The Facts
RMS acquires land for upgrade of Pacific Highway
In 2016, Roads and Maritime Services of New South Wales compulsorily acquired a block of land to upgrade the Pacific Highway.
The landowner accepted an offer of $3,114,540 as compensation from RMS for the compulsory acquisition of land. This sum was determined by the Valuer-General and comprised $2,950,000 for the market value of the land and $164,540 for disturbance to the business.
Service station impacted by compulsory acquisition
The service station which occupied the land was to be significantly impacted by the compulsory acquisition. The business had been successful because of its proximity to the Pacific Highway. Due to its locality, it serviced a number of nearby towns.
The landowner and the owners of the service station business were two distinct and separate legal entities. The service station had no lease over the premises. Instead, it had a verbal tenancy agreement with the landowner and paid monthly rent under a “tenancy at will” (that is, one of no fixed duration) which could be terminated with one month’s notice.
The Valuer-General determined compensation payable to the service station operator based solely on disturbance to the business and did not otherwise take into consideration the anticipated costs associated with relocation or alternatively, if it had to close, the permanent loss of profits by the service station.
Service station makes claim for disturbance to business
The service station reasoned that the amount paid to the landowner was irrelevant to its own claim for compensation, because the service station was a completely different entity and its claim was based solely on disturbance to the business from the compulsory acquisition, not on the market value of the land.
The service station claimed compensation for the loss attributable to the disturbance, which included the anticipated costs associated with relocation, including short-term loss of profits, or alternatively, the permanent loss of profits that the service station would have otherwise derived, but for the acquisition by RMS.
Expert commentary on the court's decision
Upgrade to Pacific Highway between Woolgoolga and Ballina
RMS had compulsorily acquired 4928 Pacific Highway, Harwood for road works associated with a Pacific Highway upgrade, between Woolgoolga and Ballina. The land was owned by Lastep Pty Limited and Elmon Pty Limited.
United Petroleum Pty Limited occupied the land as a tenant under an informal verbal tenancy arrangement with Lastep and Elmon, operating a service station and restaurant business known as the Harwood Roadhouse.
While RMS compensated the landowners for the compulsory acquisition of the land the service station was built on, United Petroleum made its own claim for compensation for loss due to disturbance of its business.
Initial LEC decision in favour of United Petroleum overturned by Court of Appeal
United Petroleum was initially successful in the Land and Environment Court with its claim for loss attributable to disturbance to the business under section 59(1)(f) of the NSW Land Acquisition (Just Terms Compensation) Act 1991. (See United Petroleum Pty Limited v Roads and Maritime Services [2018] NSWLEC 35.)
The Land and Environment Court awarded United Petroleum $2,050,360 in compensation for the loss of business profits, a comparatively small adjustment of the rent during the acquisition period and a costs order against RMS.
However, the Court of Appeal overturned the decision previously made in the Land and Environment Court, setting aside that court’s orders and finding in favour of RMS. (See Roads and Maritime Services v United Petroleum Pty Ltd [2019] NSWCA 41.)
Was the loss of future profits a direct consequence of the acquisition?
The Court of Appeal revisited the question of whether United Petroleum was entitled to compensation from RMS under section 59(1)(f) of the Act.
The court pointed out that under the legislation, the scope of any loss attributable to disturbance, compensable under section 59(1)(f), is limited to a “direct and natural consequence of an acquisition”.
Crucially, while the closure of the service station business could be seen as a direct and natural consequence of the acquisition, the loss of a perpetual stream of profits from the business was not. Rather, it stemmed from United Petroleum’s arrangement of its business affairs and its decision to conduct its business under a tenancy at will, which could be terminated on one month’s notice.
Consequently, the Court of Appeal found that the loss of future income from a business carried on under a tenancy terminable on one month’s notice is not a loss attributable to disturbance.
Implications for tenants of weak tenure upon land
The Court of Appeal found that the term “any other financial costs” did not extend to the loss of future income or profits of a business reliant on a weak tenure upon the land.
It is important for tenants to understand that their interest in the property they are renting depends on their rental arrangements. A verbal agreement to occupy a property does not provide the same degree of protection as a formal lease if the property is acquired compulsorily.
In the case discussed here, the compensation to United Petroleum due to disturbance to the business was limited to lost or foregone future profits for a period of one month after the date of acquisition, since that was the length of the notice period the landlords had to give the service station.
The court decided that the expectation of indefinite renewal of the tenancy based on the friendly relationship between the landlord and the tenant was to be excluded from the valuation of the tenant’s interest in the land, because it was purely a personal matter which had no bearing once the land had been bought by someone else.
Despite United Petroleum’s legitimate expectation that it could occupy the site indefinitely because the landlord was a related company, so it could be confident in the long-term security of its tenancy to operate and invest in its business, the appeal court held that this expectation of renewal was a personal matter and does not form an interest in the land for compensation. The court stated:
Thus, United Petroleum’s loss was not a direct and natural consequence of the acquisition.
What this judgement means for future compulsory acquisitions
This judgment appears to curtail dramatically the operation of section 59(1)(f), which was previously regarded as a “catch-all” for financial loss attributable to disturbance suffered as a consequence of compulsory acquisition.
Specifically, the outcome of this case will make it more difficult for a business to claim future loss of profits, especially where the right of tenure is inadequate given the nature of the enterprise.
A robust, long-term lease is critical to any claim for business compensation.
The Court of Appeal took the view that to award a tenant business compensation for loss of future profits purely because the landlord and tenant were separate legal entities would amount to paying the same compensation twice, because the land’s potential profitability was already included in the sum of compensation paid to the landowner.