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CANTERBURY EARTHQUAKE

The complexities of compulsory acquisition

By Andrew Horne, partner, and Janine Stewart, senior associate, Minter Ellison Rudd Watts

Shortly before the Canterbury Earthquake Recovery Act 2011 (Act) was passed, the Minister of Earthquake Recovery, Gerry Brownlee, said that the power of the Christchurch Earthquake Recovery Authority (CERA) to compulsorily acquire private property under the Act would be used sparingly. He confirmed, however, that the power would be important for the recovery of the Christchurch suburbs as well as the Christchurch CBD (12 April 2011, 671 New Zealand Parliamentary Debates 17898).

There has been a significant amount of commentary regarding CERA’s powers to demolish or take control of dangerous and/or earthquake-prone buildings. There has been markedly less comment with respect to how and where CERA may use its powers of compulsory acquisition and the disputes that are likely to arise in respect of the ‘current market value’ of compulsorily acquired land. This may be because CERA and the Christchurch City Council are still considering whether some suburbs should be rebuilt at all and where the Christchurch CBD will ultimately be based.

This article examines the power of CERA to compulsorily acquire land, the acquisition process, and some of the key issues which are likely to arise. Our comments provide a broad overview only. Further issues relating to matters such as valuation, insurance and security interests, some of them complex, are likely to arise and will require analysis.

Power of compulsory acquisition
The Minister and the Chief Executive of CERA have extensive powers under the Act including the power to acquire or dispose of property and to compulsorily acquire land. Section 53(4) provides:

“The Minister may, by notice in the Gazette, declare land held under this Act to be set apart for a Government work in terms of the Public Works Act 1981.”

The Act is silent as to the purpose for which the Chief Executive may compulsorily acquire land. Media commentary suggests that the power may be used for the purpose of building new commercial centres and implementing other redevelopment plans, but this is not a requirement under the Act.

Unlike the Public Works Act 1981 (PWA), there is no right to object to the decision to compulsorily acquire land under the Act. However, powers must be exercised in accordance with the purpose of the Act which is set out at section 3, and includes:

Providing appropriate measures to ensure that greater Christchurch and the councils and their communities respond to, and recover from, the impacts of the earthquakes;
Enabling a focused, timely, and expedited recovery;
Facilitating, coordinating, and directing the planning, rebuilding, and recovery of affected communities, including the repair and rebuilding of land, infrastructure, and other property; and
Restoring the social, economic, cultural, and environmental well-being of greater Christchurch communities.

It should also be noted that landowners will have the ability to seek judicial review of the exercise of the Minister’s power on the basis that he is not acting in accordance with the purpose of the Act. While the purpose of CERA necessarily appears wide, giving the Minister a broad base upon which to exercise his powers, such applications may nevertheless complicate the acquisition process.

The process of compulsory acquisition
Once the Minister determines that land is to be acquired, the steps set out in sections 53 to 57 of the Act apply as follows:

(a) The Minister must publish a notice of intention to take the land in the name of the Crown in the Gazette, which must be notified publically twice. The notice must give:

(i) a general description of the land required to be taken (including the name and number of the road or some other readily identifiable description of where the land is situated); and
(ii) a description of the purpose for which the land is to be used. This requirement is interesting given that the landowner has no right of objection under the Act. However, the purpose will be relevant to any application for judicial review of the Minister's powers.

(b) The Minister must serve upon the owner of the land, or persons with a registered interest in the land, a notice of intention to take the land, unless it is impracticable to do so;

(c) The notice which is published in the Gazette must be lodged with the Registrar General of Land, who will register it on the computer register;

(d) The Minister may then recommend that the Governor General make a proclamation declaring that the land be taken in the name of the Crown; and

(e) The proclamation must then be published in the Gazette and publically notified within one month of its making.

Land is deemed to be vested in the Crown and free from all encumbrances on the fourteenth day after the proclamation is published in the Gazette. The Crown also succeeds to all rights, entitlements, and benefits the owner has or may have against:
(a) The insurer of the land; or

(b) The insurer of any building or other property on the land.

