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Sydney Metro approved

12/01/2017

The Minister for Planning and Environment has approved the Chatswood to Sydenham section of the Sydney Metro project.  It will allow a new metro rail line to be constructed and operated from Chatswood, through twin railway tunnels under Sydney Harbour and the Sydney CBD, to Sydenham, with new stations at Crows Nest, Victoria Cross, Barangaroo, Martin Place, Pitt Street, Central and Waterloo.

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Construction will start this year.

Transport for NSW has been negotiating  with affected property owners and business operators for some time.  It has already issued a few with property acquisition notices.

It’s worthwhile taking legal and valuation advice if your business is dislocated by the project.   It will ensure you get fair compensation and the costs can be added to the claim.

Call John Hodgkinson + 61 (0) 415 530 337 for expert assistance.

How business risks affect compensation for compulsory acquisition.

23/11/2016

Mr Taylor owned a small blueberry farm with 4 acres of vines. It was very profitable.  In FY15, it yielded 65 tonnes of blueberries for a gross profit of $10.36 per kilogramme.  The farm was acquired by  the NSW Government to accommodate an upgrade of the Pacific Highway near Ballina.  Market value was agreed, but his business losses fell to be determined by the Land and Environment Court.

Following the compulsory acquisition, Mr Taylor bought another property and replanted his vines.  It would take four years for the new plantation to reach the same level of production.

The problem was that blueberry production is cyclical.  Vines have a productive life of Image result for blueberry farmten years.  They bear more fruit in the middle of that period than in the early or late years.   However, the compulsory acquisition legislation does not specify any particular time frame for assessment of lost profits. Mr Taylor calculated his lost profit over the four years it would take to re-establish production at the same level.  That  period coincided with the most productive and profitable period in the lifecycle of his vines.

In contrast, RMS took a long term view and analysed a twenty  year projection, reflecting two growth cycles and the point when the present value of the cash flow became nominal.  But Pain J thought that was too distant from the applicant’s immediate loss resulting from the acquisition.  She preferred to analyse the profit lost until production returned to pre-acquisition levels.

The Court only has power to order payment of a lump sum as compensation for those lost future profits.   Those profits had to be discounted to bring them back to their present value.   It adopted a discount rate of just 2.5% p.a, which was the rate that Mr Taylor would have earned if the compensation money had been invested in a CBA term deposit at the date of the compulsory acquisition.    That was more appropriate than a rate reflecting the cost of borrowing money (such as the Australian Government bond 10Y rate).

RMS also argued that the future profits should be further discounted by 25% p.a.post-tax to reflect the risk that they might not be realised.

That partly reflected the specific hazards facing Mr Taylor’s business, such as hailstorms, pest infestations, the cost of itinerant labour, market oversupply or collapse in demand. An investor will demand a greater return to reflect the chance that those events will affect profits.

Investors in business enterprises also demand higher returns  in comparison to risk-free alternatives because their capital is in greater jeopardy.  That market risk premium can be derived from benchmark indices which reflect the additional returns achieved over the long term from  investment in a balanced portfolio of equities.  There are even greater risks attaching to investment in small businesses, compared to  large, diversified widely-held, listed companies.  That greater risk demands an additional premium on return.

But, in the Court’s view, those risk premiums should not be applied in this case.  It was unlikely that any of those risks would materialise in the short period during which profits were projected.  In fact, none of the specific hazards had adversely impacted the farming enterprise prior to the trial.  A size premium was not warranted for a business as profitable as blueberry farming with limited apparent risks.  In any event, the applicant had plans to manage all the risks.  Pain J declined to discount Mr Taylor’s expected future profits because she treated his business as essentially risk-free.
This case provides some insight for other small businesses displaced by Government infrastructure projects.  It is unusually unproductive to be portrayed as financially challenged in an  effort to gain the sympathy of  an acquiring authority.  That approach may lead to significant discounting of the amount of compensation.  This decision illustrates the benefit of presenting as a strong, stable, well-managed, risk-free enterprise assured of future profitability.
Read all the reasons for judgement in Taylor v RMS [2016] NSWLEC 138.

Compensation for compulsory acquisition in a rising market.

28/10/2016

Infrastructure connects communities, facilitates trade and commerce and opens new opportunities. As a population grows, road, rail, electricity and other infrastructure networks should be continually improved to keep pace with demand for essential services.   But urban growth and renewal have undesirable side-effects, residents and businesses are displaced to make way for enhancements to the urban fabric.

The press is awash with stories about residents and businesses offered market value for their premises, just to find themselves priced out of the market at a later date.

