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THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

1974 — Parliamentary Paper No. 76

COMMISSION OF INQUIRY INTO LAND TENURES

FIRST REPORT November 1973

Presented by Command 4 December 1973

Ordered to be printed 1 August 1974

THE GOVERNMENT PRINTER OF AUSTRALIA CANBERRA 1975

© Commonwealth of Australia 1974

Canberra Reprographic Printers

29 November 1973

Your Excellency,

In accordance with Letters Patent dated 4 May 1973,1 have the honour to present to you the first Report of the Commission of Inquiry into Land Tenures signed by my fellow Commissioners and myself.

Yours sincerely,

R. ELSE-MITCHELL Chairman

His Excellency the Right Honourable Sir Paul Hasluck, G.C.M.G., G.C.V.O., K.St.J., Governor-General and Commander-in-Chief, Government House, Canberra, A.C.T. 2600

Commission of Inquiry into Land Tenures

The Honourable Mr. Justice Rae Else-Mitchell Judge o f the Supreme Court of New South Wales

Professor Russell Lloyd Mathews Professor o f Accounting and Public Finance, The Australian National University

Mr. Gerardus Jozef Dusseldorp Chairman of Directors, Lend Lease Corporation Limited

Mr. S.G. Litchfield

All inquiries should be addressed to:

The Secretary, Commission of Inquiry into Land Tenures, P.O. Box 782, Canberra City, A.C.T. 2601.

Chairman

Commissioner

Commissioner

Secretary

Contents

page

SUMMARY OF RECOMMENDATIONS ix

I INTRODUCTION I

Π A NATIONAL LAND POLICY 5

Objectives of Land Policy 5

Efficiency 5

Equity 6

Nature o f Land Rights 7

ΠΙ URBAN LAND POLICIES: ISSUES AND STRATEGIES 10 The Urban Problem 10

Urban Goals 11

Land Policy Issues 11

Policy Guidelines 12

Policy Constraints 13

Policy Imperatives and Strategies 13

IV RESERVATION OF DEVELOPMENT RIGHTS 15

Land Value 15

Sources of Unearned Increments 16

Development Rights 17

The Elimination of Private Gains from Land Use Decisions 17

Reservation of Development Rights 20

Compensation 20

Legislation and Implementation 21

Summary of Proposals 23

Evaluation of Other Attempts to Reserve Development Rights 23

Betterment Charges and Development Initiatives 24

Implications o f Proposed Scheme 25

V DEVELOPMENT CONTROLS AND PROCEDURES 26 The Development Cycle 26

Existing Development Controls 26

Proposed Development Control Authorities 27

Development Corporations 28

Development Defined 29

Enforcement and Compensation Provisions for Development Control 29

The Functions of Land Commissions and Development Corporations 50

The Role of Local Government in Development Control 51

v

The Role of the Private Sector 31

Disposal of Land 33

Re-development in Existing Cities 35

Summary of Recommendations 36

Implications o f Proposals 36

VI LAND TENURE SYSTEMS 38

Freehold and Leasehold Models 38

The Evolution o f the Law of Real Property in Australia 39

Objectives of a Land Tenure System 41

Security of Title and Ease of Transferability 42

Security for Financing 43

Security during Development Phase 43

Security of Designated Use 43

Legal, Political and Administrative Certainty under Land Use Controls 44

Provision of Cheap Land for Residential Purposes 45

Appropriation o f Unearned Value Increments 47

VII TENURE ARRANGEMENTS FOR DIFFERENT LAND USES 49

Rental Leasehold Tenure in Relation to Residential Land 49

Grants in Fee Simple for Residential Land 54

Residential Land for Tenant-occupied Housing 55

Land Used for Commercial Purposes 56

Economic Rents on Commercial Leasehold Properties 56

Rental Reviews 58

Lease Premiums 59

Building Renovations and Re-development 59

Terms of Leases 60

Attracting Commercial Enterprise to the New Growth Centres 60

Land Used for Industrial Purposes 62

Pollution Control 62

Charges for the Use of Industrial Leasehold Land 63

Land Used for Community Purposes 63

Land Used for Public Purposes 64

Summary of Recommendations 64

Implications of Proposals 65

VIII TENURE ARRANGEMENTS FOR DIFFERENT GEOGRAPHICAL REGIONS 66

Metropolitan and Regional Growth Centres 66

The Australian Capital Territory 67

page

vi

History o f Canberra Leasehold Tenure 67

Evaluation o f Present Canberra System and Proposals for Change 69

Development Rights in the Australian Capital Territory 70

Development Controls 70

Residential Land in the Australian Capital Territory 71

Allocation o f Residential Leases 71

Non-residential Leases in the Australian Capital Territory 72

Conversion o f Existing Leases 72

The Northern Territory 73

History o f Land Tenure in the Northern Territory 73

Development Controls in the Northern Territory 74

Evaluation o f the Existing Northern Territory System and Proposals for Change 74

