De Zalze Golf Club v VAB: Stellenbosch Municipality

The Club reviewed and set aside a decision made by the Valuation Appeal Board (VAB) for the Stellenbosch Municipality in the Club’s appeal against a valuation of its golf course by the Stellenbosch Municipality for purposes of municipal rates and the appeal was regulated by the Local Government: Municipal Property Rates Act 6 of 2004 after the Municipality’s valuation was R97,5 million while the VAB’s valuation was R26,5 million and this involved valuing golf courses.

Essence

HC engaged in the excercise of valuing and comparing golf courses in a successful appeal against the valuation arrived at by the Stellenbosch Municipality.

Decision

(3429/19) [2020] ZAWCHC 108 (25 September 2020)

Order:

(a) The application succeeds.
(b) The first respondent’s decision of 5 September 2018, by which it placed a value of R26,5 million on the applicant’s leasehold rights in respect of Remainder Erf 296 De Zalze, is reviewed and set aside.
(c) The matter is remitted to the first respondent for consideration and decision afresh. The first respondent will be entitled in its discretion to receive further evidence and submissions before reaching its decision.
(d) The second respondent must pay the applicant’s costs, including the costs of two counsel.

Judges

O L Rogers J.

Heard: 13 August 2020

Delivered: 25 September 2020 

Related books

CG van der Merwe  Sectional Titles, Share Blocks and Time-sharing (LexisNexis service issue 26 – November 2019) at

Reasons

[80] However, this was not the VAB’s methodology or line of reasoning. A court must bear in mind the distinction between review and appeal (see Minister of Environmental Affairs and Tourism v Phambili Fisheries (Pty) Ltd 2003 (6) SA 407 (SCA) para 52; MEC for Environmental Affairs and Development Planning v Clairison’s CC 2013 (6) SA 235 (SCA) para 18). A court is not entitled to set aside an administrative decision just because on the merits it would have reached a different conclusion. The converse must also apply; if an administrative body has acted irrationally or without good reason in arriving at a decision, the decision should not be allowed to stand just because the court considers that the same result could be reached by a permissible or adequate line of reasoning. The applicant for review is entitled to have a proper decision from the body appointed by statute to make it. This is particularly important where one is dealing with a specialised subject such as property valuation. Quite possibly a pure-profits method such as I sketched in the preceding paragraph is unsound.

[81] In my view, therefore, this ground of review has been made out. The VAB’s valuation is not rationally related to the reasons it has given for its decision (s 6(2)(f)(ii)(dd) of PAJA). Relevant considerations were not considered (s 6(2)(e)(iii)). The decision was in any event unconstitutional and unlawful (s 6(2)(i)) because the VAB failed to apply its mind properly to the issues raised by the appeal (cf Pharmaceutical Manufacturers Association of SA & another; In re Ex parte President of the Republic of South Africa & others 2000 (2) SA 674 (CC) paras 82-83).

Quotations from judgment

Note: Footnotes omitted and emphasis added

Introduction

[1] The applicant, De Zalze Golf Club (‘Club’), seeks the review and setting aside of a decision made by the first respondent, the Valuation Appeal Board for the Stellenbosch Municipality (‘VAB’), in the Club’s appeal against a valuation of its golf course by the second respondent, the Stellenbosch Municipality (‘Municipality’). The valuation (which is for purposes of municipal rates) and the appeal were regulated by the Local Government: Municipal Property Rates Act 6 of 2004 (‘Rates Act’). The Municipality’s valuation was R97,5 million while the VAB’s valuation was R26,5 million.

[2] The Municipality opposes the application. The VAB abides the court’s decision but has filed an explanatory affidavit. Although the proceedings of the VAB were mechanically recorded, a transcript has not been placed before me. Information as to what happened at the VAB’s hearings is confined to what the parties have stated in their affidavits.

[3] The Club holds a 99-year lease of the golf course from the De Zalze Winelands Estate Home Owners Association (‘HOA’). The golf course is located within a gated residential estate. The valuations discussed below were valuations of the Club’s leasehold. At all material times the golf course was operated under contract by De Zalze Golf Club NPC (‘NPC’), a non-profit company of which the Club is the sole member. All financial activities relating to the golf course are accounted for in NPC.

[4] In terms of the operating agreement, none of NPC’s income may be used for any purpose other than ensuring that the golf course and golf club business are used, maintained and improved for the benefit of the Club and its members.

[5] The Club’s constitution stipulates that it may not distribute profits or gains to any person and that it is required to use its funds solely for investment or for the objects for which the Club has been established. The constitution envisages that the Club will seek tax-exempt status. Whether this has happened does not appear from the record. If the Club is tax-exempt, then upon its dissolution any excess of assets over liabilities must be transferred to another tax-exempt club or association having similar objects. If it is not tax-exempt, on dissolution any such excess must be distributed to members in such proportions as the Club’s committee may determine.

