Land and Environment Court

Overview of compensation for Compulsory Acquisition of land

 

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This section of the Court’s website is designed to provide information to Court users, legal practitioners, experts, students and the general public on cases concerning compensation for compulsory acquisition of land.

This section is intended to act as a guide to the Court’s approach to compensation for compulsory acquisition of land. However it does not constitute legal advice or offer any guarantees as to how a particular dispute will be decided by the Court.

In this section you will find information on:

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Proceedings in the Land and Environment Court

A person who has claimed compensation under the Land Acquisition (Just Terms Compensation) Act 1991 (Just Terms Act) for the compulsory acquisition of land may, within 90 days after receiving a compensation notice from the acquiring authority, lodge with the Land and Environment Court an objection to the amount of compensation offered: s 66 . This is done by lodging with the Court its prescribed form of application (on the Court’s website). Such proceedings are in Class 3 of the Court’s jurisdiction: ss 19(e), 24 Land and Environment Court Act 1979 (LEC Act). Section 38 of the LEC Act refers to the procedure in Class 3 matters. It is supplemented by the Court’s Practice Note Class 3 Compensation Claims, which includes the Court’s usual pre-hearing directions.  

In such proceedings the acquiring authority is not bound by its statutory offer of compensation made prior to the proceedings and therefore may contend for a lower amount.   However, the statutory offer remains open for acceptance until the Court determines the proceedings.

A claimant for compensation in respect of a compulsory acquisition is usually entitled to recover their costs of the proceedings, having acted reasonably in pursuing the proceedings and not having conducted them in a manner which gives rise to unnecessary delay or expense.

Amount of compensation

The amount of compensation to which a person is entitled under the Just Terms Act is such amount as, having regard to all relevant matters under that Act, will justly compensate the person for the acquisition of the land: s 54(1).

In determining the amount of compensation to which a person is entitled, regard must be had to the following matters only ( s 55):

(a) the market value of the land on the date of its acquisition,

(b) any special value of the land to the person on the date of its acquisition,

(c) any loss attributable to severance,

(d) any loss attributable to disturbance,

(e) solatium,

(f) any increase or decrease in the value of any other land of the person at the date of acquisition which adjoins or is severed from the acquired land by reason of the carrying out of, or the proposal to carry out, the public purpose for which the land was acquired.

Market value (s 55(a))

Market value is defined as the amount that would have been paid for the land if it had been sold at the date of acquisition by a willing but not anxious seller to a willing but not anxious buyer, disregarding (among other things) any increase or decrease in the value of the land caused by the carrying out of, or the proposal to carry out, the public purpose for which the land was acquired: s 56.  

Under this statutory definition the sale is between hypothetical parties.   Therefore the amount thereby determined is not necessarily the value to the owner or to the acquiring authority.

Although the statutory definition of market value in s 56 is paramount, it derives from, and is illuminated by, the extensive consideration of market value in Spencer v Commonwealth [1907] HCA 82, (1907) 5 CLR 418 .

There is attributed to the hypothetical parties a knowledge, as at the acquisition date, of all matters that might affect the land’s value, including development potential, the predicted impacts of future events, the experience of the past, and the rate of return on other investments.

The market value of land is determined as at the date of acquisition on the basis of the land’s most advantageous use, commonly called its highest and best use.   To determine whether land had potential at the acquisition date for a highest and best use that was different from its use at the acquisition date, regard is had to whether the other use was physically possible, legally permissible and financially feasible.

For example, a beachfront block of land may be used as a caravan park but may be capable of development for an apartment complex that may be of a greater value.   While the actual use of the land is as a caravan park, the highest and best use of the land is potentially as a development site for an apartment complex if it is large enough (physically possible), appropriately zoned or likely to become appropriately zoned under the relevant planning instruments (legally permissible), and likely to be profitable as a development project (financially feasible).  

In the absence of comparable sales of other lands with similar potential, the incremental value of the potential other use of the acquired land might be expressed as a premium on the market value of the land without that potential (a “bottom up” approach) or as a discount on the market value of the land assuming the potentiality was realised (a “top down” approach). Which approach is more appropriate depends on an assessment of the extent of the likelihood that the potential will be realised and when it will be realised.