If the owner or occupier fails to give vacant possession of the land within one month after the proclamation has been published in the Gazette, the Minister may seek an order from the High Court directing the owner or occupier to give vacant possession.

Compensation
Pursuant to section 64 of the Act, compensation for compulsorily acquired land is to be determined as at the date of the compulsory acquisition. (Presumably this will be on the date that the land becomes vested in the Crown. Pursuant to section 55(6) of the Act, this will be on the fourteenth day after the day on which the proclamation was published in the Gazette.) In other words, the appropriate amount of compensation will be determined at post-earthquake value.

Gerry Brownlee has commented that powers to forcibly acquire land are a ‘backstop’ if commercial negotiations fail causing unacceptable delays to the recovery, and explains the compensation value in the following terms: “It is if commercial negotiations fail and other people are prevented from getting on with the bigger recovery,” said the Minister (Ben Heather, “Landowners may be forced to sell at loss”, The Press, 19 May 2011). Paying post-quake market value for property is a fair measure because, if commercial negotiations fail, there is no other value for the property.

Section 61 of the Act provides that compensation:
(a) Means compensation for actual loss; but

(b) Except as provided by the Act, does not include compensation for:

(i) A loss by an insurer arising from a liability to indemnify;
(ii) Any part of a loss that is insured;
(iii) Any part of a loss that ought reasonably to have been insured;
(iv) A consequence of regulatory change arising from the operation of this Act causing loss;
(v) Cancellation of an existing resource consent that had already been exercised;
(vi) Cancellation of an existing use right;
(vii) Economic or consequential loss;
(viii) Loss of personal property exceeding $20,000 in value;
(ix) Business interruption;
(x) Any other loss that the Minister reasonably considers is unwarranted and unjustified.

The procedure for claiming compensation is set out in sections 60 to 67 of the Act and may be summarised as follows:

(a) A claim for compensation must be lodged by sending or delivering to CERA a properly completed claim form provided by the Chief Executive within two years after the exercise of the power in question;

(b) The Minister will then determine whether compensation is payable, and if so, the amount of the compensation, as follows:

(i) compensation is to be determined in the case of compulsory acquisition as at the date of the compulsory acquisition;
(ii) the Minister must determine the compensation payable, having regard to its current market value as determined by a registered valuer;
(iii) the Minister must determine compensation in accordance with the relevant provisions in Part 5 of the PWA;
(iv) before making a final determination as to the amount of compensation payable, the Minister must give a claimant (or a representative of the claimant including a lawyer, accountant, or other expert) a reasonable opportunity to appear before the Minister or the Minister’s delegate, to make representations as to the nature of the claim and the amount of compensation payable; and
(v) if the owner of a property is dissatisfied with the level of compensation payable, they have the right to appeal on that issue to the High Court.

Any such appeal must be filed within 10 days of the date of the determination. The High Court then has the power to appoint one or more suitably qualified persons to assist in giving advice as to the value of the property. The Court may give as much or as little weight to this as it wishes.

The acquisition and compensation processes under the Act raise a number of issues which require consideration. These include the measure of ‘current market value’ and implications for insurers and mortgagees.

Current market value
Valuation issues in Christchurch will be vexed. In this section, we provide a broad overview of the measure of 'current market value' under the Act. At present, there are more questions than answers with respect to how this is likely to work in practice.

As set out above, section 64(3) of the Act requires the Minister to determine compensation “with regard to the current market value of the land as determined by a valuation carried out by a registered valuer”; and so far as practicable, in accordance with Part 5 of the PWA.

Relevant principles under Part 5 include, in summary, the following:
(a) No allowance is to be made due to the fact that the taking of the land was compulsory; and

(b) The value of the land is to be taken to be that amount which the land if sold on an open market by a willing seller to a willing buyer on a specified date might be expected to realise.

The Minister and/or the High Court will most likely refer to decisions under section 62 of the PWA in considering claims for compensation. As many claims under section 62 are resolved in private negotiation or arbitration, recent judicial commentary is limited.

