Penrith is in a unique situation at the moment with multiple examples of compulsory acquisition across the Local Government Area (LGA) including the widening of Mulgoa Road, the new Northern Road and the construction of the train line from St Marys to the airport including a metro station in Orchard Hills (the Railway Project).
One of the best things about having a law firm in the suburbs is that we get to deal with local people and help them try to solve local issues every day.
Over the past few years we have acted for a number of land owners who have had to sell some or all of their land to ensure that Penrith takes its rightful place as a genuine regional city with adequate public transport and roads to service its burgeoning population.
Generally, most of our clients have had a pretty good experience throughout the acquisition process. In almost all cases we have been able to work with the government to ensure our clients get a fair price for their properties with the assistance of experienced valuers.
Valuers are critical to the compulsory acquisition process because they are the ones that ultimately determine the price range into which the value of a property will fall.
There is a science to the valuation process, so if two valuers (for example, one appointed by the government and one appointed by the landowner) conduct a valuation of the same property with the same assumptions they will usually arrive at a similar valuation. It is not an exact art but given that most valuers apply the same methodology in completing their valuations you usually end up with a valuation range in which to negotiate so a deal can be done without the matter having to proceed to a formal acquisition process.
There is controversy afoot, however, in one local suburb which demonstrates why reform is needed in the “just terms” acquisition space.
The Orchard Hills Conundrum
For over a century Orchard Hills has been made up of sprawling farmland unaffected by large scale residential development like many of its neighbouring suburbs. Today, many of these farms have been carved up into five-or-so acre lots and are home to a variety of dwellings including small shacks for hobby farmers and large homesteads with established gardens.
The landscape in Orchard Hills is set to change dramatically however as the government has started acquiring land to build the Railway Project.
Transport for NSW began knocking on the doors of local landowners in late 2019 armed with their copies of the Land Acquisition (Just Terms Compensation) Act 1991 (the Act) to start discussions about buying about 65 acres of land for the public purpose.
The Act commenced about 30 years ago and is the piece of law that sets out the process for compensating landowners with the aim of balancing the need for the government to be able to build important infrastructure and a person’s right to just compensation for their asset having been forcibly acquired.
The Act has undergone little change in the three decades that it has been in operation and is one part of a suite of equivalent legislation in all states and territories in the country.
Section 5 of the Act sets out that it applies to the acquisition of land by any “authority of the State”. In other words, the Act applies to the compulsory acquisition of any land by government at any level.
The Act aims to ensure that landowners receive “market value” for their land defined as, “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.”
Critically, the definition of market value goes on to say that such an assessment must 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 for which the land was acquired.”
Herein lies the problem for our Orchard Hills residents.
Prior to the announcement of the Railway Project a property of about five acres in Orchard Hills had a market value of circa $3,000,000 – $3,500,000 depending on the state of the land and the improvements thereon. This price point also reflected the current rural zoning of the area which restricts subdivision and large-scale residential development.
This is also the price range currently being offered to landowners by the government to acquire their land to make way for the Railway Project.
Wander a couple of doors up from the properties being compulsorily acquired however, and the actual market tells a different story. Since the announcement of the Railway Project and speculation that the land immediately surrounding it would be rezoned, properties that were valued at $3,000,000 – $3,500,000 in 2020 are now selling for $5,000,000 and beyond – an increase of more than 40%.
The reason for the increase is the expectation that as a result of the Railway Project land in Orchard Hills will be rezoned, opening the doors to significant residential and commercial development.
Dave Reardon of LJ Hooker Commercial Penrith recently oversaw a number of properties coming on to the market in the Railway Project precinct and offered this comment when asked about increasing property prices in the area: “The confirmation of the railway station at Orchard Hills pushed a number of properties in the near vicinity onto the market. We were fortunate enough to be able to achieve a great result for our owner. However, due to media exposure and some indecision from government in terms of timing, the momentum in the marketplace dropped significantly and now we seem to be seeing a “wait and see” attitude from most owners. Once there is clarity from the government on timing and zoning we would expect to see interest in the area on the rise again.”
