Compulsory acquisitions and compensation for relocation costs

There seems to be a lot of interesting jurisprudence emerging from compulsory acquisition cases at present. We promise to provide updates on broader planning and environmental law issues in NSW, but we couldn’t resist posting about the Court of Appeal’s judgment in El Boustani v The Minister Administering the Environmental Planning and Assessment Act 1979 [2014] NSWCA 33.

This case was an appeal against Justice Pepper’s decision at first instance in relation to the determination of compensation for the acquisition of Mr and Mrs El Boustani’s land at Leppington for the purposes of the South West Rail Link project. The acquisitions for the South West Rail Link have attracted a fair degree of media scrutiny, with some of the landowners appearing on 730 late last year.

Propertyscreen

The decision is important as it sheds new light on the exclusion of compensation provided in section 61(b) of the Land Acquisition (Just Terms Compensation) Act 1991 (Just Terms Act). In broad terms, this section excludes compensation for financial loss incurred in realising the acquired land’s potential, but only where the land’s market value is assessed on the basis of this potential. In short, the decision provides a hermeneutic for the interpretation of the section – if the land’s potential is “far off” and considered too “remote” then the financial losses in realising such potential will not be allowed by the Courts.

The other interesting aspect to this case relates to the composition of the Court of Appeal in determining the appeal, and the litany of errors held to have been made by the primary judge. In this regard, the Chief Judge of the Land and Environment Court not only sat on the Court of Appeal on hearing the case, but also delivered the principle judgment which held that:

  • the primary judge’s decision “involved numerous errors of law” [at 116]
  • the primary judge “misdirected herself” on a number of fronts [at 119, 122, 134], asked the “wrong question” [at 127, and 140], made an “error in approach” [at 128 and 129]
  • the primary judge’s reasoning was “opaque and some of the findings are inconsistent with each other” [at 147]
  • parts of the primary judge’s allowances for compensation were “without evidentiary foundation [at 154] and involved “a constructive failure to exercise jurisdiction” [at 156].

Both Gleeson JA and Beazley P agreed with Preston CJ’s judgment.

Given the number of compulsory acquisitions that will be necessary to enable some of the State’s current infrastructure commitments, it is likely the decision will have relevance to the compensation being determined for a number of future acquisitions. In our experience, dealing with the relocation costs of landowners can be a difficult area. This decision is relevant:

  • where relocation costs are claimed
  • where the land acquired has a market value based on the land’s potential to be used for another purpose
  • in working out what it means to “realise” the “potential” for the land to be used for another purpose, and in considering whether the circumstances are too remote.

Facts

Mr and Mrs El Boustani used their land for the purposes of growing tomatoes and other vegetables (intensive horticulture). On 23 July 2010, the Minister acquired two thirds of their land, which included a large multi-span igloo, two smaller igloos and a dam used for the purpose of vegetable growing. As a consequence of the acquisition, the El Boustanis could not use the remaining portion of the land for the purpose of intensive horticulture because of the loss of access to the dam and most of their growing lands. The El Boustanis wished to re-establish their horticulture business elsewhere and their claim for compensation included the relocation costs of doing so.

At first instance, the primary judge determined that the El Boustanis were entitled to $1,436,059 in compensation, comprising:

  • $1,194,556 for the market value of the acquired land
  • $237,310 for loss of profits as a consequence of the acquisition
  • $4,193 for other disturbance costs (legal and valuation costs).

The primary judge did not grant the El Boustanis compensation for their relocation costs. The primary judge based this decision on section 61 of the Just Terms Act, which relevantly provides:

If the market value of land is assessed on the basis that the land had potential to be used for a purpose other than that for which it is currently used, compensation is not payable in respect of:
….
(b) any financial loss that would necessarily have been incurred in realising that potential.

The primary judge held that the market value of the acquired land adopted ($70 per square metre) reflected the acquired land’s potential to be used a purpose other than its current use, namely ‘urban development’, and therefore the relocation costs fell within section 61(b) of the Just Terms Act. Accordingly, the primary judge held that the El Boustanis were precluded from being awarded compensation for their relocation costs.

