Compulsory Acquisition Between Contract and Settlement: Who Gets the Compensation?

A developer exchanges contracts to purchase land. Before settlement occurs, a Notice of Intention to Acquire (NOITA) is served over part of the property. The vendor wants to terminate the contract whilst the purchaser wants the compensation. The acquiring authority says only the registered proprietor has a claim.

Who is right?

The answer is often more complex than first appears.

One of the more challenging issues arising in compulsory acquisition matters is the position of a purchaser who has signed a contract of sale but has not yet settled when an acquiring authority acquires part or all of the land.

Many authorities and practitioners, in a compulsory acquisition claim, focus on the registered proprietor. However, that approach can overlook an important principle: a purchaser under a contract of sale may have an equitable interest in the land and may therefore be entitled to compensation in their own right.

The Purchaser’s Equitable Interest

The starting point is that a purchaser under a specifically enforceable contract is often regarded in equity as the beneficial owner of the land.

That principle becomes important when land is compulsorily acquired. The question is no longer simply who is registered on title, but who held an interest in the land immediately before acquisition.

The decision in Fisher v The Minister (Fisher) remains one of the key authorities considered when analysing the rights of purchasers under contract in compulsory acquisition matters.  In Fisher, the Court determined that the acquiring authority’s argument, that a purchaser under contract had no compensable interest in the land, was “unsound in law”.  The effect of this is that a purchaser under contract is not precluded from claiming compensation due to not being the registered proprietor of the land at the time of acquisition.  

Who Gets the Compensation?

The more difficult issue is often not whether compensation is payable, but how compensation should be apportioned between the vendor and purchaser.

Where a contract exists before acquisition, the vendor may ultimately be entitled to receive the agreed purchase monies, under the contract, while the purchaser may be entitled to compensation associated with the acquired interest and any uplift in value beyond the contract price.

The position is often more nuanced than simply identifying the person(s) registered on title.

Does the Contract Come to an End?

Not necessarily.

A common misconception is that a compulsory acquisition automatically frustrates a contract of sale. In many cases that assumption is incorrect.

Where only part of the land is acquired, the contract may remain capable of performance, which may lead to both the vendor and the purchaser having a right to claim compensation from the acquiring authority.  The total of both claims, if made, may exceed the price agreed to under the contract.

What About Land Affected by a Public Acquisition Overlay?

The issue becomes even more complicated where land is affected by a Public Acquisition Overlay (PAO).

Many sophisticated development contracts now contain detailed provisions dealing with compensation rights and allocation risk.  Understanding the effect of these provisions, prior to entering into a contract of sale, is crucial to ensure a that the rights of a vendor and / or purchaser are best protected.

Inner Public Purpose Land and Infrastructure Contributions Plans

A particularly difficult issue arises where land has been identified as Inner Public Purpose Land within an Infrastructure Contributions Plan (ICP).

There is an argument that a purchaser under contract who has become the owner in equity of the land is a person holding an interest in the land for compulsory acquisition purposes.

The Importance of Bespoke Contract Conditions

One of the recurring themes in compulsory acquisition disputes is that parties often spend significant time and money arguing about compensation rights after service of the NOITA or publication of a Notice of Acquisition (NOA).

When the land is under contract, any uncertainty, as to compensation rights, could have been avoided through careful drafting at the time the contract was entered into.

Land affected by a PAO at the time the contract is entered into is an obvious example. However, similar issues can arise whenever there is a realistic prospect of the introduction or removal of a PAO, the service of a NOITA, publication of NOA, inclusion of land within an ICP, amendment of planning controls or any other government action capable of affecting land value.

Without bespoke drafting and proper legal advice, a contract may leave unanswered questions regarding compensation rights, planning risk and value changes before settlement.

A Right to Terminate Following a Notice of Intention to Acquire May Not Be the Best Outcome

The service of a NOITA often prompts an immediate reaction from parties to a contract of sale.

The first question is frequently whether the contract can be terminated. The better question is often whether it should be terminated.

Termination will not necessarily produce the most favourable commercial outcome.

Practical Considerations

Where a compulsory acquisition arises after exchange but before settlement, vendors and purchasers should promptly consider their compensation rights, contractual rights, planning controls and the allocation of risk between them.

Conclusion

Compulsory acquisition occurring between contract and settlement creates a unique intersection between property law, equity and compensation law. Ultimately, the most important issue is often not who wins the compensation dispute after acquisition occurs. It is whether the parties properly considered and allocated the risk before the acquisition occurred.