New law in relation to claims for financial loss as a consequence of a reservation of land under section 98 of the Planning and Environment Act 1987 - The Supreme Court of Victoria departs from Gobbo J’s judgment in Mario Piraino.

This Alert is relevant to acquiring authorities and owners of land who are involved in responding to or making claims for compensation pursuant to section 98 of the Planning and Environment Act 1987.

On 1 August 2017, the Supreme Court of Victoria delivered its judgment in the case of Barilla v Roads Corporation [2017] VSC 349. This case is significant as it represents a departure from the law established by the case of Mario Piraino Pty Ltd v Roads Corporation (No 1) [1991] 2 VR 534 in relation to claims for financial loss under section 98 of the Planning and Environment Act 1987 (the P&E Act) and, in particular, the operation of sections 104 and 101 of the P&E Act.

As those familiar with section 104 of the P&E Act will be aware, that provision provides that the compensation payable for financial loss under section 98 of the P&E Act must not exceed the difference between the value of the land on the date the liability to pay compensation first arose (the affected value) and the value that the land would have had if it had not been reserved or required for a future public purpose (the unaffected value). Since Mario Piraino was decided, it has remained authority for the proposition that the words “value of the land” as they appear in section 104 of the P&E Act mean “value to the owner”, a unifying principle which not only incorporates market value and special value but is also capable of including other consequential losses. As a consequence of the judgment in Barilla, the words “value of the land” in section 104 of the P&E Act no longer carry that meaning. The result of this finding is that, in most instances, claims for financial loss under section 98 of the P&E Act will be capped at the difference between the affected market value of the land and the unaffected market value of the land.

The Mario Piraino case has also been authority for the proposition that the words “preparing and submitting the claim” in section 101 of the P&E Act include all pre-requisite steps to a claim for compensation under section 98 of the P&E Act. This finding has long been considered to mean that expenses incurred in taking steps in accordance with section 99 of the P&E Act in order to “trigger” a right to claim compensation under section 98 of the P&E Act, including steps to procure a loss on sale or a permit refusal on grounds that the whole or part of the land is or will be needed for a future public purpose, are compensable under section 101 of the P&E Act. As a consequence of the judgment in Barilla, this position is no longer accepted by the Court and section 101 of the P&E Act will be construed to only apply to those expenses incurred after the right to claim compensation under section 98 of the P&E Act has already been triggered by one of the circumstances outlined in section 99 of the P&E Act (i.e. after the sale of the land or relevant permit refusal).

Background

This matter involved a claim for compensation made pursuant to section 98 of theP&E Act for financial loss in relation to land affected by two public acquisition overlays (the Reservations).

The claimants purchased the land prior to the land becoming affected by the Reservations with the intention of developing it as a plant nursery and tourist attraction that included an animal nursery, water ponds, olive grove, vineyard, maze and visitors’ centre. The claimants obtained permits and undertook works to develop the land for some, but not all, of these purposes during the course of their ownership of the land.

Following the imposition of the second reservation, the claimants exercised their right to sell the land pursuant to section 106 of the P&E Act and trigger a right to claim compensation for financial loss under section 98 of the P&E Act.

The matter became a disputed claim for compensation and was referred to the Court for determination.

Key issues

In addition to claiming the difference between the sale price and the market value the land would have had if it was not affected by the Reservations (the loss on sale), the claimants also claimed:

  • The costs of the sale (i.e. agent’s commission, legal fees, valuation fees, advertising expenses etc.);
  • The cost of obtaining advice and a tax ruling in relation to Capital Gains Tax; and
  • The value of the lost opportunity to invest the difference between what they would have received for the land (if the land had not been subject to any reservations) and what they actually received from the date of settlement of the contract of sale to the date the matter was referred to the Court for determination.

The claim for loss on sale was resolved by agreement between the parties at an early stage of the proceeding. Accordingly, only the above claims were left to be determined at trial.

The claim for costs of the sale was made under section 101 of the P&E Act or, alternatively, under section 98(1)(a) of the P&E Act. The claims for the cost of the CGT advice and tax ruling and value of the lost opportunity were made under section 98(1)(a) of the P&E Act only.

In order to establish the claims under section 98(1)(a), the claimants needed to establish that the financial loss claimed was suffered as the “natural, direct and reasonable consequence” of the Reservations. Further, the claimants needed to overcome the statutory cap in section 104 of the P&E Act by establishing that the compensation claimed did not exceed the difference between the sale price and the value of the land unaffected by the Reservations as at the date of the sale of the land.

