Compensation for Compulsory Acquisition in a Rising Market

Infrastructure connects communities, facilitates trade and commerce and opens new opportunities. As population grows, road, rail, electricity and other infrastructure networks should be continually improved to keep pace with demand for essential services. But urban growth and renewal have undesirable side-effects and residents and businesses are displaced to make way for enhancements to the urban fabric.

The press is awash with stories about residents and businesses offered market value for their premises, just to find themselves priced out of the market at a later date.

The ‘double whammy’ of rising markets and improved urban amenity can price displaced residents and business-owners out of the market. Early engagement in negotiation, good legal counsel and regular valuation updates can avoid that problem.

In NSW, legislation requires landholders to be compensated for the market value of property taken from them. Market value is the amount for which the property might be hypothetically exchanged at a particular date. The most reliable method for deducing market value is direct comparison with the prices actually achieved on sales of comparable properties.

Market value is calculated at a specific date. Property prices and rents rise (and fall) over time in response to market conditions like supply/demand, competition, availability of substitutes, market expectations and other factors. Changes in property values reflect the combined influence of those market forces as they come to bear upon the property over a period of time. In a rapidly rising market, timing differences can have significant effect. According to the CoreLogic Home Value Index, prices for all dwellings across Sydney increased by 10.21% during the year to 30 September 2016. That suggests that a property accurately appraised to be worth $1 million a year ago would now cost $1.102 million to replace. That’s a clear demonstration of the need, when negotiations are protracted, for valuations to be regularly updated during periods of disequilibrium.

Sometimes, the project itself affects supply and demand in the vicinity. For example, market demand for commercial office space in the Sydney CBD has increased by 63,000 square metres* to accommodate tenants displaced by the Sydney Metro Project . This inevitably reflects in increased rents or decreased leasing incentives. The legislation explicitly requires that the effect of the project and any works already carried out is to be disregarded. The price premium attributable to the project must be ignored. In practice, this means adjusting the value deduced from actual transactions to take account of those effects. Lawyers and valuers know the principle as the “Pointe Gourde principle”. The observation was made in Pointe Gourde Quarrying & Transport Co Ltd v SubIntendent of Crown Lands (Trinidad) [1947] AC 565 that “It is well settled that compensation for compulsory acquisition of land cannot include an increase in value which is entirely due to the scheme underlying that acquisition.”

* Source: Savills Briefing Sydney CBD Office October 2016.