Special value (s 55(b))

In some circumstances land may have a special value peculiar to the owner that exceeds the market value.  

Special value of acquired land is defined as the financial value of any advantage, in addition to market value, to the person entitled to compensation which is incidental to the person's use of the land: s 57.   It arises from some attribute of the land, some use made or to be made of it or advantage derived or to be derived from it.   Neither sentiment nor a long attachment to the land will suffice.

For example, the compulsory acquisition of a blacksmith’s forge adjacent in the vicinity of a horse racing track may, if the blacksmith’s forge is unable to be relocated elsewhere in the vicinity of that horse racing track, give rise to a claim for special value compensation.

There are few cases in which land does have a special value for a particular owner.

Severance (s 55(c))

Loss attributable to severance of land is defined as the amount of any reduction in the market value of any other land of the person entitled to compensation which is caused by that other land being severed from other land of that person: s 58.

For example, the compulsory acquisition of a strip of land through a farmer’s paddock may result in the farmer retaining two separated parcels of land, rather than one original parcel of land, severed by the land compulsorily acquired which, if resulting in a reduction in the market value of the retained land, may give rise to a claim for compensation for loss attributable to severance.

Disturbance (s 55(d))

Loss attributable to disturbance of land is defined as follows ( s 59):

(a)  legal costs reasonably incurred by the persons entitled to compensation in connection with the compulsory acquisition of the land,

(b)  valuation fees reasonably incurred by those persons in connection with the compulsory acquisition of the land,

(c)  financial costs reasonably incurred in connection with the relocation of those persons (including legal costs but not including stamp duty or mortgage costs),

(d)  stamp duty costs reasonably incurred (or that might reasonably be incurred) by those persons in connection with the purchase of land for relocation (but not exceeding the amount that would be incurred for the purchase of land of equivalent value to the land compulsorily acquired),

(e)  financial costs reasonably incurred (or that might reasonably be incurred) by those persons in connection with the discharge of a mortgage and the execution of a new mortgage resulting from the relocation (but not exceeding the amount that would be incurred if the new mortgage secured the repayment of the balance owing in respect of the discharged mortgage),

(f)  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. 

"Financial costs" in s 59(d) includes financial losses such as loss of income or profits and is not limited to expenditure. 

Financial loss otherwise falling within s 59 is not payable in respect of (a) any financial advantage that would necessarily have been forgone in realising that potential and (b) any financial loss that would necessarily have been incurred in realising that potential: s 61.  For example where stamp duty is incurred in connection with the purchase of land for relocation where that relocation is necessary to enable the potential to which s 61 refers to be realised, s 61(b) denies a claim for the stamp duty.  Section 61 only applies where the potential for use for the other purpose is very proximate.

Solatium (s 55(e))

Solatium is defined as compensation to a person for non-financial disadvantage resulting from the necessity of the person to relocate his or her principal place of residence as a result of the acquisition: s 60.   The maximum amount is fixed by the Minister by notice published in the Gazette.   A separate solatium payment (to the maximum amount) may be paid if more than one family resides on the same land, if the family resides in a separate dwelling house, or if the responsible Minister approves of the payment: s 60(6).

In assessing the amount of solatium compensation, all relevant circumstances are taken into account including the length of time the person has resided on the land and the inconvenience likely to be suffered by the person because of his or her removal from the land.  

Increase or decrease in value of adjoining or severed land (s 55(f))

A decrease in value of adjoining or severed land (sometimes called injurious affection) may give rise to a claim for compensation, whereas an increase in their value (sometimes called betterment) may give rise to a downward adjustment in the compensation payable: s 55(f). 

For example, the compulsory acquisition of land for, and subsequent creation of, a road may result in a decrease in the value of the owner’s adjoining land due to higher levels of noise, or it may result in an increase in value due to easier access.  