In NSW, legislation requires landholders to be compensated for the market value of property taken from them.  Market value is the amount for which the property might be hypothetically exchanged at a particular date.  The most reliable method for deducing market value is direct comparison with the prices actually achieved on sales of comparable properties.

Market value is deduced at a specifiImage result for rising commercial property pricesc date.  Property prices and rents rise (and fall) over time in response to market conditions like supply/demand, competition, availability of substitutes, market expectations and other factors.  Changes in property values reflect the combined influence of those market forces as they come to bear upon the property over a period of time.  In a rapidly rising market, timing differences can have significant effect.  According to the CoreLogic Home Value Index, prices for all dwellings across Sydney increased by 10.21% during the year to 30 September 2016.  That suggests that a property accurately appraised to be worth $1 million a year ago would now cost $1,102 million to replace.  That’s a clear demonstration of the need, when negotiations are protracted, for valuations to be regularly updated during periods of disequilibrium.

Sometimes, the project itself affects supply and demand in the vicinity.  For example, market demand for commercial office space in the Sydney CBD has increased by 63,000 square metres* to accommodate tenants displaced by the Sydney Metro project . That inevitably reflects in increased rents or decreased leasing incentives.  The legislation explicitly requires that the effect of the project and any works already carried out on those prices is to be disregarded. The price premium attributable to the project must be ignored.   In practice, that means adjusting the value deduced from actual transactions to take account of those effects.   Lawyers and valuers know the principle as the “Pointe Gourde principle”.  The observation was made in Pointe Gourde Quarrying & Transport Co Ltd v SubIntendent of Crown Lands (Trinidad) [1947] AC 565 that “It is well settled that compensation for compulsory acquisition of land cannot include an increase in value which is entirely due to the scheme underlying that acquisition.”

The ‘double whammy’ of rising markets and improved urban amenity can price displaced residents and business-owners out of the market.   Early engagement in negotiation, good legal counsel and regular valuation updates can avoid that problem.

* Source: Savills Briefing Sydney CBD Office October 2016.

Government land acquisition reforms offer nothing for business.

20/10/2016

The NSW Government has recognised that the land acquisition process for public infrastructure is difficult and complex.  In 2012, it asked David Russell SC to review the legislation and administrative arrangements in order to make the process fairer and more transparent.  This year, it asked the Customer Service Commissioner (Michael Pratt) to revisit Mr Russell’s recommendations, although the effect of compulsory acquisitions on business was excluded from the scope of his review.   On 18 October, the government announced a number of legislative and administrative measures addressing their recommendations.

The most publicised measure has been to increase the allowance for ‘solatium’ up to $75,000 and to index it to annual increases in the consumer price index.  That sum is intended to cover the inconvenience of forced relocation, as well as the emotional and social costs of establishing new social networks in an unfamiliar area.  However, this head of compensation is available only in the case of a principal place of residence.  No allowance whatsoever is made for non-financial costs arising from the displacement of a business.

” it’s disappointing that the Government has focused on residential markets and overlooked the need for reform in this space “

Businesses face costs and disruptions that are quite different in character and amount to displaced homeowners. For example, a business operator often needs to obtain development and other regulatory consents in order to relocate its business, supported by relevant planning, architectural and engineering advice.  Large scale projects (like the Sydney Metro and WestConnex) affect vacancy rates, incentives and market rents for commercial space.   Displaced businesses can lose local markets and face increased operating costs.  Trading, profitability and goodwill can be impaired in the short- and long-term.  In some cases, relocation is entirely impracticable and the business is rendered unviable.

The legislation currently allows businesses to recover “any other financial costs reasonably incurred (or that might reasonably be incurred) relating to the actual use of the land, as a direct and natural consequence of the acquisition.”  That’s a broad ‘catch-all’ provision that is poorly understood and inconsistently interpreted by constructing authorities.  The Law Society of NSW advocated for a better, more detailed framework for assessing business claims, but the Government‘s only response has been to encourage greater consistency between acquiring authorities.  It simply promises to monitor outcomes and consider further action in the future.

The proposed changes to the Land Acquisition (Just Terms Compensation) Act 1991:

  • allow six months of negotiations before the compulsory acquisition process can be triggered;
  • require constructing authorities to give the Valuer General a detailed brief about the issues affecting compensation;
  • permit the Valuer General up to 45 days to make its determination (up from 30 days);
  • give the constructing authority up to 45 days to issue a compensation notice after it receives the Valuer General’s determination (up from 30 days);
  • facilitate independent merits review of hardship applications; and
  • where the resumed property is used in a particular way, allow its replacement with a reasonably equivalent property in the exceptional case there is no general market for the property.

