The statutory disregard, stamp duty and just compensation: the NSW Court of Appeal clarifies

The NSW Court of Appeal in Sydney Metro v G&J Drivas Pty Ltd [2024] NSWCA 5 has continued the recent trend of narrowing the circumstances in which owners whose land is acquired in accordance with the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) (Act) are entitled to be compensated for the cost of purchasing a replacement property.

The Court has also clarified the scope of the statutory disregard when assessing the market value of acquired land, which requires any changes in the market value attributable to the public purpose to be ignored.

The NSW Court of Appeal in Sydney Metro v G&J Drivas Pty Ltd [2024] NSWCA 5 was required to consider two important issues concerning the assessment of compensation payable to owners whose land is acquired for a public purpose.

The first issue concerned the entitlement of an owner, in this case a property investor/developer, to claim the costs of purchasing a replacement investment property. Traditionally, dispossessed landowners claim compensation for stamp duty and mortgage costs associated with the purchase of a replacement property under either section 59(1)(d) and 59(1)(e) of the Act, where the person is relocating from the acquired land. This option is not open to property investors and developers as they are generally not in occupation of the acquired land therefore cannot "relocate". Instead, developers and investors have claimed those costs under the "any other financial costs" provision in section 59(1)(f) of the Act relying on an earlier Court of Appeal decision in Blacktown City Council v Fitzpatrick [2001] NSWCA 259. The NSW Court of Appeal has now curtailed the ability of any landowner to be compensated for property replacement costs under section 59(1)(f).

The second issue considered concerned the scope of what is described as the "statutory disregard". When assessing compensation for the market value of land compulsorily acquired, a key question is often whether certain changes in value as at the acquisition date are caused by the public purpose, and consequently are required to be disregarded. The critical causation issue has been revisited by the NSW Court of Appeal, which has potentially narrowed the scope of the statutory disregard ^[1] .

A planned redevelopment in Parramatta meets a planned public transport development

The Drivas proceedings related to Sydney Metro's compulsory acquisition on 19 March 2021 (Date of Acquisition) of three allotments of land in the Parramatta CBD (Acquired Land) for the public purpose of the Sydney Metro West project.

At the Date of Acquisition, the Acquired Land was improved by a two-storey mixed-use office/retail complex which was leased to, and occupied by, various tenants. A development consent had been granted in 2018 for the construction of a 25-storey tower with retail uses at lower levels. The former owners had also taken steps to prepare a further development application to increase the height and GFA of the development (Combined Development). The evidence before the Court was that the further development application would likely have been approved.

The former owners claimed that they had discontinued preparing detailed drawings for the Combined Development in February or March 2019, as they suspected their land would be acquired by Sydney Metro (Discontinue Decision), and then decided to cease all work on the approved development and further development application when formally notified by Sydney Metro of the intended acquisition (Stop Work Decision). But for the proposed acquisition, the former owners said they would have continued with the Combined Development and by the Date of Acquisition would have obtained vacant possession, entered into construction contracts, demolished the existing improvements and be well advanced on basement construction.

The former owners contended that the Acquired Land should be valued on its assumed development state rather than its actual physical state at the Date of Acquisition because section 56(1)(a) required their Discontinue Decision and Stop Work Decision to be disregarded. Section 56(1)(a) provides that in assessing the market value of land which is acquired for a public purpose, 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" is to be disregarded.

The former owners also claimed as compensation the cost of purchasing a replacement property (including stamp duty) under section 59(1)(f) (relying on the Court of Appeal's decision in Fitzpatrick) on the basis that they were in the business of acquiring and developing property, and the Acquired Land formed part of their "stock in trade".

By the time the matter reached the Court of Appeal, the relevant issues were the proper construction and application of:

• the statutory disregard under section 56(1)(a) to the assessment of market value; and
• section 59(1)(d), (e) and (f) to claims for stamp duty and other expenses in the purchase of replacement land.

The Court also considered on cross-appeal whether the advantages of any construction contract for the Combined Development, which the former owners said could have been novated to a hypothetical purchaser, should have been excluded from market value considerations.

