The scope of the “disturbance payments” recoverable by land-owners under section 66 of the Public Works Act 1981 (PWA) was clarified last week in a test case before the Land Valuation Tribunal (the Tribunal).
The Tribunal’s findings are of immediate relevance given the importance of the PWA compulsory acquisition provisions in making land available for the Christchurch rebuild and for large infrastructure projects.
The first claimant – Gold Star Insurance Company Ltd – owned four adjoining pieces of land in Valonia St, Waterview, which it planned to develop for high density housing. The second claimant was Gold Star’s managing director and sole Class A shareholder – a Mr Burgess – who claimed the value of interest payments secured by a mortgage over the properties.
At the time Gold Star bought the properties, the land was not subject to any notice or designation relating to a proposed motorway. Gold Star applied successfully to the then Auckland City Council in 2004 to have the land rezoned to Residential 5 and in 2005 for resource consents to develop it into an 83 unit residential development.
As early as 2005 the NZ Transport Agency (NZTA) indicated that it had an interest in acquiring the property in contemplation of the Waterview Connection roading project. The negotiations fell through due to the wide gap between the parties on property value. In 2006, the claimants were provided with an indicative plan of the current design for the motorway, emphasised as being preliminary only, and an indication that a Notice of Requirement seeking to designate part of the land was likely to be lodged under the Resource Management Act (RMA) in mid-2006.
The claimants decided, on the basis of that indication, that it would not be appropriate to continue with their development.
In August 2010, the Notices of Requirement were issued and in November 2010 the Minister for Land Information issued a Notice of Desire under the PWA to acquire the property. By an agreement for advance compensation in July 2011, Gold Star obtained $9,410,000 compensation for the land taken by the Crown.
The agreement was without prejudice to Gold Star’s right to claim compensation for disturbance costs under the PWA, which claim was the subject of the Tribunal’s proceedings.
A test case
Disturbance payments are provided for under section 66 PWA. They can be claimed where the land owner is not a willing party to the taking or acquisition, or is a willing party principally because the land had been notified.
In this case, the claimants sought disturbance payments under section 66 to recover holding costs (including debt interest payments, rates, maintenance costs and consent extension fees) and abortive expenditure incurred pre-acquisition – i.e. during the “shadow of acquisition” period.
Although the PWA has been in force for more than 30 years, this is the first time the matter of disturbance payments has come before any court or authority, making it a test case for the correct interpretation of section 66.
The Tribunal drew on a UK Privy Council decision from 1995 in respect of two principles:
that to qualify for recovery a cost must be causally connected to the loss of the land, proximate and reasonable, and
that costs sustained before the actual acquisition can be recovered.
By far the largest claim in terms of monetary value was for the interest paid on a sizeable bank loan between 14 March 2006 (when Gold Star was formally advised that the land may be needed for the motorway) and 22 July 2011 (when the terms of the compulsory purchase were agreed).
In this instance, the land had been used as security for borrowings by Mr Burgess to buy shares in Fidelity Life. These shares were then transferred by Mr Burgess to a family trust in what the Tribunal referred to as “a legitimate estate planning programme”, with Mr Burgess retaining liability for the interest and other costs under the borrowings. The Tribunal stated:
“The interest incurred by Mr Burgess on the purchase of the shares relates to a personal investment, which in our view is not a cost associated with the development of the land the subject of the taking. The land was merely the vehicle by which security was provided to the lender”.
Accordingly, the Tribunal declined the claim, reiterating that:
“… s66 applies to a very limited type of claim proximate to the acquisition both in terms of nature and time. The word ‘disturbance’, while not defined in the Act, should be given its natural meaning in the light of its context amongst the other provisions. Within that context disturbance payments to be claimable under s66 of the Act must be directly attributable to and in proximity with the upheaval caused to an owner as a result of the acquisition.”
The claims relating to the rates and maintenance costs were rejected as “simply burdens associated with ownership of the land” which “cannot be equated with disturbance payments”. And the Tribunal said that the resource consent costs and other abortive costs claimed should have been reflected in the valuation assessment which informed the compensation paid for taking the land.
“It would not be principled, in our view, to endeavour to reimburse the claimants by categorising such costs as disturbance payments contrary to a proper interpretation of s66”.
The Tribunal went on to say that even had the claims been accepted as coming within section 66, the costs could not have been claimed for the entire period. The holding and other costs incurred during the amount of time it would reasonably have taken to complete the residential development and take it to market would need to be deducted as these costs would have been incurred in any event.
The ‘corporate veil’
Had the interest claim qualified as a disturbance payment, another issue which emerged in the proceedings was whether the “veil of incorporation” should have been lifted to allow Mr Burgess to be paid the compensation for the interest component when – technically – Gold Star rather than he owned the land.
The Tribunal said, had it had to decide this question, the answer would have been “no”. Gold Star was the owner of the land and also the proposed developer.
“Mr Burgess deliberately chose to have the property developed by a separate company with limited liability. Presumably, if the development had turned out badly and there was a loss suffered, Mr Burgess would have been happy to shelter behind the limited liability of Gold Star to protect his personal assets”.
Chapman Tripp comments
This is an extremely useful decision – and a timely one. Issues and disputes are bound to emerge – indeed, have already emerged – in the compulsory acquisition of land in Christchurch so it is good to have some clarity over the scope and intended operation of the disturbance payment regime.