Emerging issues in planning compensation claims: prior knowledge and timing for loss on sale
Planning compensation claims under Part 5 of the Planning and Environment Act remain an essential means for owners and occupiers of land to mitigate the effects of planning blight.
Planning compensation is compensation available to owners and occupiers of land under the Planning and Environment Act 1987 (PE Act) for financial loss resulting from the requirement for land to be acquired or rezoned for public purposes.
In Victoria, pre-acquisition compensation is available to owners and occupiers of land reserved or otherwise required for public purposes. Such compensation is available under the PE Act and provides for the significant loss of value resulting from 'planning blight'. Developers should be aware of the avenues available for obtaining planning compensation.
Broadly speaking, there are two main avenues for obtaining planning compensation before land is acquired. One is upon refusal of planning permission on public purpose grounds. The other is upon the sale of land at a loss reflecting its public purpose. In this article, we will be discussing:
- the issue of prior knowledge in planning compensation claims, and an emerging argument relating to prior knowledge of a reservation proposal, which is particularly relevant to developers
- a recent decision of the Supreme Court on a crucial issue of timing for loss on sale claims.
Typically (although not always) an acquiring authority will make its requirements public by a planning scheme amendment to apply a public acquisition overlay (PAO) over the land. The PAO acts to reserve the land for a public purpose, facilitating its eventual compulsory acquisition under the Land Acquisition and Compensation Act 1986 (Vic) (1).
Where land is reserved by a PAO, the affected landowner essentially holds it for the future benefit of the acquiring authority. Any application for planning permission to use or develop the PAO-affected land will be referred to the acquiring authority which is likely to object to any proposal inconsistent with its acquisition plans. Refusal of planning permission will inevitably follow.
Even where land is not affected by a PAO, permission to use or develop it may equally be obstructed if a public authority has strategic plans for the land and can induce a refusal from the responsible authority on the ground that the land is or may be required for a public purpose. So, the fact that land is or may be required for a public purpose can be a significant blight on its development potential, and consequently its value. The phenomenon is known colloquially as ‘planning blight’. As noted above, the PE Act provides a regime for landowners and occupiers to seek compensation for financial loss incurred as a consequence of planning blight. Broadly, there are two species of claim:
- first, on the basis that the land has been reserved for a public purpose under a planning scheme, ie. where a PAO has been applied to the land (2)
- second, for the refusal of a planning permit to use or develop the land on the ground that the land ‘is or will be needed for a public purpose’ (3). This does not require a PAO to have been applied to the land.
As noted above, there are also, broadly, two ways the entitlement to claim compensation can be ‘triggered’:
- first, on the refusal of a planning permit to use or develop the land (4)
- second, on the sale of the land for less than the owner might reasonably have expected to get, had the land not been reserved for a public purpose (5).
The entitlement to planning compensation in Victoria serves a similar purpose to the right of a landowner in New South Wales to bring forward an acquisition of reserved land in cases of hardship(6). In contrast with the New South Wales scheme, in Victoria a landowner may bring forward its entitlement to compensation on acquisition, although not the acquisition itself.
Part 5 of the PE Act provides an entitlement to compensation for financial loss suffered as the ‘natural, direct and reasonable consequence’ of the land being reserved for a public purpose or a permit having been refused on that ground. This is effectively a statutory test of causation.
Knowledge of a reservation
Courts in Victoria have long held that prior knowledge of a reservation defeats this statutory test by interceding between the reservation and the loss (7). For example, an owner of land who purchased land after a PAO was applied cannot claim as financial loss the diminution in the value of the land resulting from that PAO.
In that circumstance, any loss the landowner suffers is said to result not as the ‘natural, direct and reasonable consequence’ of the PAO, but from the purchaser’s own actions in purchasing the land in the knowledge it was so blighted. In other words, if the purchaser paid full value for the PAO-affected land, his or her loss was self-inflicted.
Of course, where the claim is for the reservation of land, eg. by a PAO, a landowner cannot have prior knowledge of that reservation until the land has in fact been reserved, ie. by an amendment to the planning scheme to apply that PAO.
Knowledge of a proposal
Before an amendment to apply a PAO is gazetted, it will typically have been advertised (8). Landowners will have been invited to make submissions on it, and it may have been referred to a planning panel. Throughout that process, it can be said that there is a proposal to reserve the land.
