Another claim bites the dust: NSW Court of Appeal curtails claims for loss of future profit in land acquisition

Acquiring authorities in NSW will have greater clarity about when claims for the loss of future profit can be made under section 59(1)(f) of the Land Acquisition (Just Terms Compensation) Act 1991, following the NSW Court of Appeal's decision in Roads and Maritime Services v United Petroleum Pty Ltd [2019] NSWCA 41.

The judgment follows two other recent Court of Appeal decisions that are likely to stymie a growing trend in recent years which has seen section 59(1)(f) disturbance claims greatly exceed the quantum of the market value of the acquired interest, and compensation for loss of future profits being awarded where the proprietary interest of a business is tenuous at best.

The acquisition and the compensation claim

United Petroleum operated a service station and restaurant business on land owned by two related special purpose companies who had an oral lease with United Petroleum, terminable on one month's notice.  RMS acquired the land in August 2015, and United Petroleum was unable to relocate its business.  The owners of the fee simple estate were offered and accepted over $3 million in compensation for the acquisition of their interests. 

In the Land and Environment Court, United Petroleum accepted that its monthly tenancy had no market value under section 55(a) of the Act.  Rather, it claimed compensation for disturbance under section 55(d) / section 59(1)(f) of the Act, and was ultimately awarded:

• almost $2,000,000 as the capitalised sum for the loss of the business; and
• $82,956 for the additional rent paid to RMS for continuing possession in the period between compulsory acquisition and vacant possession, which was additional to the rent United Petroleum had previously been paying to the original lessors.

The key issues for the NSW Court of Appeal

RMS's grounds of appeal fell into two categories:

• whether the financial loss claimed to have been suffered by United Petroleum (by being unable to continue to operate the business in perpetuity) was not a financial cost within the meaning of section 59(1)(f); and
• whether the occupation fee paid by United Petroleum to RMS after acquisition was recoverable under section 59(1)(f).

  Accordingly, the claim for future business losses was entirely based on section 59(1)(f).

When is compensation available for loss of future profits under section 59(1)(f)?

In section 59(1)(f) "loss attributable to disturbance of land means any of the following: … (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".^[1]

While reaching the unanimous conclusion that no compensation was payable to United Petroleum for loss of future profits, there were four separate judgments given, indicating a more nuanced approach by the appeal judges to the proper construction of section 59(1)(f). 

The end of the "catch all" – section 59(1)(f) is constrained

In a number of previous cases, section 59(1)(f) has been referred to as a "catch all provision" and being of "wide import", which has been used as a basis for applicants to expand the categories of compensation payable as disturbance under section 59(1)(f). 

Consistent with the reservations it expressed in Melino v Roads and Maritime Services [2018] NSWCA 251, the Court of Appeal rejected the concept of section 59(1)(f) as being a catch-all provision. There were a number of constraints on the operation of section 59(1)(f), which flowed from the context and structure of section 59 as a whole (at [9], [96]).  While Justice Sackville (Justice Payne agreeing) accepted that there is little doubt that section 59(1)(f) read in isolation is capable of a wide application, it is not to be read this way (at [94]) - it must be construed in context of the Act as a whole. The reference in section 59(1)(f) to "any other financial costs" clearly envisages costs of a similar kind to those in section 59(1)(a)-(e), such as legal costs, valuation fees and stamp duty costs (at [96]).  Justice Basten (Justice Macfarlan agreeing) reached a similar conclusion (at [13]). 

Importantly, Justice Basten (Justices Macfarlan and Payne agreeing) held that to the extent that Health Administration Corporation v George D Angus Pty Ltd (2014) 88 NSWLR 752; [2014] NSWCA 352 involved reading the words in section 59(1)(f) in isolation from its statutory context, it reached an erroneous result (at [54], [72], [73]).  In addition, Chief Judge Preston of the LEC noted that a different construction is to be preferred to that which he offered in George D Angus at first instance (and was upheld on appeal) adopting the quotation "the matter does not appear to me now as it appears to have appeared to me then" (at [128]). 

Loss not a "direct and natural consequence of the acquisition"

Chief Judge Preston of the LEC and Justice Sackville (Justice Payne agreeing) focused strongly on the words "as a direct and natural consequence of the acquisition" in section 59(1)(f) (at [117], [157-161]) in order to dismiss United Petroleum's claim for future loss of profits, but they had different reasons for doing so.  Chief Judge Preston of the LEC took the view that section 59(1)(f) is capable of extending to financial losses, such as loss of income or profits (at [142], [163]). 