The El Boustanis claimed that it would take four years for them to re-establish their horticulture business and claimed loss of profits under section 59(f) of the Just Terms Act for this period. The primary judge determined that the El Boustanis were only entitled to three years loss of profits.

Issues on appeal

The El Boustanis claimed that Justice Pepper had made errors in law in relation to the following two aspects of her decision at first instance:

  1. the rejection of the El Boustani’s claim for relocation costs, on the basis of section 61 of the Just Terms Act – the El Boustanis claimed that the primary judge had misconstrued the application of section 61 and also, that her Honour’s decision not to award relocation costs, resulted in her Honour not awarding ‘just compensation’ as required under section 54 of the Act (often described as the “just terms override” section)
  2. the assessment of the amount of compensation for lost profits under section 59(f) of the Just Terms Act – the El Bousantis claimed that the figure for loss of profits awarded by the primary judge was arrived at in the absence of any evidentiary material or logical reasoning and also that the primary judge had failed to determine a critical issue relating to loss of profits, that being the El Boustani’s preference to waiting until the conclusion of the proceedings prior to purchasing a new property.

The proper construction of section 61

Preston CJ analysed the language of section 61 as well as the case law which has previously interpreted the section. His Honour’s interpretation of the language of section 61 is technical, but provides the key to understanding the difference between the two approaches of Justice Pepper in the Land and Environment Court, and the Chief Judge in the Court of Appeal judgment. The Chief Judge analysed the following three phrases within the preamble to section 61:

  • ‘the basis’ – the use of the word “the”, rather than the word “a”, before “basis” demonstrates that the assessment of the market value must have used the ‘potential use’ as its fundamental foundation – it is not sufficient if the market value of the land was assessed ‘having regard to’ or ‘being influenced by’ the potential use’ (at [93])
  • ‘a purpose other than that for which it is currently used’ – this expression requires two purposes which are different from one another in nature or kind – if the current use of the land even one of the bases upon which the market value of the land is assessed, then this precondition is not satisfied (at [94])
  • ‘had potential’ – there are two temporal components to this phrase:
    o ‘had’ – requires the potential to exist at the date of acquisition
    o ‘potential’ – whilst an ambiguous term, Preston CJ held when considered in the context of the rest of section 61 phrase, this requirement will be satisfied:

….if the potential for development for the other purpose is temporally very proximate – the land is ripe and would be virtually certain to be developed for the other purpose within the very near future … However, if the land is unlikely to be developed for that other purpose for a long time and there is considerable uncertainty that it would be so developed for that purpose, the precondition will not be satisfied (at [99] – [100]).

Preston CJ concluded that where the market value is primarily assessed based on the current use of the land, but with the addition of a “hope value” for the possibility of a future, different use, the requirements of section 61 will not be satisfied. His Honour held that the “potential of land to be used for a purpose other than that for which it is currently used will need to be sufficiently temporally proximate or ripe in order for the precondition in s61 to be satisfied”.

His Honour then turned to the meaning of paragraph (b) in section 61, which applies if the requirements of section 61 are satisfied, and provides that compensation is not payable in respect of:

(b) any financial loss that would necessarily have been incurred in realising that potential.

The Court concluded that a “financial loss, such as relocation costs, incurred in connection with the sale of land could be said to be necessarily incurred in realising the potential in the case of the land that is ripe for development for the other purpose but not in the case of the land where the potential for development for that other purpose is some 10 years away”[at 115]. In other words, if land is unlikely to be developed for a different purpose to its current use for 10 years, then the land would continue to be used for that current use for 10 years, and the sale of that land would not “realise” (make real or give reality to) the new or different purpose, which precludes the application of section 61.