There is an emergent argument that a landowner who purchased with knowledge of such a proposal is debarred from claiming planning compensation for the ultimate reservation of the land. This argument appears to be out against developers who are perhaps thought to have known of the public purpose before it was formalised as a reservation. To our knowledge, this argument has yet to be tested in court.
In our view, knowledge of a proposal to reserve land should be no bar to a claim for financial loss for the ultimate reservation of the land, for at least two reasons. The first is that there is always an element of uncertainty over whether and in what form an advertised planning scheme amendment will be gazetted. A mere proposal cannot be assumed to affect the value a purchaser will pay for the land in the same way as does an actual reservation. The second is that, as a matter of common sense, knowledge of a proposal cannot intercede between the reservation and the loss as there cannot be knowledge of the reservation before it makes its way into the planning scheme.
Loss on sale claims: a recent decision on timing
We note the Supreme Court’s recent decision in Plunkett v Roads Corporation  VSC 39 (Plunkett), a decision of her Honour Justice Richards.
As noted earlier, one means of claiming planning compensation under Part 5 of the PE Act is ‘after the sale of the land’ if the owner sold it at a lower price than they might reasonably have expected to get if the land (or a part of it) had not been reserved for a public purpose (9). Importantly, the entitlement to claim crystallises ‘on the sale of the land’ (10). Before selling the land, the owners must give the acquiring authority at least 60 days’ notice of their intention to sell.
Although the PE Act is silent on the issue, it has long been assumed that the ‘sale of the land’ means the date a contract of sale is executed. That date forms the relevant date for the purposes of assessing the loss on sale. It was also assumed owners were entitled to claim the loss from that date.
Plunkett concerned a claim for compensation for loss on the sale of land in Mickleham affected by a PAO for the future Outer Metropolitan Ring Road. Once the contract of sale was executed, although yet unsettled, the Plunketts served their claim on VicRoads. VicRoads refused the claim, asserting it had been made prematurely. The question before the Court was whether, for the purposes of the claim, the ‘sale of the land’ had occurred:
- as the Plunketts contended, when they entered into a binding contract of sale in May 2017, or
- as VicRoads contended, when the transfer of the land was registered in December 2017.
The Court disagreed with both contentions, finding that the sale of the land occurred in October 2017 upon settlement, remarking (11):
In my view the purpose to be served by Pt 5 of the PE Act is better achieved if ‘sale of the land’ in ss 99 and 106 is understood to mean completion of the contract for sale of the land, when the full purchase price is paid and the contract becomes unconditional. Until that time, the loss suffered in consequence of the reservation of the land for a public purpose remains prospective, contingent on completion of the sale. Until that time, it remains possible that the contract will fall through, that there will be no change in ownership, and that the vendor will be able to continue to use the land or to sell it to another purchaser.
A number of consequences flow from Justice Richard’s decision in Plunkett, including:
- the right to claim compensation for loss on sale is now deferred until settlement, which may be months or years beyond the execution of the contract
- a vendor under a conditional contract (eg. on rezoning or subdivision) will have no right to claim compensation unless and until the conditions are met
- the date for giving the relevant authority notice of the sale must be not less than 60 days before the settlement of the contract
- for compensation valuers, the relevant date for assessing loss is the date of completion
- for contracts with extended terms, vendors intending to claim loss on sale will continue to be exposed to market movements until completion.
Although the law relating to planning compensation continues to evolve, claims under Part 5 of the PE Act remain an essential means for owners and occupiers of land to mitigate the effects of planning blight.
There are obvious cash flow benefits in crystallising and obtaining compensation at present land values, rather than waiting years (perhaps in a falling market) for an acquisition that may never eventuate. Moreover, the loss is assessed by reference to the actual reservation of the land, not that part of the reservation the authority ultimately decides to acquire.
- Land Acquisition and Compensation Act 1986, s 5(1), Victoria Planning Provisions cl 45.01-6.
- Planning and Environment Act 1987, s 98(1)(a).
- Planning and Environment Act 1987, s 98(2).
- Planning and Environment Act 1987, s 99(a).
- Planning and Environment Act 1987, ss 106(1), 99(b).
- Land Acquisition (Just Terms) Compensation Act 1991 (NSW), s 23.
- See, e.g. Halwood Corporation Ltd v Roads Corporation (1995) 89 LGERA 280.
- Planning and Environment Act 1987, Part 3, Division 1.
- Planning and Environment Act 1987, s 106(1).
- Planning and Environment Act 1987, s 99(b).
- Plunkett v Roads Corporation  VSC 39 at .
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