Justice Sackville's position (Justice Payne agreeing) was that as a result of the Court of Appeal's previous decisions relating to the treatment of loss of income or profits under section 59(1)(f) (in George D Angus) and section 59(1)(c) (in El Boustani v Minister for Administering Environmental Planning and Assessment Act 1979 [2014] NSWCA 33; 199 LGERA 198), the aspects of those decisions which were not challenged by RMS in this appeal, he needed to approach the matter on the basis that section 59(1)(f) allowed compensation for lost profits where a business conducted on the acquired land is forced to close due to a compulsory acquisition (at [104]-[106]). 

Generally speaking, Chief Judge Preston of the LEC and Justice Sackville (Justice Payne agreeing) found that while the closure of the business that had operated on the acquired land might be a direct and natural consequence of the acquisition, the loss of a perpetual stream of profits from the business (because United Petroleum was no longer able to operate the business on the land indefinitely) was not.  United Petroleum lost these profits because of its decision to conduct its business under a tenancy at will terminable on one month’s notice (at [117], [161]).  Justice Sackville held that it was only the loss of one month’s profits that could fairly be said to be the "direct and natural consequence of the acquisition" (at [118]).  Thus, loss of profits in respect of a longer period was not compensable. 

In contrast, Justice Basten (at [21]-[27]) (Justice Macfarlan agreeing) found that in circumstances where United Petroleum's interest in the acquired land had no market value, the claimed loss was an attempt to re-characterise the loss that had already been recognised in the assessment of market value.  It would therefore be contrary to principle to allow compensation for the disturbance of the continued operation of the business which was not supported by an interest in land (at [52]).

A difficulty - some uncertainty on the scope of "financial costs"

Despite four judges harbouring reservations that "financial costs" in section 59(1)(c) and section 59(1)(f) do not extend to loss of income or profits, because there was no direct challenge to the correctness of the decisions of George D Angus and El Boustani on this issue, the claim was assessed on the basis that they were claimable.  Consequently, until this issue is revisited by the Court of Appeal, these claims could potentially be made under those provisions in the future depending on the particular facts of the case including circumstances where the business occupying the acquired land has a more secure tenure than a mere tenancy at will. 

Rent payments

In Attard & Ors v Transport for NSW [2014] NSWLEC 44, Biscoe J, relying on the earlier decision of Roads and Traffic Authority v McDonald [2010] NSWCA 236, held that rent paid to an acquiring authority by a person who remains in occupation post-acquisition under section 34 of the Act was entitled to claim that rent as disturbance under section 59(1)(f).  United Petroleum only claimed under section 59(1)(f) the difference between the rent it paid the lessor and the occupation fee that it paid to RMS which was allowed by Justice Robson at first instance.

The Court of Appeal (at [58] and [64], [72], [73], [79] and [166]) agreed with RMS's submissions and concluded that compensation for any increase in rental during the period between compulsory acquisition and vacant possession under section 59(1)(f) should not be awarded because:

• the loss is not a "direct and natural consequence" of the acquisition (as required under section 59(1)(f)), but rather the consequence of United Petroleum's decision to remain in occupation post-acquisition at the agreed fee (at [57]); and
• the terms of section 34 of the Act are inconsistent with the award of increased rental under section 59(1)(f), thus a coherent construction of the legislation prevented this recovery.This is because section 34 only permits continued occupation by a person to whom compensation is payable under the Act, and also provides that unpaid rent and fees can be set off against the compensation payable (section 34(1) and section 34(4)).

It seems therefore that applicants' ability to remain in occupation post-acquisition effectively rent-free, notwithstanding section 34, appears to have come to an end.

Conclusion: more clarity on some business loss claims, but still some questions

While the decision of the Court of Appeal in United Petroleum involved different approaches to dismissing the business loss claim in that case, it is clear that loss of future profits will be much more difficult to claim under section 59(1)(f) of the Act by businesses impacted by an acquisition.  The Court of Appeal's decision will have significant implications for acquiring authorities in terms of how they seek to negotiate and resolve acquisitions involving business interests, particularly where there are multiple interest holders. 

While the Court has come to a relatively clear decision in respect of whether future loss of profits are compensable under section 59(1)(f) where the rights of occupation are weak, there is a tension as to how future loss of profits might be dealt with in the situation where a business enjoys more secure tenure or decides to relocate.  There may be an opportunity at the appropriate time, and in the appropriate factual circumstances, for an acquiring authority to directly challenge whether loss of profits is compensable as disturbance under section 59(1).