[6] The HOA’s memorandum of association states that it cannot distribute its assets in any way. It may not pay dividends. Its income and property must be applied solely in the promotion of its main object.

[7] In terms of the 99-year lease, the annual rent payable by the Club to the HOA is R100. The Club may not use the leased area for any purpose other than a golf course and related activities without the HOA’s consent which shall not be unreasonably withheld. The Club is entitled to all revenue and income earned from the leased area and is responsible for all operational and necessary capital expenditure and losses. The Club must at its own cost maintain the leased area and attend to all repairs, renewals and replacements that may reasonably be required. It is must pay all rates and taxes as well as charges for water, electricity and sewage imposed in respect of the leased area.

[8] Clause 12.6 of the lease requires the Club to accumulate all entrance fees in a capital reserve fund which will be used only to meet the golf course’s capital expenditure (‘capex’) requirements. These entrance fees are once-off fees payable by new members. There is no similar restriction imposed on the Club in respect of annual subscriptions, playing fees, green fees and the like.

[9] In terms of the lease, the Club may sub-contract to a third party its rights and obligations in respect of the maintenance, management, operation and control of the leased area, subject to the Club’s committee’s consent which may not be unreasonably withheld. (The operational agreement between the Club and NPC is such a sub-contract.) For the rest, the Club may not cede, delegate or encumber its rights and obligations under the lease, and may not sub-let, without the landlord’s prior consent which may not be unreasonably withheld.

[10] It is common cause that the VAB’s valuation decision is ‘administrative action’ for purposes of the Promotion of Administrative Justice Act 3 of 2000 (‘PAJA’).

The leased area

[11] The leased area comprises 14 erven, some of which belong to the HOA and over others of which it has secured servitudes. The total area of these erven is 63,17 ha. Naturally the fairways, greens and surrounding roughs cover the greater part of this area. The clubhouse (including the pro-shop) is located on Erf 296. It appears that the other improvements, such as offices, ablution facilities and workshops, are also on Erf 296, which is 9801 m² (ie just under one hectare).

[12] The valuation of R97,5 million against which the Club appealed to the VAB stated in its heading that it was a valuation in respect of Erf ‘296/A’, 9801 m² in extent. The meaning of ‘A’ in this reference is unexplained. In the substantive part of the valuation, there were columns headed ‘Entity’, ‘Category’, ‘Tariff’ and ‘Valuation’. ‘Entity’ refers to an identified piece of property. The value of R97,5 million appeared in the last column of the first row, preceded by ‘Primary’, ‘Business’ and ‘BUS’ in the Entity, Category and Tariff columns. Beneath this row, the 14 erven making up the leased area were listed in the Entity column, in each case with ‘Business’ in the Category column, ‘PROS’ in the Tariff column and R0 (Rand zero) in the Valuation column. There was an entry of this kind inter alia for Erf 296. From the Municipality’s Property Rates Policy, which forms part of the record, one can see that ‘BUS’ signifies ‘Business’ while ‘PROS’ signifies ‘Private Open Space’.

[13] The VAB’s amended valuation followed exactly the same format, save for the revised figure of R26,5 million in the ‘Valuation’ column of the first (‘Primary’) row.

[14] Although in the event the Municipality’s valuer and the VAB adopted a method of valuation which concentrated on the improvements located on Erf 296, it is clear that such valuations were intended to be the rateable value for the golf course as a whole. Since it would be difficult, and of no practical relevance, to apportion the value of the golf course as a whole between the individual erven, it made sense to attribute the value to a primary property and to give a zero value to everything else. It thus seems that ‘Primary’ and ‘296A’ were intended to encompass the entire golf course and its improvements.

Factual background

. . . . .

The grounds of review

[31] The following six grounds of review can be distilled from the founding papers:

(a) The VAB was required to value the golf course as a whole, not the clubhouse buildings.
(b) The VAB disregarded the restrictions affecting the operation of the golf course and assumed that because NPC’s financial statements reflected a profit, such profits were distributable. The VAB disregarded the fact that the applicable agreements made it impossible for the Club to dispose of its leasehold rights to a third party in a way that would enable the latter to operate the golf course as a profit-making business.
(c) The VAB rejected the enhancement/double taxation contention without explaining why there had to be a fixed formula to quantify the enhancing impact of the golf course on residential properties. The evidence before the VAB showed that the enhancement was on any reckoning so substantial that the golf course could have no independent value.
(d) The VAB simply adopted Mr Botha’s rental rate R110/m² for the clubhouse, without explaining why that rate was adopted and without addressing or giving reasons for rejecting the lower rates put up by Mr du Toit.
(e) The VAB did not explain its adoption of a 10% CR.
(f) The VAB failed to take into account comparable valuations addressed in Mr du Toit’s report of 20 August 2018, in particular the R7,2 million valuation of the highly comparable SGC.