In the case of Tauhara Properties Ltd v Minister of Works and Development [1980] 2 NZLR 673 at 677 (which concerned land acquired under the PWA, and where the Court cited commentary on value from Turner v Minister of Public Instruction (1956) 95 CLR 245), the Court made the following statements as to how compulsorily acquired land should be valued:

“It is of course to be valued in cases of compensation with a view to ensuring that the actual value of the land is replaced in the hands of the owner by an equivalent amount of money. The value must therefore be the value to the owner which the land possessed to him in its condition at the date of resumption. That value was necessarily affected by all the advantages which the land possessed and these rights might be a matter of future or even contingent enjoyment.”

The 'current market value' test is likely to present difficulties, particularly as factors which would normally be relevant to the assessment are uncertain. These include, for example, the following:
(a) Zoning – residential versus commercial – until CERA and the council have created and publicly released the rebuild plan for Christchurch, this will remain unclear. The value must be determined as at the date of acquisition, and zoning in place at that time will be the relevant measure. However, the assessment of current market value also allows the ‘potentiality’ of the land to be considered, which could include potential zoning amendments.

(b) Proximity to the CBD and key services – where will the CBD be located in the future? As the property is to be valued at the time of acquisition, will valuers be required to assume that the CBD is in its current position, or will “CBD” acquire a new meaning as businesses relocate to premises around Christchurch?

(c) Development potential of the land – recent commentary suggests that the current market preference in Christchurch is for low-rise, pedestrian-style office blocks. How will this affect the development potential of the acquired land?

(d) Geotechnical issues will be important – recent earthquake analysis and geographic surveys identifying new fault lines are likely to be a relevant consideration.

The High Court appeal procedure may be a forum in which market perceptions and expectations are considered in detail. The market is constantly changing and is sensitive to factors such as environment (for example, ongoing aftershocks) and time. Two blocks of land that are acquired six months apart may be determined to have very different current market values.

Insurance issues
Compulsory acquisitions under the Act that give rise to valuation issues, or even the potential for such acquisitions, are likely to have negative consequences for insured landowners and other interested parties such as financiers.

Important insurance issues include the following:
(a) Insurance policies normally provide cover for the replacement value of buildings only where the insured in fact replaces them and does so within a reasonable time. Otherwise, only indemnity value, which may be a much lower amount, is payable. Where an insured’s land is compulsorily acquired, an insurer may not necessarily accept the purchase of a replacement building elsewhere or the erection of a new building on another site as constituting reinstatement for the purposes of the policy, particularly where there has been a lengthy delay.

(b) Insurance policies normally indemnify property owners for physical loss and damage to land (which in the case of residential land is covered primarily by the Earthquake Commission) and buildings. They do not normally provide cover for loss of value that arises as a result of changed market perceptions. Many landowners are likely to find that the cost of repairing physical damage to their land and buildings is significantly less than the additional losses they have suffered because their land and buildings have become undesirable. This may occur as a result of increased public recognition of their susceptibility to earthquake damage or decisions by other landowners or CERA not to rebuild in their area.

(c) Landowners whose land is compulsorily acquired will not normally be insured for losses they suffer because their entitlement to compensation under the Act (which is assessed net of any entitlement to insurance proceeds) is significantly less than the pre-earthquake value of their land and buildings.

Property owners affected by these issues may also find that they are unable to meet their repayment obligations to lenders who have financed properties on the basis of their pre-earthquake values. This, in turn, may prevent property owners from financing the reinstatement of land or buildings damaged by the earthquakes, particularly if lenders avail themselves of their contractual entitlements under loan agreements and insurance policies to receive the proceeds of insurance directly in repayment of their loans.

Conclusion
The purpose of the Act is clear, in particular the facilitation of the rebuild and restoration of Christchurch. The power of compulsory acquisition is arguably necessary to achieve this purpose. However, it remains to be seen as to how the compulsory acquisition process under the Act will work in practice, and how the issues highlighted above will be addressed.

NZLawyer extra, edition 27, 10 June 2011