Introduction
The system of compulsory acquisition of land by way of legislative authority, as we now know it, has its roots in the early half of the 1800s during the industrial revolution in Great Britain. Much land was required for the great railway projects of the time and the use of “Private Acts” was the method by which that land was compulsorily acquired by the railway companies. One of the earliest legislative frameworks for the resumption of land is found in the English Lands Clauses Consolidation Act 1845. That Act put into statutory form the power for the State to compulsorily acquire land for public purposes, and a recognition that, upon that acquisition, all of the dispossessed owner’s interest and title in their former lands was converted into a right to compensation.
One of the key aspects of this genealogy is that the power to take land, and the entitlement to compensation for the loss of that land, is purely a creation of statute. There is no rule of common law underpinning the resumption of land, although over time the courts charged with determining compensation have developed principles to guide them in that enquiry.
Unsurprisingly, legislation has been developed and refined over time to reflect the needs and expectations of a changing society. In Australia, each State and the Commonwealth has passed its own legislation concerning these matters. Again, unsurprisingly, each of those jurisdictions has formulated its own statutory regime for the assessment of compensation.
By way of example, in Queensland, section 20 of the Acquisition of Land Act 1967 provides that:
1. In assessing the compensation to be paid, regard shall in every case be had not only to the value of land taken but also …
Section 55 of the Commonwealth’s Land Acquisition Act 1989 sets out “general principles” for the assessment of compensation which provide in part:
2. In assessing the amount of compensation to which the person is entitled, regard shall be had to all relevant matters including:
(a) except in a case to which paragraph (b) applies:
(i) the market value of the interest on the day of the acquisition
Whilst, in South Australia, section 25 of the Land Acquisition Act 1969 provides:
1. the compensation payable under this Act in respect of the acquisition of land shall be determined according to the following principles:
(a) the compensation payable to a claimant shall be such as adequately to compensate him for any loss that he has suffered by reason of the acquisition of the land; and
(b) in assessing the amount referred to in paragraph (a) of this section consideration may be given to:
(i) the actual value of the subject land
What is meant by “Value of the Land”
The short extracts above demonstrate that each jurisdiction has chosen its own formulation of the words used to describe the value to be assessed. In Queensland, it is “the value of the land taken”, for the Commonwealth, it is “the market value of the interest”, in South Australia, it is “the actual value”. In some judicial pronouncements, it is described as “value to the owner”.
It is now accepted by courts of the highest authority that these various formulations all mean the “market value” of the land on the date it was resumed. In the almost 170 years that has elapsed since the earliest legislation was promulgated, the inquiry has been to identify that market value. In Australia, the concept of market value that has stood the test of time (and which has recently been affirmed again) was set out by the High Court in Spencer v Commonwealth (1907) 5 CLR 418.
In what has become known as the “Spencer Test” Griffith CJ said:
The test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e. whether there was in fact on that day a willing buyer, but inquiring “What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?” It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together.
His Honour Isaacs J said:
In the first place the ultimate question is, what was the value of the land on 1st of January 1905?
All circumstances subsequently arising are to be ignored. Whether the land becomes more valuable or less valuable afterwards is immaterial. Its value is fixed by statute as on that day. Prosperity unexpected, or depression which no man would ever have anticipated, if happening after that date named, must be alike disregarded. The facts existing on 1st January 1905 are the only relevant facts, and the all important fact on that day is the opinion regarding the fair price of the land, which a hypothetical prudent purchaser would entertain, if he desired to purchase it for the most advantageous purpose for which it was adapted. The plaintiff is to be compensated; therefore he is to receive the money equivalent to the loss he has sustained by deprivation of his land, and that loss … cannot exceed what such a prudent purchaser would be prepared to give him. To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business considerations. We must further suppose both to be perfectly acquainted with the land, and cognisant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property.
The authority and correctness of the Spencer Test is such that it has been incorporated into, and expressly set out in, the compulsory acquisition legislation of most states and the Commonwealth.
A shorthand question I pose to express this test (which admittedly contains elements of other relevant tests) is:
At what price would a hypothetical prudent purchaser and a willing but not anxious vendor (both of whom are perfectly acquainted with the land and all factors that may affect its value) come together on the date of resumption in an unconditional contract (in which all risk for uncertainty is reflected in the purchase price) to purchase the land for the most advantageous purpose to which it can be adapted.
The Spencer Test is a hypothetical test, and the evidence of that hypothetical transaction is given by expert Valuers putting themselves into the shoes, as far as possible, of the hypothetical parties. The strength of the Spencer Test is that the principle itself is not a method of valuation. Rather, it permits an expert to use any method of valuation that is capable of yielding a result within the bounds of reason.
