Relocation does not equal reinstatement: NSW Court of Appeal limits compensation available to lessees following compulsory acquisition

The recent NSW Court of Appeal decision of Sydney Metro v C & P Automotive Engineers Pty Ltd [2024] NSWCA 186 significantly narrows what compensation is available for tenants who relocate following a compulsory acquisition.

Following the Court of Appeal's decision, a dispossessed tenant won't be compensated under s 59(1)(c) of the Land Acquisition (Just Terms Compensation) Act 1991 (Just Terms Act) for costs associated with:

• the fit out of a new premises, if the fixtures it uses under its current lease were the fixtures of a landlord; and

• the difference in the rent at the new premises (whether temporary or permanent) and the rent at the acquired land.

It follows that unless a tenant finds a replacement property with sufficient existing fixtures at the same or lower rent, it is unlikely to be able to recover all costs associated with its relocation following a compulsory acquisition.

Facts

On 19 March 2021, Sydney Metro acquired a parcel of land at 8 Tennyson Street, Clyde (the Acquired Land). The Acquired Land was owned by Ms Nohra and Ms Carpenter (the owners) and leased to C & P Automotive Engineers Pty Ltd (C&P) to operate a hire, storage, sales and repair business. Mr Nohra, Ms Nohra's husband, was the sole director of C&P. The lease was for a term of five years commencing on 1 April 2020, with a further option of five years. Clause 3.2 of the lease provided that "the lessor's fixtures are included in the property leased".

Following temporary relocations to six properties for a period of three months (the Temporary Sites), C&P ultimately relocated its business to 131 and 133 Railway Parade, Granville (the Relocation Site).

In C & P Automotive Engineers Pty Ltd v Sydney Metro [2023] NSWLEC 95, C&P was awarded compensation in the amount of $2,418,759.99, which relevantly included under s 59(1)(c) of the Just Terms Act the amounts of:

• $1,914,404 for “relocation” costs involving construction of new landlord’s fixtures at the Relocation Site (the Fit-Out Costs); and

• $88,173 for the difference in rent between what was paid at the Acquired Land and what was paid at the Temporary Sites (the Rental Difference).

Sydney Metro appealed the award of compensation for the Fit-Out Costs and the Rental Difference.

Relevant provisions of the Just Terms Act

Under s 55 of the Just Terms Act:

55 Relevant matters to be considered in determining amount of compensation

In determining the amount of compensation to which a person is entitled, regard must be had to the following matters only (as assessed in accordance with this Division)

• (a) the market value of the land on the date of its acquisition…
• (d) any loss attributable to disturbance,

Section 59 defines "loss attributable to disturbance":

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),

Both the Fit-Out Costs and the Rental Difference were awarded under s 59(1)(c) of the Just Terms Act by Pain J of the Land and Environment Court (LEC).

Court of Appeal Decision

The Court of Appeal observed at [72] that "relocation" in its:

ordinary usage means the act of moving something or someone from one place to another. Building new capital works, which then accrue to the value of the owner at the new premises, on its face does not involve the act of moving something or someone from one place to another. There is nothing in the text of s 59(1)(c) that permits compensation to be paid for financial costs of replacing assets available for use as an incident of a lease of leased premises if those assets are not available to be moved by the lessee, as is the case in relation to landlord’s fixtures which form part of the leased premises.

C&P had been successful in obtaining the Fit-Out Costs in part because the LEC had accepted that the Relocation Site had to be appropriate for the conduct of its business, given the "nature of the business that needs to be replaced". The Court of Appeal found at [75] that:

The text of s 59(1)(c) provides no support for [C&P]’s basal proposition that “relocation” necessarily imports a requirement that the premises to which relocation occurs has to be appropriate for the conduct of the enterprise that is moved and that compensation is payable to construct new landlord’s fixtures to give effect to that requirement.

C&P submitted that, in circumstances where there was no other suitable premises available in the market, compensation under s 59(1)(c) should extend to the construction of landlord fixtures when appropriate. The Court of Appeal again rejected this, saying at [85]:

In context, “relocation” of business operations refers to movement of the relocated business. The physical characteristics of the leasehold premises, belonging to the landlord, are not aspects of the tenant’s business which are capable of movement by the tenant. The context tends strongly against [C&P]’s submission that s 59(1)(c) permits compensation for financial costs incurred in building new landlord’s fixtures at new rental premises.