Summary o f Recommendations for the Australian Capital Territory and the Northern Territory 75

page

vii

Summary of Recommendations

1. As a pre-requisite to achieving comprehensive land use reform in Australia, all future development rights (that is rights to future changes in land use) should from a base date be acquired by and reserved to the Crown without payment of compensation.

2. All land use rights existing at the base date should remain unchanged.

3. Where privately owned land is acquired by the Crown after the base date, compensation should be paid on the basis of the higher of: (a) the existing use value at the date of acquisition; or (b) the market value at the base date accumulated at a rate of interest (to be

determined) from the base date to the date of acquisition.

4. Where privately owned land is designated for another use after the base date, the owner should (a) pay to the Crown an amount representing the value of the development rights, or (b) require that his land be compulsorily acquired on the compensation basis described above, or (c) sell the land subject to separate payment to the Crown for the

development rights.

5. All development rights should be vested in metropolitan and regional Development Corporations, which should also have full and effective powers to control all urban development and re-development.

6. Development Corporations should be given powers and financial resources to enable them to acquire land by negotiation or resumption, to make direct outlays on sub­ division, servicing and development, to make serviced or developed land available for use in accordance with the land tenure arrangements recommended below and to ensure that all demands or needs for land for residential and other urban purposes are satisfied.

7. Development Corporations should also be given clear powers to define the conditions and timing of development and re-development for both public and privately owned land through the issue of development orders.

8. Development orders should require landowners (a) to comply with the conditions specified in the orders within a specified time, or (b) to accept compensation for the acquisition of their properties by Development Corporations on the basis indicated in Recommendation 3, or (c) to sell the land to purchasers prepared to comply with the

orders.

9. Development orders should reflect the principle of public ownership of development rights by including among the conditions a requirement that owners or developers make payments for the development rights on the basis indicated in Chapter IV. Payment for development rights in respect of residential land might, however, take the form of a

requirement that a specified proportion o f home sites be transferred to the Development Corporation at a pre-determined price.

10. Land disposed of for residential purposes should be granted on the basis of fee simple titles subject to improvement conditions and the reservation of development rights. Until such time as legislation has been enacted to reserve development rights in all existing estates in fee simple, grants in which development rights have been reserved

should be issued under new titles, suitably designated by a term such as ‘residential grants’ or ‘residential freeholds’. If and when development rights to all lands have been vested in the Crown, grants in the new growth centres will be similar to those in existing cities and,

like the latter, might then be called grants in fee simple. Residential grants should be purchased by capital sums which might be paid over a term of years by instalments at rates of interest comparable with those used for housing loans.

11. Land disposed of by Development Corporations for commercial purposes should be the subject of leases for a term of years reserving an economic rent subject to periodical re-appraisal. For purposes of rental review, the initial site rent should be related to the initial market rental value of the whole property (land and buildings), in order to

establish a fixed proportion to be applied to the current market rental value at the time of each rental review.

12. Voluntary conversion to Crown leasehold of existing non-residential estates in fee simple could be encouraged by offering taxation concessions such as: (a) the amortisation for income tax purposes of both existing and future improvements on Crown leaseholds; and (b) exemption of Crown leaseholds from land tax.

13. Consideration should be given to the possibility of requiring all development orders issued by Development Corporations in existing cities to indude conditions requiring conversion o f fee simple titles for non-residential land to leasehold.

14. Land disposed of by Development Corporations for industrial purposes should be the subject of leases for a term o f years. Fixed capital premiums approximating the cost of acquiring and servicing the land should normally be payable. All industrial leases should be subject to controls to prevent pollution and protect the environment.

15. Land disposed of for community purposes should be the subject of leases for a term of years, under which charges might be nominal and should not exceed the cost of providing and servicing the land.

16. Land used for public purposes should be subject to development and land use controls.

17. Recommendations relating to the reservation of development rights, the introduction of development controls and forms and conditions of land tenure should apply generally, insofar as they are applicable, to both the Australian Capital Territory and the Northern Territory.