. . . . .

First ground – valuation of buildings only

[34] I have already explained how I understand the valuation statements issued by the Municipality and the VAB. I do not accept the VAB’s explanation that it confined its attention to the clubhouse because it was only valuing Erf 296. I can only think that that this was a lawyer’s point which the VAB unwisely adopted. The Municipality in its answering affidavit followed the same course.

. . . . .

[43] It is thus desirable to defer a decision on the first ground of review, pending a consideration of other matters.

Second ground – restrictive documents

[44] I have already summarised the most important restrictive terms of the constitutional documents of the HOA and Club and of the lease and operating agreements. It is clear from these documents that the profit generated by NPC must be invested or used to maintain and improve the golf course and its facilities. No part of this profit may be distributed to members.

[45] The VAB’s reasoning on this aspect in its decision of 5 September 2018 is skeletal, but it expanded upon its reasons in the explanatory affidavit. Its chairman referred to s 46(3)(c) of the Rates Act which states that in determining the market value of a property, any unregistered lease in respect of the property must be disregarded. This is not directly in point, because the Club was not objecting to the valuation on the strength of an unregistered lease. The Club did argue, however, that the valuer should have regard not only to the terms of the registered lease but also to the constitutional documents and operating agreement.

. . . . .

[50] This must mean that, notwithstanding the terms of the registered right, a market comprising willing buyers and sellers must be assumed, ie restrictions on disposal in an open market must be disregarded (cf Todd v Administrator, Transvaal 1972 (2) SA 874 (A) at 881H-882A).

. . . . .

[53] In argument the Municipality’s counsel referred me to the judgment of Vally J in Atholl Development (Pty) Ltd v Valuation Appeal Board, Johannesburg, & another 2014 (5) SA 485 (GJ). [GF note: the appeal to the SCA against that judgment was struck off the roll on 30 March 2015]

Counsel placed particular reliance on what the learned judge said in para 50. The learned judge stated that where a municipality elects not to value a registered lease, it is entitled to value the land in the hands of the owner without regard to the burden imposed by the registered lease.

He observed that if a ‘private treaty’ were allowed to reduce the value of property on the basis that ownership of the burdened property would have limited commercial appeal to buyers, the purpose and objects of the Rates Act would be defeated. The correctness of that view does not arise in the present matter, because the Municipality, as it was entitled to do, chose to value the leasehold. Where it does so, the Municipality must naturally value the leasehold warts and all, save in the respects I have identified.

[54] Accordingly, I do not think that this ground of review has been made out.

Third ground – enhancement and double taxation

[55] Once again, the VAB’s treatment of the extensive material and submissions placed before it on this subject is unsatisfactorily terse. In its decision of 5 September 2018 the VAB stated that it had ‘considered’ this aspect but had not felt able to make a ‘definite ruling’ because of the ‘absence of a fixed formula to ascertain the exact impact’ which the golf course had on the value of the residential properties in the estate. If the premise of Mr du Toit’s contention was right, the absence of a ‘fixed formula’ to determine an ‘exact impact’ was germane only if it was a marginal case. On the figures put up by Mr du Toit, the enhancement in the rateable value of the residential properties was so great that it would dwarf any plausible valuation of the leasehold.

. . . . .

[62] In the present case, the Club did not advance its case before the Municipality and the VAB on the basis that the enhanced values of the De Zalze residential properties were a consequence of particular restrictive terms contained in any of the constitutional and contractual documents. Its case was that the mere presence of a fine golf course enhanced the values of the residential properties. (And quite possibly, I may add, the presence of luxurious homes in the estate may symbiotically add value to the golf course.) Moreover, the VAB did not wrongly ignore any restrictions which should have been taken into account.

Fourth ground – rental rate of R110/m2

[63] Once again, the VAB’s reasons for its decision are unsatisfactory. I would have expected the board to address the details of Mr du Toit’s contentions regarding the rental rate. Although an adjudicative administrative body does not have to state its reasons as fully as a court of law, it is still important for the losing party to know why its principal contentions were rejected.

. . . . .

[80] However, this was not the VAB’s methodology or line of reasoning. A court must bear in mind the distinction between review and appeal (see

A court is not entitled to set aside an administrative decision just because on the merits it would have reached a different conclusion. The converse must also apply; if an administrative body has acted irrationally or without good reason in arriving at a decision, the decision should not be allowed to stand just because the court considers that the same result could be reached by a permissible or adequate line of reasoning. The applicant for review is entitled to have a proper decision from the body appointed by statute to make it. This is particularly important where one is dealing with a specialised subject such as property valuation. Quite possibly a pure-profits method such as I sketched in the preceding paragraph is unsound.

