"Extortionate" - Queensland Land Court rejects over the odds compensation claim for Hail Creek mining lease

What you need to know

• The Land Court has determined compensation in relation to the grant of a mining lease under the Mineral Resources Act 1989 (Qld) wholly adopting the valuation methodology and quantum submitted by the mining lease applicant.  
• The valuation methodology proposed by the mining lease applicant, and ultimately adopted by the Land Court, was the "direct comparison method" which considers the subject property and its actual or proposed use against sales of like properties.
• This decision highlights the central importance that valuation evidence plays in compensation cases.

What you need to do

• Where an applicant for a mining lease in Queensland cannot agree compensation with a landholder, they should be aware that the Land Court's preferred compensation valuation methodology is likely to be the direct comparison method.
• While proponents and landholders are free to agree any sum as to compensation, the parties should factor the preferred method into their negotiation strategies in case the parties are unable to reach agreement.

Compensation related to mining lease for existing Hail Creek accommodation camp

Hail Creek Coal Holding Pty Limited & Ors v Michelmore [2021] QLC 19 concerns the compensation payable by Hail Creek Coal Holdings Pty Ltd and other mining companies (Miners) to a landholder in relation to the grant of a mining lease. The mining lease would authorise the use of the land for an accommodation camp that has already been in use by mine workers from the adjacent Hail Creek Mine for more than 15 years (the subject site had been occupied under a lease due to expire in 2023).

We have previously written on the mining lease objection matter relating to this mining lease – see our 14 May 2020 Energy & Resources Alert Queensland Land Court strikes out frivolous objection to Hail Creek mining lease application.

The parties had been unable to reach an agreement on the compensation payable for the grant of the mining lease.  The parties had each engaged a professional valuer and those valuers had arrived at markedly different figures:

• the Miner's valuer reached a sum of $530,530;
• the landholder's valuer reached a sum of $7,000,000.

Accordingly, the Miners applied to the Land Court to settle the amount to which the landholder was entitled.  The Land Court's power to determine compensation comes from section 281 of the Mineral Resources Act 1989 (Qld) (MRA).  

The Court's Reasoning

Member Stilgoe OAM was concise in summarising her task of assessing compensation by asking: "what is the value to be given to the surface of the land?".  Answering that question entailed selecting between competing valuation methodologies, and factoring in so-called "questions of risk" which might affect the value of the land.

Questions of risk in reaching a valuation

The "questions of risk" referred to in the court's reasons might also be called the known unknowns. For example:

• would there be a camp on the proposed mining lease for the full term of that lease?
• would any other entity be interested in purchasing the camp?
• would the development approval for the camp meet the needs of a future purchaser?

The court heard evidence from economists, engineers and valuers in answering the questions of risk. Most notably for the purposes of the valuation exercise were the findings that there was little, if any, demand for the camp which was not related to the Hail Creek Mine, that there was a lack of proximity with other mining operations that may wish to utilise it, and that there would be major issues for a future purchaser of the camp to address including in relation to water supply, sewerage, telecommunications and traffic.

What was the correct valuation method?

The parties each submitted different valuation methodologies for the court to accept.  Counsel for the landholder submitted that the correct methodology was that expressed in Vyicherla Naryana Gajapatirajup Bahadur Garu v Revenue Divisional Officer, Vizagapatam [1939] AC 302, namely that the "potentiality in the acquired land, which can be taken to fruition only by the acquiring authority, is to be considered in valuing that land for the purposes of assessing compensation."  Additionally, the valuer for the landholder had themselves offered a preference for the "net present value of the potential rent" – that is, the land's potential rental by reference to rent obtained in other accommodation villages.  The court, however, was not minded to accept either of these methodologies. 

Instead, the court quoted a 1983 decision of the Land Appeal Court that "the best test of value is to be found in sales of comparable properties, preferably unimproved or lightly improved, in the open market as close as possible to the date of valuation."  This approach is referred to as the direct comparison method, and was the approach taken by the valuer engaged by the Miners.

Direct comparison method

The court considered evidence from both of the two valuers in relation to the direct comparison method.  While the direct comparison method was not his preferred approach, the landholder's valuer did analyse the Miners' valuer's assessment of the comparable sales and offered assessment of that in evidence.  

The relatively unique nature of the property and land use meant there was a dearth of readily-comparable sales.  Nevertheless, the Miners' valuer had considered, insofar as was possible, comparable sales of land with existing accommodation, and sales of land bought with the intention of constructing mine accommodation. His assessment, which was ultimately accepted by the court, involved:

• a finding that the comparable sales reflected a premium of between 100% and 250% over and above the value for the alternative uses for the land; 
• adopting the highest premium of 250%; 
• applying that premium to the land's value as grazing land (which the parties had agreed would be valued at just under $190,000); and
• applying an additional 10% uplift for the compulsory nature of the acquisition as required by the MRA,

for a total compensation amount of $530,530.

The court also considered the "classic definition of value" being "a sale by voluntary bargaining between the vendor and the purchaser, willing to trade but neither of them so anxious to do so that he would overlook any ordinary business consideration" (Spencer v The Commonwealth (1907) 5 CLR 418 at 441).  The court concluded that the possibility that the Miners might be the only purchaser of the land "does not justify an extortionate valuation". 

The court questions capacity of landholder's valuer to give independent advice

The court interrogated the landholder's valuer's capacity to give the Court independent advice, and ultimately determined that while it could consider that evidence, it could have no confidence in the evidence and could afford it little or no weight. 

The basis for this finding included, among other things, that the valuer had issued to the landholder invoices that were "odd" and "concerning", including apparently invoicing for work not done by the valuer's firm and therefore not payable to the valuer's firm.

Effect of the compensation determination

As compensation has now been determined by the Land Court, the hurdle under section 279(1) of the MRA - that a mining lease cannot be granted unless compensation is determined - has been cleared.  This marks an important step towards the eventual grant of the mining lease application to the Miners.