There are a number of assumptions and matters that the Valuer is required to have regard to in applying the Spencer Test. In Hall & Hedge v The Chief Executive, Department of Transport (1997-1998) 18 QLCR 285 at 305-306 and the Queensland Land Court identified the following assumptions:
1. that the notional purchaser must not be taken to possess any special prescience or knowledge, but it must be assumed that both he and the vendor would be concerned with the nature of the development which would be permissible at the date of acquisition and in the future after that date;
2. that regardless of the circumstances of the relevant land, a sale must be assumed, and that if no buyer is possible, then one must be assumed;
3. that if a willing buyer is actually identified, his price cannot by itself dispose of the matter;
4. that given that a sale must be assumed as at the relevant date, the marketing period for the sale of the property must precede the date of valuation;
5. the hypothetical sale is an unconditional sale with any uncertainty arising over the possible use of the land to be reflected in the sale price and not by way of some condition.
What Knowledge Do The Perfectly Acquainted Parties Have?
A further
aspect of this hypothetical transaction, set out in
Kenny & Good Pty Ltd v MGICA (1992) 199 CLR 413 is that
“The market for property is… assumed to be an efficient market in which buyers and sellers have access to all currently available information that affects the property.” Given that assumption, what is the extent of the information available to the hypothetical parties concerning their perfect acquaintance with the land and all of the circumstances that might affect its value, either advantageously or prejudicially?
In Hall & Hedge v DOT 1997 18 QLCR 284 the court said:
“Spencer does not propose a method of valuation, nor does it suggest the type and extent of information which the hypothetical parties might possess and on which a Valuer might rely. It would be inconsistent with principle, however, if the parties or either of them were presumed to have information not usually available in transactions of the type in contemplation at the relevant date.
…
It is unquestionably the case that greater information will lead to greater certainty and therefore less risk, however, there is in my view a conflict with the Spencer formulation where the type and detail of information relied upon turns more on the choice the parties take in the presentation of their cases then in an attempt to replicate Spencer in the prevailing market conditions. … The level of risk that the Court should take into account is the level which would be in mind of the hypothetical prudent purchaser at the relevant date based on the level and reliability of information which would ordinarily be available to him.”
In Gosford SC v Green 1980 4 8 LGRA 201 the court said that:
“… the knowledge to be attributed to a notional purchaser is that which as a prudent purchaser making all proper enquiries he would have at the date of the resumption…”
In Manufacturers Mutual v Gosford CC 1982 The Valuer 214 the New South Wales Land & Environment Court said:
“… the knowledge of the hypothetical parties to the issue and sale of the… land is limited to the knowledge possessed by a prudent purchaser at the date of resumption.”
In McDonald v RTA (NSW) 2009 169 LGERA 352 the court said:
“Thus, the hypothetical parties must be supposed to have ‘a knowledge of all matters that affect its [the land’s] value’ and, further, to be ‘perfectly’ acquainted with the land itself. As to the former, the High Court in Walker did not say that the attributed knowledge of all matters is perfect.”
Conclusion
In determining the amount of compensation payable to a dispossessed landowner the enquiry turns to an assessment of the market value of the land on the date of resumption. This involves an application of the “Spencer Test”, the authority of which is undoubted.
The test is a hypothetical exercise in which the expert Valuer places themselves into the shoes of a “hypothetical prudent purchaser” and a “willing but not anxious vendor” to ascertain the price at which the hypothetical parties would have come together for the sale of the land for its most advantageous use on the date of resumption.
Both of these parties are perfectly acquainted with the land and all matters that may affect its value. This assumes an efficient market for the sale of land in which both buyers and sellers have access to all information that affects the property as at the date of resumption. The degree of knowledge imported to both hypothetical parties is the subject of some controversy, and there is no binding legal principle on this point.
The conflict arises when the type and detail of the information assumed to be available to the hypothetical parties is concerned more with the presentation of the litigation rather than from an attempt to replicate the Spencer test in the prevailing market conditions. That is, the actual parties to the litigation are often inclined to assume a greater or lesser availability of information to support or undermine certain aspects of each party’s respective case.
At this time, it can be said that the authorities support a level of knowledge which is not perfect, but which would be in the mind of the hypothetical prudent purchaser and available to him at the relevant date having made all proper enquiries. It is suggested that the extent of this knowledge is not fixed, but will sensibly vary depending on the circumstances of, and the value contended for, in each particular case.
