Compensation claims for financial loss under the Planning and Environment Act 1987

If you are a mortgagee, the value of the land over which you hold security may be adversely affected by the manner in which a government agency (“Authority“) interferes with its use and development, some of which will give rise to compensation claims when financial loss is suffered or expenses incurred which arise as a natural, direct and reasonable consequence of the action of the Authority.

We suggest that:-

  1. You read Sections 2 to 5 on the Owner Page (and the Categories linked to that page) to gain an understanding of the nature and extent of the constraints which can be imposed by an Authority in pursuit of its functions.  If a compensation claim can be made, it is probable that at least part of the compensation paid will relate to financial loss suffered by the owner for a reduction in the value of the property, thus, recognising that the market value of the property has been adversely affected by
    the Authority’s imposition of the constraints on its development and use.
  2. You read the terms of your mortgage to ascertain the contractual position between you and the mortgagor in the making of a claim for compensation and its conduct.

Under the Planning and Environment Act 1987, only an owner or an occupier can claim compensation from the Authority for financial loss suffered as a natural, direct and reasonable consequence of the action of the Authority.  Whether the term “owner” extends to include a mortgagee, as the registered proprietor of a mortgage, is not clear.

Hypothetical fact situation

We start with the Hypothetical Fact Situation for the Owner proposing to sell in Category 2.2 as our example of the need for a mortgagee to be actively involved in the making of a claim for compensation.  In this issue, a public acquisition overlay (“PAO“) affecting the property was introduced into the planning scheme after the owner purchased the property and gave the mortgage as security for a loan.

We rework the Hypothetical Fact Situation from Category 2.2 for the current purpose:-

  1. Kaitlyn owns a property on the highway close to town with development potential which was mortgaged to FinCo from which she borrowed 70% of its purchase price.
  2. After buying the property, the local water corporation procured the introduction of a PAO into the planning scheme to reserve part of Kaitlyn’s property for a waste water treatment plant. Kaitlyn’s objection to this proposed amendment to the planning scheme was unsuccessful.  The local water corporation has no immediate plan to compulsorily acquire.
  3. Kaitlyn has concerns that the impact of this PAO on the future use and development of her property may reduce its market value. She consults a valuer who confirms her fears.  The property is now worth less than she owes to FinCo.
  4. Kaitlyn now wishes to sell the property but has insufficient funds to meet the cost of retaining a town planner, valuer, estate agent and solicitor to advise her on a sale of the property and the making of a claim for compensation.
  5. Kaitlyn approaches FinCo to borrow further funds to enable her to trigger her claim for compensation and compile and conduct a claim.  FinCo refuses this request.
  6. Kaitlyn petitions for bankruptcy.

In these circumstances, FinCo can only recover its loan if, by agreement or court order, it can make the claim for compensation as “the owner”.  Perhaps the better course was to fund Kaitlyn’s costs on agreed terms permitting her to trigger and make the claim, thus avoiding the academic argument and/or actual loss.

Compensation claims for compulsory acquisition under the Land Acquisition and Compensation Act 1986

To have a claim for compensation under the Land Acquisition and Compensation Act 1986 (“the LAC Act”), the claimant must have an “interest in land” on the date of acquisition which is divested or diminished as a result of the acquisition (refer to s.30 of the LAC Act).

The LAC Act defines an “interest in land” as:-

“(a)      a legal or equitable estate or interest in the land; or

 (b)       an easement, right, charge, power or privilege over, or in connection with, the land.”

A mortgage, whether registered or unregistered, is an interest in land entitling the mortgagee to make a claim.  Whilst older forms of mortgage may not regulate the manner in which a claim for compensation following compulsory acquisition is to be conducted by the owner, most current forms of mortgage deal with this issue in the Memorandum of Common Provisions incorporated by reference into the mortgage (“MCP“).

We set out two examples:-

(i)      The current form of ANZ Bank mortgage incorporates the terms of MCP No. AA479 which includes the following clause:-
If I receive a notice that the property may be resumed or compulsorily acquired by a government agency, I will immediately give ANZ a copy of the notice.

I will not lodge a claim for compensation unless ANZ agrees first in writing to what I ask for in the claim, and how I ask for it. In deciding whether or not to agree, ANZ must act reasonably.

I will not reduce or compromise a claim unless ANZ agrees first in writing.

I will do everything that ANZ says is necessary or desirable (including lodging a claim) so that ANZ can recover any compensation and to make sure that any compensation is paid to ANZ. ANZ may apply that compensation towards payment of the secured money.”

(ii)     The current form of Law Institute Standard Form Mortgage incorporates MCP No AA1955 which includes the following clause:-

If the Mortgagor becomes aware that the Land or any part of the Land may be or has been resumed or compulsorily acquired by a public authority:-

(1)     the Mortgagor must immediately notify the Mortgagee;

(2)     the Mortgagor must give then Mortgagee copies of all documents about the compulsory acquisition or resumption as soon as the Mortgagor receives them;

(3)     the Mortgagor must keep the Mortgagee informed of the status of any claim for compensation and provide the Mortgagee with copies of all documents relating to such a claim.

The LAC Act permits:-

  1. The owner to make a claim for compensation, take action to recover compensation and settle the claim even if the Authority is aware of the existence of a mortgage, whether registered or unregistered.  However, whilst the LAC Act imposes on the owner, in such circumstances, specific ways in which he may use the compensation on its receipt (which include the discharge of any debt or encumbrance), the Authority does not have to police compliance with this obligation.  Accordingly, as the LAC Act does not require the owner to comply with the terms of the MCP nor for the Authority to pay the compensation directly to the mortgagee (unless the mortgagee makes the claim) there is a risk that the owner receives the compensation without repaying the liability secured by the mortgage.
  2. The mortgagee to make a claim for compensation, take action to recover compensation and settle the claim which may be paramount to protect its security as the land acquired is discharged from the mortgage on publication of the Notice of Acquisition in the Government Gazette.
  3. Whilst we are unaware of this section having ever been employed by an Authority, the Authority, at its discretion, to purchase or redeem the interest of the mortgagee in any land acquired or proposed to be acquired by paying or tendering to the mortgagee:-
    (a)        the principal sum and interest due on the mortgage;
    (b)        the expenses and charges (if any of the mortgagee; and
    (c)        3 months’ additional interest.