18. Residential land in the Australian Capital Territory should be held under perpetual leases, subject to the reservation of development rights and to the payment of capital premiums on allocation but not to rental obligations.

19. Residential land in the Northern Territory should be granted under fee simple title subject to improvement conditions and the reservation of development rights, and existing residential leases should be converted to such titles.

20. Non-residential urban land in the Australian Capital Territory and the Northern Territory should be leased for fixed terms in return for economic rents on commercial leases and capital premiums on industrial leases. Encouragement should be given to convert existing non-residential leases and fee simple estates to the new forms of leasehold tenure.

21. The right to convert non-residential leasehold land in the Northern Territory to fee simple tenure should be abolished.

COMMISSION OF INQUIRY INTO LAND TENURES

Report

To His Excellency the Right Honourable Sir PAUL MEERNAA CAEDWALLA HASLUCK, a member of Our Most Honourable Privy Council, Knight Grand Cross o f the Most Distinguished Order of Saint Michael and Stint George, Knight Grand Cross o f the Royal Victorian Order, Knight o f the Most Venerable Order o f the Hospital of Saint John of Jerusalem, Governor-General and Commander-in-Chief in and over the Commonwealth of Australia,

MAY IT PLEASE YOUR EXCELLENCY.

I INTRODUCTION

1.1 We were appointed by Letters Patent under the Great Seal o f the Commonwealth o f Australia, bearing date the fourth day of May, 1973, to inquire into and report upon the following matters, namely:

(1) The most appropriate methods o f leasehold administration and management o f land for urban purposes, consistent with the private rights of lessees and the public interest in the land, being land in the Australian Capital Territory and the Northern Territory and land acquired by or for the purpose of a Land

Commission which may be set up -in any Australian State to which the Parliament may grant financial assistance on terms and conditions relating to the acquisition, development and use of land for urban purposes.

(2) Without in any way derogating from the generality o f the last preceding paragraph, the following particular matters: (a) the principles and practices currently being applied in the leasing of land by public authorities for urban purposes, including the operation of the

leasehold land system in the Australian Capital Territory and the Northern Territory and, to the extent necessary, the administration o f leasehold lands in other parts of Australia and in other countries; (b) what are the essential characteristics of leasehold tenure as it could be

used in an urban land system; (c) the most appropriate term of years for land leased for residential, commercial, industrial, public and community purposes, and the advant­ ages, if any, of a reduction in the commonly used 99-year lease period; (d) the purposes of land rent and the appropriate methods for arriving at the

annual land rent payable for different classes of land use and the intervals at which the rentals should be subject to re-appraisal; (e) the appropriate mechanisms for allocation of leases, indicating the conditions under which auction systems, ballots and direct allocations

(needs basis, etc.) are appropriate for different circumstances and types of leases; (f) the criteria under which the collection o f any land rentals might be deferred or rebated for lessees of land used for purposes which do not

produce income and who would suffer hardship if required to meet normal land rent charges;

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(g) the conditions, including methods of arriving at land rentals, under which leases might be made available to non-profit making community bodies and for uses such as schools, churches, clubs, community centres; (h) equitable arrangements for lessee rights at the expiration o f the lease

period and in the event of the lease being terminated before the expiration o f the lease term; (i) the procedures that should be followed when lessees seek a change in the conditions o f lease; (j) the procedures that should be followed in the event that the lease

conditions are varied and the means of arriving at the appropriate charges on the land by way of re-assessment of any land rent or the imposition of any other payment in the event of such variation; (k) the rights that neighbouring leaseholders should have in the event of a change in the conditions of a lease especially a change in the purpose clause; 0 ) the use o f the lease purpose clause as a land use control measure for town planning purposes; (m) the manner in which any revenues raised by any lease allocation system should be reflected in any land development account, for example, whether these should be regarded as the disposal of a capital asset and/or profit by the land authority; (n) the appropriate nature, structure and powers of an appeal body to receive and determine complaints about the level of rent reappraisal, conditions of lease renewal, compensation in cases o f termination of leases, changes in lease purpose clauses and any other lease matters about which the Commission considers that leaseholders and other interested parties should have the opportunity for the redress of grievances; (o) existing revenue arrangements for leasehold lands in the Australian Capital Territory and Northern Territory and any desirable changes that should be made; (p) as a matter for a separate report, the problems associated with the leasehold system in the Northern Territory including the conversion process from urban leasehold to freehold; (q) such other matters within the general scope of the inquiry as may be referred to the Commission by the Minister for Urban and Regional Development, the Minister for the Capital Territory and the Minister for the Northern Territory acting jointly.