Methods of Valuation

Comparable sales valuation method

The comparable sales valuation method seeks to determine the value of the acquired land by reference to sales of similar properties considered comparable to the acquired land.

The comparable sales valuation method generally proceeds in four steps, which may be called accumulation, analysis, adjustment and application.

Accumulation is the identification of a pool of potentially comparable sales from which information may be deduced concerning the value of the acquired land.

Analysis of comparable sales provides a common basis of measurement by converting the sales to a common dollar unit rate, such as dollar value per square metre or per hectare

Adjustment of comparable sales acknowledges the differences between each comparable sale property and the acquired land and seeks to adjust the analysed dollar unit rate for each comparable sale to arrive at a dollar unit rate for the acquired land.

For example, in a residential property valuation, adjustments may be undertaken for differences in location, land area, land shape, land surface such as slope, views, permissible use, town planning, land contamination, encumbrances (such as easements and rights of way), flood liability, nearby development, soil type (for rural property), improvements, and the time period between the sale and the date of compulsory acquisition of the subject land.  

On analysis, the differences may be found to be so great that the sale cannot be regarded as truly comparable or its use is unsafe, such that it should be disregarded.

Application of the unit rate of a comparable sale to the subject land involves a judgment as to its relevance or weight (such as being limited, indirect or direct) to the acquired land.

Before and after valuation method

When only part of a dispossessed owner’s land is compulsorily acquired, the before and after valuation method valuation might be appropriate.   The market value of the whole land before acquisition (including the acquired land) less its value after acquisition (excluding the acquired land) determines not only the market value of the acquired land but also any loss in value of the retained land and (in an appropriate case) any loss attributable to severance. 

For example, in the case of acquisition of an easement over land, market value compensation is the difference between the value of land without the easement and the value of the land with the easement. 

Income valuation methods

Income valuation methods seek to determine the value of the acquired land by reference to some form of income stream either capitalised at a capitalisation rate (capitalisation method of valuation) or discounted at a discount rate (discounted cash flow method of valuation).

For example, in office, retail or industrial property valuation, the current net income may be capitalised at an appropriate capitalisation rate or a projection of future net income over a given period may be discounted at an appropriate discount rate.

The estimates of rent, expenses and other income variables together with the estimated capitalisation rate or discount rate should be supported by reference to comparable transactions having regard to the four steps in the comparable sales valuation method.

Cost based valuation method

The cost based valuation method seeks to determine the value of the acquired land by reference to some form of cost, being premised on the assumption that there is a relationship between cost and value.

The cost based valuation method is of potentially greatest use where there are no suitable comparable sales or where the acquired land is not primarily an income producing asset.   The method requires an assessment of the cost or value of the underlying land and the cost of the buildings and improvements upon the land, adjusted for such issues as depreciation and obsolescence, functional comparability and optimisation, with supporting evidence required for each.

For example, the Sydney Town Hall is a property for which there are few, if any, comparable sales transactions and which is not primarily an income producing asset, being a period building with an elaborate external façade and an ornate central hall.   Application of the cost based valuation method to Sydney Town Hall would require consideration of a range of issues including the amount to be attributed to the underlying land and to the cost of the building including assembly space (functional comparability) and reconfiguration together with the use of modern construction methods (optimisation).

Hypothetical development valuation method

The hypothetical development valuation method aims to determine the value of the acquired land with development potential by reference to the value of a completed hypothetical development less the costs of such a development.

The hypothetical development valuation method is of potentially greatest use where the acquired land is a development site and either there are no suitable comparable sales or the land is not primarily an income producing asset.

For example, the value of a residential apartment development site may be determined using the hypothetical development valuation method by estimating the value of the completed apartment development and then deducting the building costs and associated development costs including developers profit and risk margin, debt interest during the holding period, stamp duty, council rates, land tax, legal expenses, advertising expenses and selling agent’s commission.

The estimate of the value of the apartments on completion should be supported by reference to comparable transactions having regard to the four steps in the comparable sales valuation method, with supporting evidence also required for each of the estimates of building costs and associated development costs.

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