The increase in prices has not been restricted solely to the epicentre of the Railway Project precinct. Core Logic data reveals the sale of a 5-acre property on Wentworth Road, not far from the metro station site, with a purchase price of $4,750,000 in March 2021.
It would appear that interest in Orchard Hills was piqued following not only the announcement of the Railway Project, but publication of a document titled “Penrith Local Housing Strategy” in 2019 and the exhibition of the environmental impact statement (EIS) for the Project in December 2020. Both are arguably precursors to rezoning.
The 2019 report, commissioned by Penrith City Council, speaks specifically to the fact that rezoning is or will be inextricably linked to the completion of the Railway Project: “In the longer term, the majority of new housing is likely to occur primarily within Glenmore Park South (Stage 3) and Orchard Hills. In locations where future train station precincts are delivered, future capacity may be increased however the rezoning, delivery and provision of new housing around these locations be entirely dependent on the progress and staging of the new North-South Rail link.”
The report references Orchard Hills as a rezoning site slated for residential housing development contingent on the completion of Railway Project multiple times throughout. This, coupled with the EIS in late 2020, saw interest in the suburb from developers soar, and with it, property prices.
This has left landowners scratching their heads as to why the government hasn’t increased its offers in light of recent, comparable sales showing that the market has improved dramatically since confirmation of the Railway Project and evidence that this trend is likely to continue in the future.
Section 56 (1) (a) of the Land Acquisition (Just Terms Compensation) Act 1991
The answer lies in section 56(1)(a) of the Act, which says: “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…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…”
The rationale behind Section 56(1)(a) is that landowners achieve ‘market value’ in a vacuum. They avoid copping a devaluation of their property as a result of the relevant project (which can occur if land becomes useless by virtue of the project, for example a strip of land immediately adjoining a freeway) while at the same time preventing landowners from receiving an artificial windfall in circumstances where the project increases the value of the land (for example due to rezoning that often accompanies a project like in the case of Orchard Hills).
On one view, this is the fairest approach because a landowner receives the same market value compensation as they would have received had the infrastructure project never existed reducing or eliminating any chance of under-compensation.
The problem is, however, that the actual market is the true determiner of price – and in Orchard Hills, the market is saying that the price is much higher than the artificial value that the Act is producing.
What makes matters even more challenging is that property prices in Western Sydney have been climbing organically for a number of years, in Orchard Hills and a range of other areas including Castlereagh, Llandilo and Mulgoa as large blocks of land with potential for future housing development become more and more scarce in the Sydney basin.
Further, as residential housing developments continue to tentacle to the north and south of Penrith, rural residential properties are becoming harder to find which has the inevitable effect of forcing prices up.
We spoke to lifelong Orchard Hills local Jesse Vella who owns a property that the government is acquiring.
“I’ve lived in Orchard Hills my whole life. All my wife and I ever wanted was to buy a 5-acre property here in Orchard Hills where we could be close to our families and could build a life for ourselves,” Jesse said.
“When I left school I was working 6-7 days a week with the dream of starting my own plumbing business so that we could afford to buy our own property in Orchard Hills. If we sell to the government at the price they are offering we won’t be able to afford to buy a similar property in the area because prices have gone through the roof. I don’t think that is fair. I’m really happy for other residents in the area whose land values have gone up. They’ve worked hard over many years to build what they have and they deserve the uplift in value. I just don’t think the landowners whose properties are being acquired should lose out.”
When asked his opinion on what he thinks needs to change to improve the plight of landowners he said: “My number one concern is reinstatement. If the government is going to forcibly acquire my land they should at least have to provide me with enough compensation to enable me to purchase a similar property in the same suburb. If the government was required to pay reinstatement costs, I would be happy. I would sell to them for a price that would enable me to move to another property of a similar type in the Orchard Hills area. Landowners will still be upset of course. Some of the locals have spent their entire lives on these properties, but at least we could potentially replace what we lost.
