four most comparable properties, he did not explain why it was not within his assessed range which was given as $6.7 million to $9.25 million.
• The valuer failed to explain why the four properties selected were considered “most comparable” whereas the three other properties that he had investigated were not regarded as comparable.
• The valuer gave no explanation by reference to the criteria adopted by him as to why the subject property was inferior or superior to the seven properties he had investigated.
• In relation to four of the seven properties, the valuer had included the comment “local residential market having improved post this transaction” but had not explained what he had meant by this or how that fact was taken into consideration, if at all, in forming his opinion as to the value of the property.

Emmett AJA then concluded (at 35]) that there had been no error on the part of the trial judge in rejecting the tender of the valuation report. His Honour said that the valuation report did not demonstrate how the opinion expressed by the valuer was based on his specialised knowledge as there was nothing in the report to explain how the sales of the four most comparable properties for prices of $7.35 million, $9.25 million, $6.7 million and $11.06 million had led to his conclusion that the property would be likely to have a value of $7.5 million as at the date of its sale, on the assumption that the fire damage had been rectified.

His Honour went on to say (at [36]-[39]) that, in any event, had the Court concluded that the valuation report should not have been rejected, there would have been little utility in returning the matter to the trial judge to enable the valuer to be cross-examined on behalf of the insurer. This was because the valuation report contained no material that supported a conclusion that there was a difference between the price that might have been realised for the property had the fire damage been rectified in full, on the one hand, and the price realised for the property, on an arms-length sale, plus the cost of that rectification, on the other hand. His Honour said that, in the absence of any such material, it seemed highly likely that the difference between the value that the property would have had, had the rectification been carried out, and the value that it had without carrying out the rectification would have been the cost of rectification. Thus, as the property had been sold for $4,068,000 in its fire damaged state and it was agreed that the cost of rectification was $991,946, it was likely that the value of the property at the date of sale with the damage rectified was about $5 million. His Honour said that in these circumstances, whatever the valuer might say in cross-examination would be unlikely to throw any light on the question of why the difference between the value before rectification and the value after rectification would not simply be the cost of rectification.

Additional observations

Meagher JA made some additional observations, with which Beazley P agreed. Those observations were as follows (at [4]-[6]):

• The valuer had adopted the comparable sales method which could involve deriving, from the comparable sales, measures of value for particular characteristics and applying those measures to the property being valued, and the making of adjustments to comparable sale prices to take account of differences in those characteristics as between the comparable sale properties and the property being valued.
• While these and other analyses carried out by the valuer would involve estimate, inference and other judgments that were probably not going to be precise, the valuer was still required to set out the process by which this method had been followed.
• It was not sufficient, as had happened in the case before the Court, for the valuer to identify in “fairly general terms” the similarities and differences between the comparable sale properties and the subject property, and then to express an opinion as to the value of the subject property. The valuer had to explain, in a way which demonstrated the application of the methodology adopted by him and specialised knowledge, how the comparable sales justified the conclusion reached as to value.