Understanding the Impact of Compulsory Acquisition on Market Value
The recent decision in Sydney Metro v G & J Drivas Pty Ltd [2024] 113 NSWCA 5 (Drivas) provides critical clarity on how compulsory acquisition affects the market valuation of land under the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) (Just Terms Act). This case focuses on whether the market value of land should include the value of a hypothetical development that was halted due to the prospect of acquisition. The ruling of the Court of Appeal, now upheld after the High Court declined special leave to appeal, reaffirms the principle of just compensation and sets clear limits for claims related to hypothetical development costs.
Case Background
- The Site: On 19 March 2021, Sydney Metro acquired land in the Parramatta CBD that had been improved by a two-storey mixed-use office and retail complex known as “Greenway Plaza”. Some portions of the site were leased to and occupied by tenants (Site). Parramatta City Council had approved a development plan for the construction of a 25-storey tower and a four-storey tower on the Site (Approved Developments) in December 2018.
- Development Plans: Although no physical works had been initiated by the date of acquisition, G & J Drivas Pty Ltd (Drivas), the landowners of the Site, confirmed that they had undertaken other non-physical steps to progress the Approved Development, including preparation of detailed drawings.
- Suspension of Development: In or around early 2018, Drivas became aware that Sydney Metro may compulsorily acquire the Site. Consequently, in February and March 2019, based on concerns about the potential acquisition of the Site, Drivas reduced expenditure of the Approved Development after a review of geotechnical investigations conducted by Sydney Metro, and ceased development-related activities after Sydney Metro confirmed the acquisition plans on 21 October 2019 (Ceased Works).
- First Instance Decision: Duggan J of the Land and Environment Court found in favour of Drivas, finding that the Ceased Works caused a decrease in the value of the Site at the date of acquisition, compared to what the value would have been but for the compulsory acquisition. Total compensation was awarded to Drivas in the amount of $190 million for market value and disturbance.
Court’s Findings
- Appeal of Proceedings: Sydney Metro appealed the Land and Environment Court decision to the Court of Appeal.
- Drivas’ Submissions: On appeal, Drivas contended that the Ceased Works should be disregarded in consideration of the market value under section 56(1)(a) of the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) (Act), which states that:
(1) In this Act—
market value of land at any time means 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 (for the purpose of determining the amount that would have been paid)—
(a) 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,
…
- Drivas submitted that the market value of the Site should be valued based on the hypothetical improvements that would have been made pursuant to the Approved Development, which would have occurred but for Drivas becoming aware of the Site potentially being compulsorily acquired.
- Ruling of the Court: The Court of Appeal rejected the argument of Drivas, finding that the market value should not include the hypothetical improvements or developments that were not physically undertaken. The Court emphasised that the Ceased Works were the result of decisions made by the owner in anticipation of a compulsory acquisition of the Site, and were not caused by the actual or proposed carrying out of the public purpose for which the land was acquired, as set out in section 56(1)(a) of the Act.
- Just Compensation: The Court of Appeal concluded that the purpose of the Act is to ensure just compensation, and just compensation under the Act does not extend to compensation for costs that were not actually incurred.
- At [62] of the Judgment, the Court of Appeal noted that there may be instances where owners continue undertaking development works despite suspicions or knowledge that their land is likely to be compulsorily acquired, because they may believe that the eventual claim for market value could be higher, as it would be based on the value of the land at the time of acquisition rather than the status of development prior to the acquisition.
- High Court Appeal: The Respondent sought special leave to appeal the decision to the High Court, which was denied. As a result, the Court of Appeal’s ruling stands.
Recent Application of the Case
The Drivas decision was applied in the recent Court of Appeal case of oOH!MEDIA FLY Pty Ltd v Transport for NSW [2024] NSWCA 200, where the Court reiterated that a claimant could not claim compensation for an increase in market value based on decisions made prior to acquisition, particularly when those decisions were influenced by the possibility of compulsory acquisition.
The ruling affirmed that land should be valued based on its current state, including its potential for development, but excluding hypothetical development that had not occurred:
“[73] This is a case, like Drivas CA, where the claimant sought compensation for a putative increase in market value not in fact achieved because of its own choices made prior to the date of acquisition, being choices made because of the possibility or certainty of its interest in the land being acquired. The fact that the market value did not actually increase because of that choice is not required to be disregarded by s 56(1)(a) of the Act. The land was to be valued as it was, including all its potentialities for development.”
Key Takeaways
Drivas highlights several key principles for landowners, developers, and councils:
- Market Value: The value of the land is determined based on its condition at the time of acquisition, without considering hypothetical developments that have not been physically executed.
- Decision to Halt Development: When a decision is made by the owner to suspended the development due to the potential for compulsory acquisition, that decision is viewed as an independent decision of the owner and does not form part of the ‘public purpose’ under the Act in valuing the land;
- Just Compensation: The Act ensures that compensation reflects the actual value of the land at the time of acquisition, not speculative increases in value due to halted development.
For further information, please contact Matthews Folbigg Lawyers on 9635 7966.