In order to establish the claims under section 101 of the P&E Act, the claimants needed to establish that the claims were for “legal, valuation or other expenses reasonably incurred in preparing and submitting the claim”. The claimants relied on Mario Piraino in asserting that, because the costs of sale were incurred by the claimant in undertaking the pre-requisite steps required by 99 of the P&E Act to trigger the right to claim compensation under section 98 of the P&E Act (i.e. the sale of the land at a loss), they were incurred in “preparing” the claim and were compensable.

Determination

In summary, the Court found as follows:

Claims made pursuant to section 98(1)(a) of the P&E Act

  • Costs of sale – The claimants’ reason for selling the land was relevant to determining whether the costs of sale they claimed were financial losses which arose as the natural, direct and reasonable consequence of the Reservations. Insofar as the sale of the land was a natural, direct and reasonable consequence of the Reservations, the losses represented by the costs of sale would also be the natural, direct and reasonable consequence of the Reservations. Whilst the Court found that the claimant did not sell the land solely in response to the Reservations, the Court was satisfied that, absent the large capital gain made by the claimants upon the sale of the land, they would probably have sold the land in any event because the existence of the Reservations made it much less attractive to develop as they had planned long term. Accordingly, whilst not made explicit in the judgment, the claim for costs of sale was made out under section 98(1)(a) of the P&E Act, however, it was ultimately defeated by section 104 of the P&E Act (see below).
  • Costs of CGT advice and tax ruling – This claim was not made out as the costs were not financial losses that were “naturally” or “directly” related to the sale of the land, let alone to the Reservations. Rather, they were incurred by the claimants in order to establish and secure their personal tax position.
  • Value of the lost opportunity – This claim was not a financial loss that was the natural, direct or reasonable consequence of the Reservations. Rather, the timing of the receipt of compensation payments reflecting the unaffected value of the land was a function of the statutory arrangements for the payment of compensation under the P&E Act.
  • In any event, as the claimants had been paid the difference between the market value of the land unaffected by the Reservations and its affected market value, their claims under section 98(1)(a) were defeated by the operation of the statutory cap in section 104 of the P&E Act. In making this finding, the Court found that Gobbo J’s interpretation of the words “value of the land” in Mario Piraino as meaning “value to the owner” no longer represented the current state of the law. The Court’s decision was largely based on its view that:
    • section 104 of the P&E Act is a circumscribing provision designed to limit the consequential losses that are recoverable where land has been reserved; and
    • if all consequential loss can simply be added in one limb of section 104 of the P&E Act so as to raise the cap, then section 104 ceases to serve its purpose.

Claim made pursuant to section 101 of the P&E Act

  • Costs of sale (in the alternative) – Undertaking a procedural step in accordance with section 99 of the P&E Act to trigger a right to claim compensation does not amount to “preparing” the claim for the purposes of section 101 of the P&E Act. There is no liability to pay compensation in respect of the claim and no entitlement to be paid until the trigger event has taken place. In that sense, there can be no claim capable of being prepared and submitted until after the trigger event. In making this finding, the Court found against Gobbo J’s interpretation of section 101 of the P&E Act in Mario Piraino.

Implications and Recommendation

As the decision of the Court in Barilla has only just been made, it remains subject to an appeal. However, assuming the decision stands, its implications for the way in which compensation for financial loss under section 98 of the P&E Act is assessed are as follows:

  • In most instances, claims for financial loss under section 98 of the P&E Act will be capped at the difference between the unaffected market value of the land and the affected market value of the land.
  • Expenses compensable under section 101 of the P&E Act are limited to those incurred after the right to claim compensation under section 98 of the P&E Act has already arisen. Accordingly, costs incurred in selling the land (i.e. advertising fees, agent’s commission fees, legal and professional advice on how the sale should be affected etc.) or in obtaining a permit refusal (i.e. permit application fees, appearance fees etc.) in accordance with section 99 of the P&E Act are not compensable under section 101 of the P&E Act.
  • A claimant’s motive for selling land is relevant to determining whether financial loss is incurred as the natural, direct and reasonable consequence of a reservation of land for the purposes of section 98(1)(a). This means that, in circumstances where financial loss is incurred as a consequence of a decision to sell land for a reason unrelated to the reservation of the land (for example, to realise a capital gain on the land), such financial loss may fail to meet the statutory test under section 98(1)(a) of the P&E Act.

Acquiring authorities and claimants responding to or making claims under the financial loss provisions in Part 5 of the P&E Act in the future should take care to consider these issues and seek legal advice as required.