“In the situation we are in, there is only one loser and that’s the landowner. The government wins, because they get the land they need for their project. Neighbouring landowners win, because their property values have increased dramatically. The community wins, because they have the benefit of the new infrastructure. Meanwhile, the landowners are left having been booted off their land with insufficient money to at least replace what they lost. If the government is serious about making the Act fair it requires major review.”
The Concept of ‘Reinstatement’
Reinstatement refers to a landowner being compensated so as to put them in the equivalent position they would have been in had the government never acquired their land. To Orchard Hills residents, this means paying them a sum of money sufficient to enable them to move off their land and purchase a property nearby of a similar size and with similar improvements (which would arguably cost close to $5,000,000 using recent sales as a guide).
The Act is not aimed at reinstatement, however.
To the contrary, Section 56(3) of the Act makes clear that compensation on a reinstatement basis will only be awarded under very limited circumstances. Section 56(3) says that if land being acquired is used for a particular purpose and there is no general market for land used for that purpose and the owner genuinely proposes to continue after the acquisition to use other land for that purpose, then the market value of the land is taken, for the purpose of paying compensation, to be the reasonable cost to the owner of equivalent reinstatement in some other location.
The example used in the second reading speech when Section 56 (3) was introduced to the Parliament was the hypothetical acquisition of a church. An old church might have limited market value, particularly if it is heritage listed or subject to some other classification that limits its commercial utility. The unique nature of the use of the land however, and the absence of a ‘general market’ for the sale of churches, might justify the enlivening of Section 56 (3) enabling a valuer have regard to all of the reasonable costs to the owner of equivalent reinstatement at an alternative location including the increased costs of acquiring land of a similar nature.
In this example, the key point to consider is that the land is used for a particular purpose and that there is no general market for land used for that purpose. In other words, the use of the land needs to be fairly unique.
This section of the Act arguably does not apply to Orchard Hills landowners because the purpose their land is used for is fairly common, mostly residential dwellings and farming, and there is a general market for land used for that purpose as most properties in the area are of a similar nature.
Section 56(3) is only a relatively recent addition to the Act and there are very few, if any, precedent judgements available for guidance on the practical application on the reinstatement provisions of the Act.
Our research did reveal, however, that often properties which are the subject of a government acquisition are the least valuable properties within an area. For example, acquisitions for the WestConnex project occurred along Parramatta Road. Many of the landowners in that case argued that the compensation they received on a “market value” basis may have been representative of the market value of the acquired land, but they could not afford to buy another property in the same suburb for the same price. Properties on Parramatta Road were roughly 25% less valuable than non-Paramatta Road properties due things like traffic noise and disturbance.
The Russell Review
This issue has been addressed by various inquiries into the Act over the years including a NSW Government review in 2016 in the context of the WestConnex development and more broadly, a report known as the Russell Review instigated by the NSW Government in 2014. The Review, overseen and handed down by David Russell, SC, offered the following on the question of uplift in value as a result of a public purpose project, which succinctly articulates the competing considerations at the heart of the issue:
“…if a project has gone ahead, and the construction of that project at government expense has lifted the value of all land surrounding the project, a real question of equity arises as to who should take the benefit of that uplift in value if the landowner can purchase part or all of their land back from the acquiring authority. Taxpayer money has been spent in constructing an infrastructure project which has greatly increased the value of surrounding land. There is a good argument that the government should be entitled to the value of that uplift. On the other hand, surrounding land which was not part of the acquisition has had its value greatly increased, by government money being spent on the infrastructure project. That is a windfall for those landowners, and their land has increased in value at no expense to themselves. If the landowner whose land has been partly or wholly acquired is not given the benefit of the uplift, then that landowner is being treated differently, and is at a disadvantage compared to all surrounding landowners.”
