Not Reinstatement: Court of Appeal Clarifies Meaning of “Relocation Costs”

The NSW Court of Appeal has overturned a Land and Environment Court judgment that awarded a lessee construction costs for fitting out a new site and the rent differential between the leased premises and the new site under s 59(1)(c) of the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) (Just Terms Act).

Snapshot

• Section 59(1)(c) of the Just Terms Act does not allow compensation for financial costs incurred in replacing the physical characteristics of leasehold premises, which belong to the landlord and are available for use only as an incident of a lease.

• Compensation under s 59(1)(c) is not payable where rent for new premises is greater than the rent payable under the acquired leasehold interest.

Background

On 19 March 2021, Sydney Metro compulsorily acquired land in Clyde, where C&P Automotive Engineers Pty Ltd (C&P) operated under a long-term lease. C&P ran a hire, storage, sales, and repair business on the site, utilising a fleet of heavy machinery such as forklifts and tow trucks. The fit out (including buildings, hardstand, and critical infrastructure on the site) belonged to the landlord, not C&P.

Following the acquisition, C&P temporarily relocated to six different sites until permanently moving to a new site.

C&P claimed that the new site was deficient compared to the leased premises and sought compensation for:

1. Construction works to replicate the fit out at the leased premises (Fit-Out Claim); and
   
   
2. The difference in rent between the leased premises and the new site for the remaining lease term (Rent Differential Claim).
   

The primary judge awarded $1,914,404 for the Fit-Out Claim and $88,173 for the Rent Differential Claim, both as relocation costs under s 59(1)(c) of the Just Terms Act. Additionally, the primary judge awarded $231,000 for market value of the lease, $145,000 for temporary relocation, and $39,582.99 for legal costs, which were not contested in the appeal.

Legislative framework

The appeal centred on the proper construction of s 59(1)(c) of the Just Terms Act:

59 Loss attributable to disturbance

(1) In this Act –

loss attributable to disturbance of land means any of the following –

…

(c) financial costs reasonably incurred in connection with the relocation of those persons (including legal costs but not including stamp duty or mortgage costs).

“Those persons” in s 59(1)(c) are the persons entitled to compensation in connection with the compulsory acquisition of the land under s 37.

The Court also referenced section 56 (market value):

56 Market value

(1) In this Act –

market value of land at any time means the amount that would have been paid for the land if it had been sold at that time by a willing but not anxious seller to a willing but not anxious buyer, disregarding (for the purpose of determining the amount that would have been paid)—

…

(3) If ---

(a) the land is used for a particular purpose and there is no general market for land used for that purpose, and

(b) the owner genuinely proposes to continue after the acquisition to use other land for that purpose,

the market value of the land is taken, for the purpose of paying compensation, to be the reasonable cost to the owner of equivalent reinstatement in some other location. That cost is to be reduced by any costs for which compensation is payable for loss attributable to disturbance and by any likely improvement in the owner’s financial position because of the relocation.

The Fit Out Claim

The Court of Appeal reversed the Fit-Out Claim for the following reasons:

1. Limited scope of “Relocation”: The term “relocation” in s 59(1)(c) refers to the act of moving from one place to another, including the assets or chattels located on a leased premises. This can include the relocation of business operations. However, building new capital works at the new site to render it similar to the acquired land does not fall within the ordinary meaning of “relocation.” The Just Terms Act is neutral about the quality or suitability of replacement premises and does not provide for relocation on a “like-for-like” basis.
   
   
2. Fit-out in this case was Landlord Property: The fit-out on the leased premises was the landlord's property. C&P were entitled to use the fit-out under the lease terms. Section 59(1)(c) does not compensate for relocating something that was not their property and they were never entitled to relocate.
   
   
3. Double Dipping: C&P was already compensated under market value for losing the right to use the landlord’s fixtures / fit out on the leased premises. Awarding compensation for constructing equivalent fit-out at another site would effectively compensate for the loss of the same thing twice.
   

The Court also observed that the Fit-Out Claim was essentially seeking equivalent reinstatement. The Court stressed that there was nothing in s 59(1)(c) to infer a legislative intention that “relocation” was meant to include “reinstatement”. Equivalent reinstatement is compensable only in the limited circumstances where s 56(3) is engaged, which was not applicable here.

The Court made an important distinction between landlord fixtures and tenant fixtures:

• Landlord Fixtures: These belong to the landlord and are part of the property. They are typically permanent and are intended to remain with the property when a tenant vacates. In C&P's case, the fixtures proposed to be constructed at the new site were landlord fixtures, so the costs of constructing these fixtures could not be claimed as relocation expenses since they were not moving existing fixtures but creating new ones.

• Tenant Fixtures: These are installed by the tenant that can be removed without causing damage to the property. Tenant fixtures are typically installed to support the tenant’s business operations and can be taken by the tenant when they vacate. If C&P had incurred costs in moving tenant fixtures from the leased premises to the new site, these could potentially have been compensable as relocation expenses under s 59(1)(c).

In making this distinction, the Court of Appeal preserved the outcome in Hua v Hurstville City Council [2010] NSWLEC 61, where the tenant was compensated for the costs of installing new tenant fixtures on replacement premises because the original tenant fixtures (e.g., a large baking oven) could not be economically relocated. The Court of Appeal observed at [102]:

Hua recognises there may be grey areas where it is not economic to remove and reinstall tenant’s fixtures, or where to do so would be more expensive than simply buying and installing new tenant’s fixtures, in which case that cost may be an appropriate measure of compensation.

Rent Differential Claim

The Court of Appeal also reversed the Rent Differential Claim, holding that the difference in market rents between the old premises and new premises is not compensable under s 59(1)(c). However, the Court noted that, depending on the specific circumstances and any expert evidence, a lessee might be entitled to claim special value compensation.

The Court of Appeal again reinforced a conclusion reached in several recent cases that “the right to generate a profit is compensated as part of market value” (at [151]). In this case, market value was assessed on the “profit rental” approach.

Implications

• Clarification on s 59(1)(c): The Court of Appeal has provided much needed clarity on the scope of s 59(1)(c). It is clear that relocation of “persons” including business operations are compensable, for example:
  • Removal and relocation costs (e.g. removalist fees, truck hire, IT connections);
  • Costs of disconnecting and reconnecting services (e.g. water, power plumbing, mail redirection, telephone and internet connection); and
  • Other incidental and consequential costs of relocation, which will need to be considered on a case by case basis.

• Non-compensable Costs: Capital costs incurred in replicating fixtures that belong to the landlord to render new premises similar to the old are not compensable under s 59(1)(c). Neither are rent differentials between the acquired lease and replacement premises.

• Market Value Claims: Given the recent case law that reinforces market value as compensating the ability of the lease to generate a profit, we may see more lessees:
  • Run a s 56 (1) claim based on the stream of profits the lessee could derive for the balance of the lease term (similar to Transport for NSW v Eureka Operations Pty Ltd [2022] NSWCA 56); or
  • Attempt to claim “equivalent relocation” in the limited circumstances that s 56(3) is engaged.

• Claims for business extinguishment: If the costs of capital fit out and increases in rent are not compensable and given the difficulty many lessees will find locating suitable premises, it may be that claims will be made on the basis of the extinguishment of the lessee’s business with attempts being made to squeeze business extinguishment into market value or special value (given the difficulties in claiming such losses under s 59(1)(f) following Roads and Maritime Services (NSW) v United Petroleum Pty Ltd (2019) 99 NSWLR 279).

• Special Value Claims: In some instances, depending on the factual circumstances and evidence, a special value claim could also be made in respect of a lessee’s advantages under the lease, provided such advantage was in addition to market value.