A range of administrative changes will also be made with the effect that:
acquiring authorities will negotiate face-to-face with displaced landowners;

  • a central agency will collect and publish data from acquiring authorities;
  • a guide about compulsory acquisition will be published in straight-forward language;
  • dispossessed landowners will have first right of refusal at market value, if the land is not used for the infrastructure project;
  • additional staff will provide greater support to residents with the acquisition, compensation and relocation processes; and
  • the Valuer General process will more closely reflect the expert determination model of dispute resolution.

Given the number of commercial and retail businesses displaced by current infrastructure projects, it’s disappointing that the Government has focused on residential markets and overlooked the need for reform in this space.

Compensation for Property Investors

18/10/2016

Landowners displaced by Government infrastructure projects are entitled to just compensation. They can recover not only the market value of the freehold or leasehold property taken from them but also other losses attributable to the consequential disturbance to their operations.

For example, landowners who operate a business from the resumed property can recover stamp duty, mortgage costs, relocation expenses, lost goodwill and other costs incurred in connection with moving to alternative accommodation.  Business operators who occupy premises, off balance sheet, under lease, are equally entitled to recover financial losses caused by the disturbance to their business – George D Angus Pty Ltd v HAC [2013] NSWLEC 212.
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On the other hand, passive investors who do not actually occupy their property will not be able to recover the on-costs of buying another investment property.  A claim for stamp duty spent on purchasing a replacement residential investment property was disallowed in G. Suonaf Holdings Pty Ltd v RMS [2016] NSWLEC 116  because the applicant had not established it had actually used the house, having only received rental income from it.  And, in another recent case, Speter v RMS [2016] NSWLEC 128,  Mr and Mrs Speter presented as classic examples of passive investors.  They did nothing with their property other than taking rental income and hoping for a capital gain.  They had never occupied it and had not been forced by the compulsory acquisition to physically remove anything from it.  In that case, they were not entitled to compensation for the cost of stamp duty, mortgage establishment and other expenses associated with acquisition of a replacement property.

A property owner can recover compensation for these on-costs if it proves it is in the business of property development and the acquired land is part of its stock-in-trade.  In one case, the claimants had received the resumed land as a gift from their father. They had nothing more than vague and unstructured visions about its future development.  As a result, they were unable to recover the on-costs  of buying another property – Cannavo & anor v RTA [2004] NSWLEC 570. The dispossessed landowner was more successful in Blacktown Council v Fitzpatrick Investments [2001] NSWCA 259, because it was able to prove that it held the resumed property for the purpose, when the time was ripe, of subdivision and sale at a profit.  The costs of replacing that land bank were recoverable as “financial costs … relating the actual use of the land.”

These kinds of consequential expenses are often overlooked.  But the distinctions discussed above need careful thought and dispassionate advice from a lawyer with specialist experience.    The right advice can add tens or hundreds of thousands of dollars to compensation.

Down-zoning for infrastructure.

12/09/2016

As part of the planning process, NSW Government authorities and local councils may designate land as required for open space, national parks, roads, railways hospitals schools and other public purposes listed under section 26(1)(c) of the Environmental Planning and Assessment Act 1979.  In order to reserve that land for those purposes, and to prevent conflicting development, local councils have the power to rezone the land.  It is identified on a ‘Land Reservation Acquisition Map’ in the Local Environmental Plan.  The government authority that designated the land for rezoning is acknowledged in the Local Environmental Plan.
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Rezoning for a public purpose has catastrophic effect of the value and saleability of the land.  Thankfully, the affected landowner has a remedy under the Land Acquisition (Just Terms Compensation) Act 1991.   If it can demonstrate hardship, then it can oblige the constructing authority to acquire the land within 90 days.   Hardship is established by showing there are personal, domestic, social or economic loss pressures forcing a sale, but the land is unsaleable at its former value.   During the second reading, the parliamentary sponsor suggested that it would apply in situations where a resident has been relocated to a job in another State; a family has to relocate for health reasons or outgrows its accommodation; the owner needs to move closer to sick relatives or that maintenance is beyond the owner’s capacity as well as other circumstances.

The process is initiated by serving an approved form on the constructing authority.  The initial response is usually an attempt to negotiate a private treaty.  If a mutually satisfactory arrangement can’t be negotiated within 90 days, then the constructing authority is obliged to publish an acquisition notice in the Government Gazette.  The effect is to immediately vest an unencumbered freehold title in the constructing authority and extinguish lesser interests like leases, easements, trusts, mortgages, tenancies and other things.  The proprietary rights of the dispossessed interest-holders are converted to an entitlement to be compensated for their full market value.
Market value is defined in the legislation to mean is the amount that would have been paid for the land if it had been sold at that time by a willing but not anxious seller to a willing but not anxious buyer, disregarding the effects of the planned development.  The International Valuation Standard 2011 defines ‘market value’ as “the estimated amount for which an asset or liability should exchange on the date of valuation between a willing buyer and willing seller in an arms-length transaction after proper marketing and where the parties have each acted knowledgeably, prudently and without compulsion”.