The authors of the Review were in this case considering how land is valued in circumstances where the government acquires too much land in the context of whether or not a landowner should be able to buy the excess land back, and if so, at what price. The sentiment remains the same in the context of uplift arising out of public purpose projects generally, however.
In considering the issue of the government acquiring land in excess of what is needed for the project, which is one of the issues being raised by landowners in Orchard Hills who can’t understand how the government could possibly need nearly 65 acres of land for a train station, the Review had this to say: “When the Land Acquisition Act [the Commonwealth version of the Act] says nothing about the question, it is the acquiring authority, which is able to resell the acquired land at a greatly increased value, which takes the benefit of the uplift in value. So, while the present legislation says nothing, it does deal with uplift in value, as it were, by omission… the present system provides no incentive for acquiring authorities to limit the area of land they acquire to that which is strictly necessary for their particular project.”
On the question of reinstatement, the Review found that the Act should provide for compensation on a reinstatement basis, particularly in the context of a landowner who is dispossessed of their land and home and needs to use their compensation to acquire new land and a new home, just like Orchard Hills landowners: “Where a landowner is dispossessed from a dwelling, the reality is that they are going to have to use the compensation paid to acquire another home. In those circumstances, there is a strong argument to be made that they should obtain compensation on a reinstatement basis. There can be no reason in principle why New South Wales is the only jurisdiction in Australia that does not offer some form of such compensation.”
The Commonwealth version of the Act, the Land Acquisition Act, provides an apt summary of how reinstatement compensation should work as “the amount necessary to reimburse the person for the costs of acquiring a reasonably equivalent interest in land that entitles the person to occupation of a reasonably equivalent dwelling”. This appears to be a far more palatable position than the current rigid operation of Section 56 (3).
The Impossible Task of Achieving Balance
Invariably, the challenge for law makers is achieving balance.
Inequalities in legislation like the Act are inevitable and cut both ways.
Take for example a situation in which the government is acquiring only part of a landowner’s property. In the case of a partial acquisition, claims for “injurious affectation” are common and permitted under the Act.
Injurious affectation claims are for compensation for a reduction in the market value of land adjoining the land being acquired caused by reason of the partial acquisition.
For example, a landowner on the Northern Road having only a small portion of the front of their land acquired would be entitled to make an IA claim for traffic noise and disturbance however their next-door neighbour, who is similarly impacted by the infrastructure project but has not had any of their land acquired, would not (because the Act applies only to landowners whose land is being acquired).
So where do we go from here?
Firstly, what is clear is that the problem lies not with an evil government machine hell bent on undercompensating landowners. Valuers’ hands are tied when it comes to not factoring in the uplift in value caused by the potential rezoning of Orchard Hills South. Further, it is evident from the September 2019 report commissioned by Council that any rezoning appears to be linked to the Railway Project proceeding and the timing thereof (although it is important to note that prices in Orchard Hills have been on the rise consistently over time even before the Railway Project was rubber stamped).
This is a problem with the law. The legislation simply does not allow for a common-sense basis on which to compensate landowners in unique circumstances where the ‘market value’ basis fails the pub test.
There are a range of ways the shortcomings of the current regime could be addressed.
A levy on landowners
New legislation could impose a levy on land which experiences a significant increase in value that flows from an infrastructure project (including rezoning) payable on disposal of the land. The justification for same would be that the landowner has experienced a windfall as a result of a government funded public purpose project at no expense to said landowner.
Such a proposal arguably punishes savvy investors, however, who make deliberate decisions to land bank in areas that will be subject to rezoning long into the future. While the airport is a fairly unique example, long term rezoning is quite often predictable in places like Sydney where there is limited land supply and an increasing population. For example, land to the north and south of Sydney (e.g. The Ponds, Box Hill, Oran Park) was always going to be rezoned for residential purposes eventually to facilitate an ever-growing population.