Errors of the Primary Judge in relation to section 61

The Court of Appeal identified six errors of law which he held that the primary judge had made regarding the application of section 61 of the Just Terms Act. These errors can be summarised as “asking the wrong question and not asking the right question”. More specifically, the errors related to the following:

  1. not providing the basis on which the market value of the land was assessed –The primary judge “asked the wrong question and had failed to address the correct question” about the basis on which the market value of the land was assessed. His Honour stated that the primary judge erred in “not making an explicit finding of the basis on which she had assessed the market value of the land” [at 118]. Instead, that the primary judge had examined and relied upon the valuation methods adopted by the parties’ valuers. The Court of Appeal also noted the primary judge had stated “but for the acquired land’s potential for urban development” the rate per square metre would have been lower. Preston CJ held that the “but for” test or to inquire whether there has been an “uplift in value” when determining the market value of the land did not satisfy the requirement for determining “the basis” of the assessment for the purposes of section 61. These questions are different to that required by the precondition in the chapeau of s 61 – none of them involved determining “the basis” of the assessment of market value as required by s 61″ [at 127]
  2. not asking what was the purpose for which the land had the potential to be used at the date of acquisition –The primary judge had asked the wrong question and failed to address the correct question regarding what “potential” the land “had” at the date of acquisition to be used for a purpose other than that for which the land was currently used on that date. These errors included framing the question of what potential the land “has”, rather than “had”. His Honour held that the primary judge “conflated the concepts of use of land and the purpose for which land is used” [at 129]. In this regard, Preston CJ held that terms such as “urban development” or “town centre” were too broad and generic and did not meet the test for characterisation of purpose, as many uses would be permissible under these terms with different market values (i.e. residential, commercial and industrial uses). Preston CJ also held that the primary judge had failed to consider the need for ‘temporal proximity’ of the potential use. Preston CJ noted that the primary judge had made findings suggesting that the “it would be many years, even a decade, before the land would be developed for urban purposes”, and in these circumstances, the required temporal proximity of the potential other use was missing
  3. not asking whether the relocation costs could be said to be “necessarily incurred” in “realising” the potential for the land to be used for the other purpose of town centre or urban development –The primary judge’s finding that the redevelopment of land for urban development would not occur for up to 10 years and there would be no inconsistency between “igloos and the town centre” for this period. Preston CJ held that this potential use of the land was not temporally proximate enough to mean that the relocation costs would “necessarily” be incurred in “realising” the potential for the land to be used for urban development. The urban development was too remote and uncertain to engage paragraph (b) of section 61.

Accordingly, His Honour held the primary judge erred on questions of law in determining that section 61 operated to deny the El Boustanis compensation for relocation costs.

Findings regarding loss of profits

The main issue between the parties in respect of the second ground to the appeal related to the number of years lost profits should be allowed. His Honour held that the primary judge had made the following errors determining the loss of profits to be awarded to the El Boustanis:

  1. The primary judge’s decision to “allow” one year for the El Boustanis to find a new property and to construct facilities necessary to grow vegetables was made without reference to any evidence and was “without evidentiary foundation”. In particular, Preston CJ noted that the hearing of the case occurred was more than 12 months of the acquisition and therefore the primary judge knew that the El Boustanis had not purchased a replacement property within this timeframe. This was neither addressed or rejected by the primary judge.
  2. The primary judge’s decision regarding a loss of profits amounted to a constructive failure to exercise jurisdiction for reasons including the incomplete and inconsistent factual findings, the failure to give reasons for the one year allowance, and the failure to address the evidence of the El Boustanis regarding why they had claimed a loss of profits for four years.

Conclusion

The Court allowed the appeal, set aside the orders made by the Land and Environment Court and remitted the matter to the Court to determine the El Boustani’s claim under the Just Terms Act according to law. It will be interesting to see how Pepper J applies the judgment in re-determining compensation.

One thought on “Compulsory acquisitions and compensation for relocation costs

  1. Pingback: North West Rail Link: Compulsory Acquisition Cases | Planning and Environment in NSW

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