The statutory disregard and costs of purchasing replacement land - where do we stand?
A recent Court decision has narrowed the circumstances in which dispossessed landowners are entitled to compensation for the cost of buying replacement land.
The Court also considered the extent of the “statutory disregard” when determining compensation for the “market value” of the land on the date of its acquisition.
Sydney Metro v G&J Drivas Pty Ltd [2024] NSWCA 5
Background
The respondent, G&J Drivas Pty Ltd, owned a large block of land in Parramatta CBD. In 2018, the land was improved by a two-storey mixed-use office/retail complex.
In December 2018, the respondent obtained development consent to erect a 25-storey tower on the land. It had also prepared a further development application to increase the height and GFA of the tower development.
In early 2019 the respondent anticipated the land may be compulsorily acquired for the Sydney Metro project. To mitigate financial risks, it decided to reduce expenditure on the tower, halting the preparation of detailed drawings for the further development application.
Upon the respondent being formally notified that the land would be acquired for the Sydney Metro West project, the respondent ceased development of the tower altogether.
In the first instance, Justice Duggan assessed the market value of the land by assuming the improvements permitted by the two development applications had been undertaken. Justice Duggan held that, but for the compulsory acquisition, the respondent would not have ceased development work, and therefore the loss in value, compared to if those improvements had been made, was to be disregarded under section 56(1)(a) of the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) (the Act).
Sydney Metro appealed the Court’s findings. On appeal, the Court of Appeal was required to consider the following two issues:
-
statutory disregard under section 56(1)(a) of the Act to the assessment of market value
-
Section 59(1)(d), (e) and f) of the Act for claims for stamp duty and other expenses in the purchase of replacement land
Issue One: Statutory Disregard
The respondent argued that the land should be valued based on the tower development approved by the development application and the further development application for the increased height and FSR. The respondent sought to uphold Justice Duggan’s finding that, but for the compulsory acquisition, it would have continued with the development.
The respondent argued that section 56(1)(a) of the Act required the decision to discontinue development to be disregarded when assessing the land’s market value.
The Court of Appeal, however, held that the respondent’s claimed loss in market value was not caused by Sydney Metro’s actual or proposed carrying out of the public purpose. Rather, the loss was caused by the respondent’s decision to stop development, which was based on the anticipated acquisition of the land.
The Court held that the cause of any increase or decrease in the value of the land is best determined by focusing on the effects of the proposed public purpose, not the effects of the proposed acquisition.
Any change in the value of the land caused by the owner’s choices before its acquisition (for example, choices based on the possibility of the land being acquired) are not regarded as having been caused by the proposed public purpose (whether it is actually carried out or not).
The Court held that the nature of the public works for which the land was being acquired was not relevant to the respondent’s decision to stop development. On this basis, no casual connection existed between the public works and the increase or decrease in the value of the land.
The Court reached this conclusion despite the respondent providing geotechnical reports prepared for the proposed works that made it clear to the respondent that the land would be acquired for the public purpose.
The Court’s decision emphasises that the causal question needs to be answered by the effects of the public purpose on the value of the land, rather than the effects of its proposed acquisition. It appears the Court considers that whether the public purpose has had any effect on the value of the land can only be determined after the formal notice of acquisition, as until then no connection exits between the public works and the value of the land.
In reaching this decision, the Court emphasised the purpose of the Act being “to ensure compensation on just terms”. In this instance, if the Court disregarded the respondent’s decision to stop development, the respondent would have received compensation for the market value of the hypothetical improvements to the land without spending anything on those improvements.
Issue Two: Stamp Duty
The Court has previously held that the entitlement to compensation for stamp duty and mortgage costs under section 59(1)(d) or (e) of the Act is not available to property investors or developers, as they generally do not occupy the land being compulsorily acquired and will not therefore relocate.
In response, developers and investors have claimed those costs under section 59(1)(f) as “any other financial costs”. In this, they rely on Blacktown City Council v Fitzpatrick [2001] NSWCA 259. The Court of Appeal’s decision in this case has narrowed this option.
The respondent sought to claim the costs of purchasing a replacement property, including stamp duty costs, under section 59(1)(f) of the Act, by relying on the Fitzpatrick decision, and given its status as a property developer (who acquires and develops property), the land should be classified as “stock in trade”.
However, the Court found that as the respondent did not “relocate”, its claim for compensation for stamp duty and other property replacement costs could not be upheld.
In so doing, the Court relied on a previous decision in Roads and Maritime Services (NSW) v United Petroleum Pty Ltd (2019) 99 NSWLR 279, which held that “any other financial costs” covered by section 59(1)(f) must be interpreted to be to add something to what is covered by sections 59(1)(a)-(e), and must be construed “purposively” and within context so as to not “subvert the limitations” contained in sections 59(1)(a)-(e).
The Court also held that the Fitzpatrick decision was primarily directed at whether a business carried out on land was an “actual use” for the purpose of section 59(1)(f) and did not consider whether stamp duty is claimable under section 59(1)(f). While the Court did not overturn Fitzpatrick, it has narrowed the circumstances under which property investors and developers may claim the stamp duty costs of relocation property in compensation.
Further developments
G&J Drivas filed an application seeking special leave to appeal the orders relating to the statutory disregard (not the stamp duty compensation costs) to the High Court. On 6 June 2024, the High Court refused special leave, confirming the Court of Appeal’s decision.
Conclusion
The Drivas decision is important to property investors and developers. It highlights the danger they face if they decide not to pursue development of their land, even where it is likely or certain that the land will be acquired for a public purpose.
The findings also present new obstacles to property investors and developers seeking to rely on the principles of Fitzpatrick to claim compensation for costs of purchasing replacement property.
Authos: Dennis Loether and Monique Lewis