That’s less than the amount a constructing authority would have pay if it compulsorily acquired the property of its own motion.  In that case, it must also pay ‘disturbance’ costs such as legal costs, valuation costs, mortgage discharge and establishment fees, (perhaps) stamp duty on a replacement property of equal value and other financial costs arising from the acquisition.  It must pay solatium for the emotional distress and inconvenience of losing a home.  It must also reimburse any loss in value due to residual parcels being separated and isolated from each other.

In the second reading speech mentioned above, the Minister of the day said “there may be situations which would warrant an authority exercising its discretion to pay one or more of these additional heads of compensation. Because all the problems and circumstances of landholders cannot be anticipated, the bill has this inbuilt flexibility to ensure fairness”.  He was referring to the section of the legislation which says that those additional heads of compensation “need not be taken into account” in an acquisition initiated by the owner. It’s not clear whether those words give a discretion in the matter or prohibit any allowance for special value, solatium, severance and disturbance.

That was argued in a recent case; Hoy v Coffs Harbour City Council [2016] NSWCA 257.  Mrs Hoy owned some land which was rezoned for public purposes by the Council.  She demanded early acquisition.  The amount of compensation could not be agreed and it fell to the Valuer General for determination.

The Court of Appeal decided that, where the acquisition was activated by the hardship, the Valuer-General does indeed have a discretion in determining compensation to take those matters into account.  It found “as a matter of language” the section was not mandatory, but conferred a discretion. It would be inconsistent with the express object of the legislation to exclude (for example) compensation for special value to an owner who suffers some hardship. That approach is consistent with what was said in Parliament when the legislation was introduced.

Surprisingly, the Court denied Mrs Hoy the costs she incurred to establish hardship.   She incurred those costs before her entitlement to compensation crystallised on gazettal of the acquisition.   That aspect of the decision seems to me to be contrary to a line of authority allowing pre-acquisition losses (see, for example, Director of Buildings & Lands v Shun Fung Iron Works Ltd [1995] 2 AC 135 per Lord Nicholls at 138).

The on-costs of replacing compulsorily acquired property.

06/09/2016

 

Landowners whose property is compulsorily acquired are compensated for the market value of that property.  That allows them to buy another property to replace what was taken from them.

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In addition, if they need to relocate, they can claim compensation for  stamp duty costs on the purchase of a replacement property.  They can also claim “any other financial costs reasonably incurred … relating to the actual use of the land, as a direct and natural consequence of the acquisition”.

The Land and Environment Court has laid down some guidelines about what a landowner needs to prove in order to sustain those kinds of claims.

In Blacktown Council v Fitzpatrick Investments [2001] NSWCA 259, the Court of Appeal decided that stamp duty could be recovered where a property developer needed to purchase other subdivisional property to replace a land bank that had been compulsorily acquired.

In Sebastian Cannavo and Alfia Jennifer Busa v Roads and Traffic Authority of New South Wales [2004] NSWLEC 570  the applicants held the land as an investment with a vague and unstructured hope that they might develop the land in due course.   There was no evidence that they had acquired the land for development or subdivision.  It was not trading stock held in the course of any business enterprise.  In that case, the financial costs associated with purchase of another property could not be said to relate to the actual use of the resumed land.

In Bezzina Developers Pty Ltd v Leichhardt Municipal Council [2006] NSWLEC 175,  there was no direct evidence demonstrating that a replacement site could be used in the same way as the subject land.  Furthermore, there was nothing to show that the market value of the resumed land was reflected in the price for a replacement.  A claim for transfer duty  could not be justified as a financial cost relating to the actual use of the land.

Most recently, in G. Suonaf Holdings Pty Ltd v Roads and Maritime Services [2016] NSWLEC 116, a claim was made for stamp duty  and other financial costs on the purchase of a residential property to replace a rented house.  The claim for duty was disallowed because the owner had not proved that it either occupied the premises or used it in the course of a business or that it intended to purchase a replacement property.  The claim for other financial costs also failed because the landowner didn’t show how the acquired land was actually used or that the replacement property was purchased as a result of the acquisition.

Claims for duty and other on-costs will not succeed unless the claimant shows that it will occupy the replacement property or that it is in the business of property development.