While exact locations are unknown, people with the resources to land bank in these kinds of areas do so on the basis that the land will increase in value over time. Not only would such a levy be arguably inequitable to the landowners who have to pay it, but it also doesn’t solve the reinstatement problem.
The more appropriate course appears to be reform to sections 56(1)(a) and/or 56(3) of the Act.
Amend section 56 (1) (a) of the Act to allow valuers to consider market value uplift
Deleting the word “increase” in the case of section 56 (1)(a) would mean that in determining the market value of land, valuers would not have to disregard uplifts in value in circumstances akin to the Orchard Hills Railway Project. Landowners would still be protected from a decrease, and if the market determined that the property would increase in value due to the project, then so be it – let that be reflected in the valuation. Sure, the government would be left holding the bag when it comes to the cost, but it would simply form part of the greater costs of the project.
On a macro level, a very small proportion of landowners in the state ever have their land compulsorily acquired (a 2016 government review revealed an average of only 371 properties per year) and on that basis, the additional cost could be justifiably put down to the costs of doing business.
Amend section 56 (3) of the Act to allow valuers to value land on a reinstatement basis
Another approach could be to broaden the operation and application of Section 56 (3) so that compensation on a reinstatement basis was more readily available to landowners who could demonstrate an obvious disadvantage to having their land valued by way of a market value basis.
The Act is already quite generous in minimising the impact of compulsory acquisition on landowners. For example, it requires that the government pay a landowners reasonable legal and valuation costs with respect to an acquisition – including, in certain circumstances, the landowners’ litigation costs should they contest the government’s valuation and elect to have the matter determined by the Land and Environment Court.
The spirit of the Act, it seems, is to insulate landowners from the negative aspects of the compulsory acquisition process – so why not extend this to the actual valuation of the relevant land as well?
Revisions to the Act could add a step in the process requiring the government to complete an audit before contacting affected landowners to determine which acquisitions might be more appropriate for reinstatement compensation versus market value compensation and instruct their valuers to prepare their valuations on this basis.
It’s not like the authors of the Act were ignorant to the possibility of these types of issues arising in the acquisition process when they drafted the legislation.
The Act currently provides for owner-initiated applications for acquisition in cases of hardship where landowners whose properties become unsellable or unmanageable as a result of a proposed public purpose project can make an application to a purpose-built department of the government to acquire their land early.
A similar department could be established to determine applications for reinstatement compensation versus market value compensation which could consider things like accelerated rezoning and increases in property prices that fall from initiatives like the Railway Project.
Introduce ministerial powers to determine cases in unique circumstances
The government could introduce ministerial powers that enable the relevant Minister to consider individual applications on a case-by-case basis where a landowner can establish unique or unusual circumstances like in the case of Orchard Hills. An overarching power for the Minister to approve compensation on a reinstatement basis or approve the payment of discretionary additional compensation in unusual cases would alleviate some of the rigidity in the Act that appears to be the source of the problem.
Conclusion
For the law to serve the people it has to evolve. As Justice Kirby put it in the 2001 High Court case of Durham Holdings Pty Ltd v New South Wales:
“Normally, in Australia, where property is compulsorily acquired in accordance with law, the property owner is compensated justly for the property so acquired. Australian society ordinarily attaches importance to protecting ownership rights in property.”
Aussies expect that legislation in this country is underpinned by a fair go. The heartbreak of affected landowners in Orchard Hills is palpable.
They are being forced from their homes for the sake of necessary progress – but at enormous personal and financial cost.
If you wandered into the local pub and asked the average Aussie what they’d say about legislation that could force them off their land with no regard to ensuring they could set up somewhere close by in the neighbourhood they love you’d get one answer.
Tell em’ they’re dreamin’.
Daniel McKinnon
Since graduating with two degrees in Law and Commerce from the University of Wollongong, Daniel’s spent over ten years solving a wide range of legal problems for the people of Western Sydney.