The Commonwealth v Reeve

The Commonwealth appealed to the High Court of Australia from a decision of the Full Court of the Supreme Court of New South Wales, which had affirmed a compensation award made by Owen J. The respondents, Mrs. Rose Reeve and her daughter Dorothy Mavis Reeve, were monthly tenants of a room in the Grace Building, Sydney, where they operated a coffee lounge. The Commonwealth resumed the land on which the building stood, thereby extinguishing the respondents' tenancy. The respondents claimed compensation under the Lands Acquisition Act 1906-1936 for the interest of which they had been deprived.

The central legal issue before the High Court was the correct principle for assessing compensation payable to a tenant whose leasehold interest is extinguished by a compulsory acquisition. Specifically, the court had to determine whether the value of the business conducted on the premises, particularly its goodwill, should be included in the compensation awarded for the extinguished tenancy, and if so, how it should be valued. The Commonwealth argued that compensation should be limited to the value of the land interest itself, and that the value of the business, including its goodwill, was not a compensable loss. The respondents contended that the goodwill of their coffee lounge business was local, attached to the premises, and therefore formed part of the value of their leasehold interest.

The High Court, in affirming the decision of the lower courts, held that compensation for a resumed leasehold interest should reflect the value of that interest to the tenant, which can include considerations of the business conducted on the premises. The court reasoned that the suitability of the premises for a particular business, and the potential for profit derived from that use, are factors that contribute to the market value of the tenancy. This is not because the acquiring authority is liable for the loss of the business itself, but because these factors enhance the value of the land interest to the tenant. The court acknowledged that while the goodwill of a business is distinct from the land, a local goodwill that is attached to the premises can increase the value of the leasehold interest. The court found that the respondents' monthly tenancy, particularly given the protection afforded by the National Security (Landlord and Tenant) Regulations, had a special value due to its location and suitability for the coffee lounge business, and that this value was properly reflected in the compensation awarded.

The High Court dismissed the appeal, upholding the compensation award of £1,250. This amount was based on the valuation of the respondents' leasehold interest, which included an assessment of the value of their coffee lounge business, particularly its local goodwill, as a factor contributing to the value of the tenancy. The court found that while the evidence regarding the precise calculation of the business's value had some unsatisfactory features, the overall valuation was a matter of opinion that had been considered and approved by two lower courts, and therefore would not be disturbed.