1.2 Public notice of our appointment and of the Terms of Reference of our Inquiry was given in the metropolitan daily newspapers in all States and persons and organisations who it was considered might be interested in the Terms of Reference were written to by the Secretary, inviting them to lodge submissions with the Commission and to give oral evidence.

1.3 Subsequently, in the light of concern that our Terms of Reference might preclude us from receiving and considering certain evidence, the Minister for Urban and Regional Development and the Minister for Northern Development, acting for and on behalf of the Minister for the Capital Territory and the Minister for the Northern Territory, directed by instrument in writing dated the twenty ninth day of June, 1973, that we should also inquire into and report upon the following additional matter, namely:

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The existing systems o f land tenure and the features, including the advantages and disadvantages of each system that relate to the acquisition, disposal, development, management and redevelopment of land for urban purposes.

1.4 Public notice of this additional Term of Reference was given in the metropolitan daily newspapers and by letter to interested persons and organisations. In the light of the evidence received at the first hearings we also found it necessary to direct a number of specific questions to interested persons and organisations inviting them to provide

evidence relating specifically to the questions.

1.5 A preliminary public sitting was held in Sydney on 7 May, 1973, attended by the Chairman and Professor Mathews (Mr Dusseldorp being absent overseas at the time). Mr Murray Wilcox of Counsel, instructed by the Commonwealth Crown Solicitor, announced that he would be appearing to assist the Inquiry. There being no applications

for leave to appear on behalf of any interested persons or organisations, the Commission fixed 18 June, 1973 as the date for the first public hearings for the submission of evidence and adjourned until that date.

1.6 The first hearings were held in Canberra and we subsequently visited all State capital cities, Darwin and Alice Springs in order to receive submissions and hear evidence from persons and organisations in those cities and places. Altogether we held public sittings on 22 days, during which we received 199 submissions and heard oral evidence from

116 witnesses.

1.7 The matters we were required by the Letters Patent and Ministerial direction to inquire into are of considerable complexity. They concern technical aspects of the law of real property, property rights, the valuation of real property interests and the assessment of compensation for compulsory acquisition of real property and interests therein.

Except for land in the Australian Capital Territory and the Northern Territory, most of these matters are predominantly within the constitutional powers of the legislatures of the States and, to that end, the Honourable the Prime Minister sought on the Commission’s

behalf each State Government’s co-operation and assistance in the Inquiry. We considered it important to obtain information descriptive of the systems o f land tenure in force in each State and the statutory provisions in each State relating to the acquisition, disposal, development, management and re-development of urban land by the Crown. Some of the

State Governments co-operated very willingly to this end and have been of considerable assistance to us. But we have not had the advantage o f receiving submissions and evidence from every State relating to the operation and experience of the administrative

systems of the existing land tenures constituted under State legislation.

1.8 In spite of these omissions we have decided to present a report on the main matters of principle covered by the Terms of Reference within the period of six months specified in the Letters Patent. We so decided for three reasons. First, we understand that there are several important and urgent decisions awaiting some expression of opinion from us.

Secondly, we have been much assisted in the task of gauging community attitudes by the large number of witnesses, representing a wide range of interests and experience, who have come forward in each of the States and Territories. Thirdly, we assume that it will

be necessary for us to submit a later report, which will discuss the issues that have been raised in submissions and hearings in greater detail. We expect that the final report will also take into account public comment on this first report and present detailed recommendations and suggestions for specific legislation.

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1.9 Because of the limited time available for us to undertake the inquiry and having regard to the omissions we have already referred to, we have not related this Report specifically to the Terms o f Reference. As was foreshadowed by the Chairman at the first public hearings, we confine the Report to matters o f general principle and defer for later examination the detailed and peripheral matters raised by the Terms of Reference,

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II A NATIONAL LAND POLICY

2.1 Although our Terms of Reference relate specifically to urban land tenure, we believe that the land tenure systems we have been asked to examine can be evaluated only in the context of a national land policy which spells out the objectives which governments seek to achieve. Few aspects of modem urban living evoke such wide-ranging expressions of concern in the community as the frustrating and often inequitable effects of land use

planning and control, the evident conflict between urban development and the preserva­ tion o f environmental quality, the erfrichment of the few at the expense o f the many through land speculation, and the tendency for rapidly increasing prices of residential land to place home ownership beyond the means of a growing number of households.

