April 2020

Hard times and hardship applications

How the COVID-19 crisis could lead to a spike in owner-initiated compulsory acquisitions

Reserving land for a public purpose

Councils often designate land for acquisition for public purposes under their environmental planning instruments. Such a purpose might include open space, a public reserve or a public place. After the designation is made, it is not unusual for a significant period of time to pass before the council acquires the land. Under the Land Acquisition (Just Terms Compensation) Act 1991 (Just Terms Act), certain landowners can require the council to buy the land before the council needs the land, so long as the landowner proves ‘hardship’.

The rationale behind these provisions is that if the owner cannot force the council to acquire the land, any delay in the council acquiring the land will cause the owner to suffer hardship.

This right is not afforded to all landowners, but only to those who are private individuals, private companies, and mortgagees entitled to exercise a power of sale.

As the COVID-19 crisis hits businesses and individuals hard, councils should expect a spike in owner-initiated hardship applications.

What is hardship?

An owner will suffer hardship if:

  1. the land reservation prevents the owner from selling the land or from selling the land for market value; and

  2. the owner needs to sell the land without delay for pressing personal, domestic or social reasons, or to avoid the loss of the owner’s income or a substantial reduction of it.

What constitutes hardship is different for corporate landowners. For these owners, hardship will arise if the owner needs to sell the land without delay for the pressing personal, domestic or social reasons of an individual who holds at least 20% of the shares in the company or to avoid the loss of the income of such an individual or a substantial reduction of it. Unlike with individuals, there is no requirement for corporate landowners to prove that the land cannot be sold or cannot be sold for market value.

The impact of coronavirus is starting to trickle through to house prices, but it is early days yet with price rises across most capital cities still driving national house prices up 0.7% in March.

CoreLogic head of research Tim Lawless recently said:

The housing market won’t be immune to a drop in sentiment and weaker economy, however the extent of the impact on dwelling values remains highly uncertain. Capital growth trends will be contingent on how long it takes to contain the virus, and whether additional constraints on business or personal activity are introduced.

These conditions, coupled with a rapid increase in unemployment rates, should make it easier for owners to establish hardship. This will leave councils vulnerable to acquire land pursuant to hardship applications at a time when they have not budgeted to do so. The added pressure for councils is the requirement to acquire the land within 90 days after receiving the owner’s application.

Review of hardship decisions

If the council’s assessment of the hardship application leads the council to form the opinion that the owner will not suffer hardship, then the owner can seek a review of the council’s decision. If this happens, council will be bound by the decision of the reviewer.

Our recent experience shows that even where councils engage a forensic accountant to test the hardship application and bring some independence to the assessment, reviewers tend to favour landowners and apply the hardship provisions generously.

Councils do not have a statutory right to appeal the reviewer’s decision. Likewise, councils do not have a common law right to a merit review of the decision – namely a reconsideration of the hardship application by a third party.

What can councils do?

Council can always lift the designation of the land, but they must do so before being required to acquire the land. From a practical perspective, this means any time before receiving the hardship application.

The designation can be lifted by a council giving the owner a written undertaking that it will use its best endeavours to remove the reservation. The council must also give the owner a written notice that the land is no longer designated for future acquisition.

If councils do not lift the designation, there is a risk that eligible landowners will lodge hardship applications. If councils do not agree that hardship has been established and if the landowner obtains a favourable review of the council’s decision, the only option councils may have to challenge that decision is to seek judicial review of the review process and decision – namely whether the decision was lawfully made.

Judicial review and its prospects of success

The Just Terms Act is silent about how the reviewer must conduct the review and the procedure which the reviewer must follow. It simply requires the reviewer to confirm or quash council’s decision. The test set by the Just Terms Act for the reviewer is expressed to be whether the reviewer is or is not satisfied that the Just Terms Act requires the acquisition of the land.

Unless the reviewer’s determination evidences that the reviewer has misinterpreted the Just Terms Act or considered the wrong issues, it might be difficult for councils to challenge the lawfulness of the reviewer’s decision.

Likewise, it may be difficult for councils to challenge the reasonableness of the decision. The test of unreasonableness is not often raised in court. Generally, councils would have little chance of successfully invoking the test of unreasonableness unless they could show that there was not even a modicum of rationality to the decision.

What this reveals is that the prospects of successfully challenging the reviewer’s decision may be limited. In any case, the cost of proceedings would certainly be prohibitive in the current economic environment.

The upshot of this is that councils must either lift the reservation of the land or be prepared to acquire land where hardship is established.

Amount of compensation payable in hardship cases

The Just Terms Act provides that for hardship applications, councils do not need to take into account the special value of land, any loss attributable to severance or disturbance and disadvantage resulting from relocation. The purpose behind this is to give councils some discretion in assessing these additional heads of compensation.

Despite this, the Court of Appeal in Hoy v Coffs Harbour City Council [2016] NSWCA 257 held that provisions of this nature should be construed generously and liberally because they are protecting the interests of those whose property rights have been damaged, in this case by the land being designated for public purposes.

From a fiscal perspective, councils can expect that acquisitions initiated by landowners in hardship cases will cost councils no less than in non-hardship cases.

Author: Peter Barakate