[81] In my view, therefore, this ground of review has been made out. The VAB’s valuation is not rationally related to the reasons it has given for its decision (s 6(2)(f)(ii)(dd) of PAJA). Relevant considerations were not considered (s 6(2)(e)(iii)). The decision was in any event unconstitutional and unlawful (s 6(2)(i)) because the VAB failed to apply its mind properly to the issues raised by the appeal (cf Pharmaceutical Manufacturers Association of SA & another; In re Ex parte President of the Republic of South Africa & others 2000 (2) SA 674 (CC) paras 82-83).

Fifth ground – 10% CR

[82] I cannot find that the VAB’s use of a 10% CR in respect of the clubhouse revenue suffers from a reviewable irregularity. In his valuation of R97,5 million Mr Botha capitalised the improvements revenue at 8,5%, and in his report of 23 August 2018 he capitalised it at 9%. The VAB’s 10% was more favourable to the Club. In Mr du Toit’s report in support of the Club’s objection he arrived at the capitalised figure of R6,809,787 by using a CR of 10% (this related to the combined adjusted net income from the golf course and the improvements). In his report of 20 August 2018, his alternative methodology, which arrived at a valuation of R7,4 million, likewise capitalised the notional rent on the improvements at 10%.

[83] Since the VAB did not include income from the golf course as a component of its valuation, it is unnecessary to consider what CR might have been appropriate for such income.

. . . . .

[86] Accordingly, there does not seem to be any material inconsistency between Mr Botha’s view regarding the appropriate CR for calculating the values of the SGC and De Zalze improvements income. It is also necessary to emphasise that the CRs used by Mr Botha in expressing his opinion to Mr du Toit of the SGC’s true value have not resulted in any issued valuation. The CR (if any) used in the current SGC valuation of R7,2 million does not appear from the record.

Sixth ground – failure to consider comparable valuations

[87] The VAB contends that the Rates Act does not oblige it to have regard to comparable valuations. If it adopted a recognised valuation method, the fact that a different method might have yielded a different result does not make its valuation irregular. The VAB in any event considered that there were material differences between the De Zalze golf course and the closest alleged comparator, the SGC.

. . . . .

[93] The Club’s counsel in argument referred to the guiding principles in the Municipality’s Property Rates Policy, among which are that the rating of property will be implemented fairly and equitably, and that all ratepayers within a specific category will be treated equally and reasonably. Section 3(1)(a) of the Rates Act requires a municipality’s rates policy to treat persons liable for rates equitably. It was submitted that, at least in relation to the SGC, which falls within the Municipality’s area, the principle of fairness and equity required the De Zalze golf course to be valued along similar lines to the SGC.

[94] However, and even assuming the two golf courses to be closely comparable in all relevant features pertaining to valuation, acceptance of the Club’s submission might require the Municipality to perpetuate a wrong valuation approach. The legislative requirement is for property to be valued in accordance with generally recognised valuation practices, methods and standards (s 45(1)), and a local authority may not depart from this in order to achieve fairness.

Depending on the outcome of the present matter, the Municipality may decide that it is the SGC valuation, rather than the De Zalze valuation, that requires adjustment in order to ensure broadly equal treatment. It is apparent from the record that the valuation of golf courses has presented challenges for municipalities around the country, and that the last word has not been spoken on the SGC valuation.

Conclusion

[95] My conclusion is that the first and fourth grounds of review have been established. Since the fourth ground warrants intervention by the court, it is unnecessary to decide whether the same would have been true if only the first ground had been made out.

[96] Although the Club’s notice of motion sought a substituted decision, its counsel recognised in argument that this exceptional course would not be appropriate and that the matter should be remitted to the VAB. The Club was anxious that my remittal order should contain binding directions regarding the VAB’s fresh decision. I do not think that this is desirable, though the reasoning in this judgment will no doubt be taken into account by the VAB to ensure that its fresh decision will withstand scrutiny.

[97] The Municipality, which opposed the application, must pay the Club’s costs. Both sides employed two counsel, a precaution which was justified.

[98] I make the following order:

(a) The application succeeds.
(b) The first respondent’s decision of 5 September 2018, by which it placed a value of R26,5 million on the applicant’s leasehold rights in respect of Remainder Erf 296 De Zalze, is reviewed and set aside.
(c) The matter is remitted to the first respondent for consideration and decision afresh. The first respondent will be entitled in its discretion to receive further evidence and submissions before reaching its decision.
(d) The second respondent must pay the applicant’s costs, including the costs of two counsel.