2.2 Until recently, there has been little evidence of a national land policy in Australia or in the several States which, in the Australian federal system, have the major responsibility for planning and controlling the use of urban land resources. Government policies have been characterised by partial or piece-meal measures, which attempt to deal with

problems as they occur and which often discriminate in favour of vested interest groups at the expense of the wider community. Policies cannot be evolved in a philosophical vacuum and the formulation of a national land policy must therefore follow the identification o f community goals and the consideration o f strategies to achieve those goals. Recent actions by Australian Governments to establish a National Urban and

Regional Development Authority (later to become the Cities Commission), the Depart­ ment of Urban and Regional Development and (in co-operation with the States) Land Commissions indicate the growing concern with urban land problems.

2.3 The formulation of a land policy is not only important for purposes of determining appropriate forms of land tenure, but is an essential link in a chain of policies directed towards protecting the natural environment, improving the quality of urban life, facilitating economic management and controlling the forces of growth. In its most

general sense, a national land policy must be seen as a means of responding appropriately to the pressures o f population growth and development, especially in urban areas. The keystone of government policy must be a recognition that land is both a basic national resource o f limited or finite extent and a necessity o f life for all Australians.

Objectives of Land Policy

2.4 A national land policy, like other aspects of government policy, must be directed towards increasing the social welfare and economic prosperity of the community, and it must be judged by reference to its success in achieving these objectives. For the purpose of evaluating particular land policies, two criteria are especially significant. These are

economic efficiency and equity.

2.5 The criterion of economic efficiency needs to be interpreted broadly as making the best use of scarce land resources. Equity needs to be interpreted as facilitating a socially acceptable distribution of income and wealth, in the sense both o f reducing inequalities and of helping to ensure that persons in similar circumstances are treated similarly.

2.6 Efficiency. More specific criteria may be identified within these broad categories. Insofar as efficiency is concerned, the following seem to us to be important: (a) Land policy must be geared to the requirements of community growth by helping to ensure that land is made available where and when it is wanted, for

the purposes for which it is wanted, at a price which reflects its value in use and thereby excludes any speculative element.

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(b) Because unfettered development has proved so destructive of environmental and aesthetic qualities, development must be viewed not as an end in itself but as a means of achieving more fundamental goals of society, including improve­ ments in the quality o f urban living and in social relationships. · Land development, use and re-development must therefore be controlled in the public interest. (c) Land policy must support and not conflict with other urban policies directed

towards accommodating growth and improving living conditions in the cities. (d) Land policy must encourage and not stifle productive enterprise. But initiatives for development and re-development must depend on the prospect of gains

from more efficient land use and not on gains which accrue to the private sector from permitted changes in land use. (e) Decisions on land use must be taken, in both the private and public sectors of the economy, with full regard to their social consequences, and not merely by

reference to their effects on the profitability of individual landholders or the budgets of public authorities. (f) Land policy must treat land as a scarce resource by ensuring that it is used effectively and not held idle for purposes of speculative gain. Society must

insist that land is used as a productive asset and not as a store of value. Buying and selling land for purely speculative reasons does not serve any useful social purpose and is inimical to enterprise. (g) Land must be made available for any given purpose at a minimal cost in terms

of labour and other resources. This means that costs of administering land policies must be kept as low as possible, consistent with the achievement of the aims of those policies, and more generally that policies must be administratively

feasible.

(h) The use of the market as a resource allocating device must be reconciled with the application of social controls intended as far as possible to prevent the market from being exploited or manipulated by sectional interests. (i) Land policies cannot meet the efficiency criterion unless they are politically

acceptable. Although the major political parties may have different philosophies and seek different goals, a particular policy must not evoke so much opposition as to lead to its eventual repeal. Nothing is so wasteful of resources as an attempt to impose a policy which, because it is directed towards sectional or short-term political goals, contains within itself the seeds of its own destruction.

2.7 Equity. Aspects of equity which we regard as important for purposes of land policy include the following: (a) A general objective must be to balance the rights and obligations of different individuals and groups in relation to land use. This involves recognition of the

fact that private rights and obligations over land need to be set against those of neighbours and of the community generally.

