The application of solatium payments in the assessment of public works compensation

Abstract

The need for public infrastructure is essential in modern society, efficient transport and communications networks are the grease in the machinery of any economy while provisions of hospitals, schools, modern sewerage and water systems provide the lifestyle that all of us want – consider what life may be like without these. The ability to compulsorily acquire land is an essential element for those authorities that provide public works. Such projects often require the assemblage of many individual land parcels which would be near impossible, or impossibly costly to achieve without such legislation. Where land is acquired by compulsion in New Zealand under the Public Works Act 1981, the compensation provided for is based on the principle of equivalence – that the landowner should be in a position no better or worse than before the land was acquired. In practice this means compensation based on the assessed market value of the land or interest acquired. A review of the literature on the subject along with analysis of public submissions to a review of the Act which was undertaken in 2001 indicate that the principle of equivalence, while accepted as a reasonable basis for the payment of compensation, may well not be adequately compensating all landowners when their properties are taken compulsorily. Further the lack of compensation for injurious affection (depreciation) incurred when no land is taken is contentious, with landowners suffering from this extremely unhappy current legislation despite evidence that the actual losses incurred as a result of injurious affection are usually quite small. The literature and the submissions to the Public Works Act review suggest that the payment of a small premium over and above the market value mandated by the principle of equivalence would be appropriate. There are sound social and economic reasons why compensation should be paid to those who suffer a loss as a result of some public work. Balanced against these considerations is the need to have a regime for the assessment of compensation that does not get bogged down in dispute, encourage spurious claims or allow landowners to be excessively overcompensated. To do so would put at risk any necessary and worthwhile public infrastructure projects. It is very common for overseas jurisdiction to make an allowance in legislation for the payment of small premiums in the range of 5% to 10% over the market value when land is acquired using an element of compulsion. This premium is often (but not always) reserved for the purchase of residential property. Often the payment of the premium is discretionary up to the maximum, particularly in cases where the premium is allowed for all classes of land. The New Zealand Act contains a similar provision, referred to as a solatium and payable on the acquisition of a residence from an owner, however this has been fixed at $2,000 for many years and is therefore too low a figure to be relevant in the overall compensation consideration. The submissions to the Public Works Act review indicated that public works providers may be willing to consider an expansion of the compensation provisions to take account of some of these concerns, but this was tempered by a concern about opening themselves up to significant future costs and the problems that will be created for them in delivery of facilities and services into the future. It is considered that a review of the current solatium provisions could provide ability to both, offer a premium in acquisition and to offer some compensation to those suffering from injurious affection when no land has been taken and at the same time keep a reign on costs. A look at the “solatium” provisions of overseas legislation shows that within reason these can be constructed to manipulate the payment in almost any manner desired so it is clearly possible to engineer a clause which would enable useful premiums to be paid but still place a reasonable limit on owners expectations. The provisions could also be extended to cover those suffering injurious affection as in most cases the losses suffered would be within the scope of a solatium payment or premium being offered to those from whom land is acquired. It is accepted that such proposals would add to the cost of public works projects but in most cases this would probably be not much more than 10% of the total property cost which is many projects is not a significant component of the overall cost of the project. On this basis it is recommended that further investigation into the possible extension of the solatium provisions of the Act be undertaken with some cost benefit modelling against actual projects to determine the viability of the proposal.