The Court of Appeal concluded at [111]:

The concept of “compensation” whether termed loss, financial cost or any other term is not apt to extend to compensating a person for something that they did not have and did not lose. The Just Terms Act does not provide compensation for relocating something that a person or a company never had any right to relocate.

Consequently, the claim for the Fit-Out Costs was rejected.

In relation to the Rental Difference, C&P submitted that it should be compensated for the additional rent it had to pay given it could not find another suitable premises at equivalent rent. The Court of Appeal rejected this, finding at [150]:

Compensation is not payable for the difference in market rents between the old premises and new premises. The rental payable at the new premises will reflect the qualities of those premises including location, size, potential use and landlord’s fixtures available for use.

Analysis of earlier authorities

An interesting part of the Court of Appeal judgment is an analysis of earlier, oft cited judgments in relation to relocation costs.

The following cases have now been found to have been wrongly decided and should not be followed:

1. Peter Croke Holdings Pty Ltd v Roads and Traffic Authority of NSW (1998) 101 LGERA 30, where Bignold J of the LEC allowed compensation for ""site preparation" for replacement premises being drainage, kerb and guttering and pergola removal" under s 59(1)(c).

2. Home Care Services (NSW) v Albury City Council (2003) 136 LGERA 117, where Bignold J of the LEC awarded compensation for relocation and fit-out costs having regard to what his Honour called "the common law basis for recovery of disturbance items", citing pre-Just Terms Act authorities which relied upon the "value to the owner" principle.

3. Mathew Massasso t/as Five Dock Pharmacy v Sydney Metro [2023] NSWLEC 115, where Moore J of the LEC allowed compensation under s 59(1)(c) for costs incurred by Mr Massasso completing capital works to enable fit-out of a new building purchased by his wife that were said to be necessary to facilitate the relocation of his pharmacy business from the acquired land.

The case of Hua v Hurstville City Council [2010] NSWLEC 61 was also examined by the Court of Appeal. In that case, a shop fit out for a bakery conducted by the lessee had cost around $300,000 and taken 10 weeks to build. The tenant was unable to sever those fixtures and so was awarded compensation by Pain J of the LEC for the cost of installing new fixtures in the replacement premises. The Court of Appeal did not overturn Hua, but noted that it:

is only authority for the proposition that “relocation costs in s 59(c) can include the replacement of essential equipment in new premises which can be described as reinstatement”: at [59]. The “essential equipment” in Hua was limited to the tenant’s fixtures which the lessee had itself installed. At its highest, Hua recognises that 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. Hua is not authority for the proposition that a lessee could receive compensation under s 59(1)(c) for construction costs of recreating landlord’s fixtures.

Key takeaways

The key learning is that if a tenant is benefiting from the landlord's fixtures under its lease then it will not be able to recover the costs of replacing those fixtures at another premises under s 59(1)(c) of the Just Terms Act.

This potentially creates significant difficulties for tenants impacted by a compulsory acquisition. A tenant may operate a bespoke business for a number of years, relying on the use of the landlord's fixtures. Unless there is a suitable replacement property which is available for it to rent, the tenant will not be able to recover the costs of replacing the improvements if they are to become the property of the new landlord. While on one view this is reasonable as the landlord themselves will have been compensated for the value of the improvements on the acquired land as part of market value, in practice there are likely to be instances of a tenant being unable to find a suitably equipped premises or afford to replace the equipment which it had used over the years.

Similarly, if a business manages to find a suitable property (ideally with suitable landlord fixtures for it to carry on its business), it cannot be compensated for the difference in rent in the new property.

It is not difficult to imagine that the Court of Appeal's decision would lead to more businesses being required to "shut up shop" following the acquisition of their leasehold interest. Given compensation for lost profits resulting from the business closure are not likely to be available following Road and Maritime Services (NSW) v United Petroleum Pty Ltd(2019) 99 NSWLR 279, a dispossessed tenant may rhetorically ask "what am I supposed to do?".

We regularly act for acquiring authorities and dispossessed owners. Please contact Tom White or Alex Beale if you would like to discuss the implications of this decision.