Replacement costs

In rejecting the former owners' claim for stamp duty and other costs to purchase replacement land, the Court embraced an evolving approach to the interpretation of section 59(1) since the Court of Appeal's decision in Roads and Maritime Services (NSW) v United Petroleum Pty Ltd (2019) 99 NSWLR 279. It held:

1. section 59(1)(f) must be taken to add something to what is covered by paragraphs (a)-(e), otherwise it would be superfluous. This is made clear by its language of “any other financial costs"; 
2. section 59(1)(f) must be construed purposively and within context and, as per Justice Basten in United Petroleum, should not be interpreted so as to "subvert the limitations contained within the earlier paragraphs";
3. where a person entitled to compensation relocates, section 59(1)(d) allows stamp duty costs to be reimbursed, based on the market value of the acquired land. This creates a negative implication that stamp duty could only be claimed in the circumstances set out in that paragraph. The issue is construing what scope the residuary provision in section 59(1)(f) has in light of the preceding provisions; and
4. The Court held that Fitzpatrick was primarily directed at whether the business which the applicant carried on was an "actual use" for the purpose of section 59(1)(f) and did not consider the question put in these proceedings: is stamp duty claimable under section 59(1)(f) in light of section (59)(1)(d)?

Because it was agreed that the former owners did not relocate and consequently could not claim compensation under s59(1)(d) or (e), the Court's findings resulted in the rejection of the claim for compensation for stamp duty and other property replacements costs.

Statutory disregard of the increase or decrease in value

Adopting an orthodox approach to statutory construction, the Court considered the text, context and purpose of the relevant provisions of the Act.

Section 56(1)(a) involves a causation inquiry: the Court is to disregard 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 in question.

Establishing causation involves the attribution of legal responsibility beyond the purely factual "but for" inquiry.

The causal question needs to be directed to the effects on the value of the land of the actual carrying out of, or the proposal to carry out, the public purpose, rather than to the effects of the proposed acquisition of the particular land. Section 56(1)(a) reflects “a policy to require a disregard only of that increase or decrease…in value for which the resuming authority is responsible” (Walker Corp Pty Ltd v Sydney Harbour Foreshore Authority (2008) 233 CLR 259; [2008] HCA 5).

The Court of Appeal held it would strain the reasonableness of legal attribution if the free choices of an owner, responding to a proposed acquisition as opposed to the public purpose itself, could affect the amount that the acquiring authority has to pay in compensation. The public purpose (i.e. the undertaking of the Sydney Metro West project) was not the direct cause of the value decrease of the Acquired Land; rather it was the Discontinue and Stop Work Decisions made by the former owners in response to the possible acquisition of the land.

Public purpose and the landowner's choices

The broad intent of section 56(1)(a) is to compensate the owner fairly for having their land compulsorily acquired, according to the Court of Appeal. It noted of significance section 3(b) of the objects of the Act to ensuring "compensation on just terms", such that the key purpose is to justly recompense for loss.

The former owners' argument for the statutory disregard to apply to the change in value caused by the Discontinue and Stop Work Decisions was rejected. If it were to apply, they (and future claimants) could potentially obtain compensation on the basis that actions were taken in relation to the land (and expenses incurred), which were not in fact taken (nor expenses incurred). This would increase the risk for significant, unjust over-compensation or "windfall", and thus would lead to a result which is clearly not just, nor a recompense for loss.

Ultimately, the Court found that section 56(1)(a) provides that an increase or decrease in value caused only by choices made by an owner in relation to the land, even if they are reasonable choices made because of the possibility or certainty of the land being acquired, are not the types of effects on value which can be considered as having been caused by the carrying out of, or the proposal to carry out, the public purpose. The Court therefore upheld Sydney Metro's appeal relating to assessment of market value, and rejected the former owners' cross-appeal.

The former owners have filed an application seeking special leave to appeal the orders relating to the statutory disregard (but not the property replacement costs) to the High Court. This matter has more to run so watch this space for further developments.

What Drivas means for just compensation in NSW

The Drivas decision is likely to have a number of implications for acquiring authorities and property investors.

The Court made clear that it is the effects of the public purpose on value which are required to be disregarded by section 56(1)(a), not the effects of the acquisition. Accordingly, decisions by landowners in response to proposals to acquire their land are not to be disregarded. In Drivas, this meant that the decisions not to proceed with the Combined Development were not ignored. Equally, this could apply to decisions made by landowners in response to an acquisition which increase value (such as lodging a development application).

Finally, although the Court of Appeal did not overturn Fitzpatrick, it has effectively been distinguished into isolation. Drivas will present a significant obstacle to property investors and developers looking to claim the costs of purchasing replacement property as compensation, of which stamp duty is usually the largest component. Even if a developer actually incurs the costs of purchasing a replacement property (as occurred in Fitzpatrick), those costs may still not be recoverable, given the Court's reliance on the judicial exegesis of section 59(1) which followed Fitzpatrick, which the Court regarded as important foundations to its decision.

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^[1]This aspect of the Court of Appeal's decision was subsequently followed in Coffs Harbour City Council v Noubia Pty Ltd [2024] NSWCA 19.