(b) Also of over-riding importance is the need for land policy to contribute towards the task of providing all members of the community with acceptable standards of housing on terms which are both just and within their capacity to pay. Given the evident propensity for home ownership on the part of most Australians, this involves making land available for residential purposes at prices which on the one hand reflect the costs to society of providing the land for those purposes, and on the other hand have regard to levels of income and

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wealth and hence capacity to pay. By reason of social or economic disability, some members of the community will be unable to meet the full costs o f land use and home ownership. Special provision must be made for these people, for example through subsidised government housing. (c) The equitable distribution of land requires appropriate provision of land for

purposes of social housing, public services generally and the preservation and improvement of the public domain. (d) Equitable arrangements for the distribution of land must also extend to commercial, industrial and non-profit organisations. In each of these user

categories the aim must be to make the price of land reflect its social cost in terms of the resources needed to justify its continuing use for the purpose in question. But the price must not reflect imperfections in the market arising from such factors as inadequate supplies relative to need, excessive demands

generated by an over-abundant money supply, or speculative pressures arising from expectations about future price increases. (e) Inflationary increases in land prices must be minimised. Government policy must seek to stabilise land prices because rising prices benefit some members of

the community at the expense o f others, for example existing landowners at the expense of potential landowners or tenants, and speculators at the expense of land users. There is a problem in equity even if the gains from rising prices are distributed by chance, but the problem is accentuated if speculators are able to

manipulate the land market in their own interests or if, because of widespread buying by persons seeking a hedge against inflation, a classical land boom develops which is followed by a collapse in prices. (f) Land policy must be directed towards ensuring that landholders are restricted

to gains from the development or use of land and are excluded from gains associated merely with the passive holding o f land. This involves action to leave individuals and organisations in the private sector with the fruits of their enterprise while reserving for the whole community the benefits which flow

from public authority decisions over land use.

The Nature of Land Rights 2.8 It follows from what has been said above that a national land policy must recognise social as well as private rights and obligations associated with land tenure and use. The 19th century laissez-faire philosophy, emphasising as it did private property rights to the

virtual exclusion of the public interest, was a digression in the development of land policies and land tenure systems. In many countries, communal ownership of land has played a key role in social organisation since the beginning of recorded history. The need for social controls has long been accepted in Australia, as in other Western countries. What has been slower in gaining acceptance has been the need to apply these controls

impartially and to distribute equitably the benefits or burdens which flow from government decisions affecting land use. But opinion is changing as more and more people recognise that, in our modem complex society, an individualistic approach to property rights and land ownership is incompatible with the public interest, unless individual rights are restricted to the enjoyment and use of land.

2.9 The changing attitude towards private land rights is illustrated by the following statement by the United Kingdom Government, when in 1965 it announced its intention to establish a Land Commission as a means of ensuring a sufficient and orderly supply

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of land for development and reserving for the community a substantial part of the increased value resulting from the development:

‘For centuries the claim of private landowners to develop their land unhindered and to enjoy the exclusive right to profit from socially created values when their land is developed has been questioned, especially when the land is sold to the community which itself has created the value realised. The view that control over development must be exercised by the community is not now seriously disputed and it is generally accepted that the value attached to land by the right to develop it is a value which has substantially been created by the community.

A growing population, increasingly making their homes in great cities, has not only made effective public control over land indispensable; it has also made indefensible a system which allows landowners or land speculators wholly to appropriate the increases, often very large, in the value of urban land resulting

either from government action, whether central or local, or from the growth of social wealth and population.* 1 * 3

2.10 More recently, the Report of a United States Task Force on Land Use and Urban Growth characterised the changing attitude towards land as flowing from a new mood which questions the desirability o f growth and development. The motivation for this new mood, the Task Force suggested, is not exclusively economic. ‘It appears to be a part of a rising emphasis on human values, on the preservation o f natural and cultural character­

istics that make for a humanly satisfying living environment.’ Although the Task Force regarded continued growth as inevitable as well as desirable, it responded to the new mood by calling for more responsibility in the way land is used, by proposing land-use

policies which recognise social as well as private interests and, most significantly, by arguing that a changed attitude towards land is needed which separates the ownership of land from the ownership of development (or what the Task Force called urbanisation) rights arising from changes in land use. Changing American attitudes towards urbanis­ ation rights were described in the following terms:

‘Historically, Americans have thought of urbanization rights as coming from the land itself, ‘up from the bottom* like minerals or crops. It is equally possible to view them as coming ‘down from the top*, as being created by society and allocated by it to each land parcel. We think it highly likely that in forthcoming decades Americans will gradually abandon the traditional assumption that urbanization rights arise from the land itself. Development potential, on any land and in any community, results largely from the actions of society (especially

the construction of public facilities). Other free societies, notably Great Britain, have abandoned the old assumption in their legal systems and now treat development rights as created and allocated to the land by society.*1

2.11 In view of the radical nature of some of the conclusions reached by the Task Force, we should perhaps emphasise that it was a bipartisan, private and widely representative group appointed by the Citizens* Advisory Committee on Environmental Quality (a body established by presidential executive order in May 1969 to advise the President and the Council on Environmental Quality). The Task Force was chaired by Laurence S. Rockefeller and the Report was sponsored by The Rockefeller Brothers Fund.

1 The Land Commission, White Paper presented to Parliament by the Minister o f Land and Natural Resources and the Secretary of State for Scotland, September 1965 (Cmnd. 2771), p.3.

3 The Use o f Land : A Citizen’s Policy Guide to Urban Growth, William K. Reilly (ed.), Crowell, New York, 1973, p.22.

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2.12 We consider that the conclusions reached by the Task Force are broadly applicable to Australia and that, in this country as in the United States, there is a growing recognition that there must be a radical re-appraisal of the rights and obligations which attach to land. On the basis of submissions received by the Commission and discussion

during hearings, we are in no doubt that there is substantially more agreement on this issue than on the question of the precise form of land tenure.

2.13 We conclude that the dividing line between public and private rights over land depends on enjoyment and use, and on the obligations which go with enjoyment and use, rather than on ownership or mere possession. Public rights obviously extend over land which is used for the benefit of the whole community (for example park land or land

used for roads). Private rights over other land are derived from the Crown and extend over the use o f the land for private residential, commercial or industrial purposes. So long as land is used for a given purpose, private rights and obligations are paramount. But whenever such land is designated for another purpose, public rights of ownership and

control need to be· re-asserted, at least until such time as the land is made available for its new purpose. Only in this way is it possible to resolve the conflict which has developed between public and private interests as a result o f the separation of ownership and control of privately used land. Society has long accepted the need for public control over land

use. It is a short step, but in our view a fundamental one, to extend the notion of public control to encompass full public rights (and obligations) over land which, as a result of that control, is in the process of being converted from one kind o f use to another. When the land is made available for its new use, private rights and obligations may be re-instated.

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Ill URBAN LAND POLICIES : ISSUES AND STRATEGIES

3.1 Urban policies interact with land policies but are not restricted to matters affecting development, land use or land tenure systems. The ultimate goal of urban policy is to accommodate and improve the living and working conditions of the great and growing proportion of Australia’s population which, by choice or necessity, inhabits the cities. But living and working conditions depend partly on social relationships, economic opportunities and the network of services which together make it possible for human beings to cluster in large urban concentrations. There seems little doubt that demographic

and industrial influences combine to make continued urban growth and concentration inevitable, at least during the remainder of the present century.

The Urban Problem

3.2 If present trends continue, Australia’s population could nearly double by the year 2000, and even with a reduced migrant intake it is likely to increase by at least 50 per cent. The number o f persons engaged in primaiy industry is likely to continue to decline under the influence of steadily increasing farm productivity, and although mining developments may counteract this trend to some extent there seems little doubt that virtually the whole of Australia’s population growth during the next 30 years - say 7 to 10

million people - will need to be accommodated in towns and cities. The magnitude of the problem may be illustrated by indicating that the facilities of the existing State capitals will need to be at least duplicated to provide for the projected increase.

3.3 Continued growth is, however, only one aspect of the urban problem. There is also a need to overcome serious inadequacies - physical, social and economic - in the existing cities, and to reconcile the pressures for growth with the community’s concern for the preservation of environmental quality. The development and re-development of the cities must therefore be accommodated in a way which has regard not only to human aspirations but also to the effective use of labour, land, other material resources and capital investment in both its private and public forms.

3.4 Although government policies have been announced which will have the effect of directing some population growth and economic development away from existing cities towards new metropolitan or regional growth centres, the existing cities will inevitably be required to bear the brunt of the urban growth that may be expected during the next few decades. The population of Australia’s most conspicuously successful growth centre, Canberra, has only increased by about 160,000 since the end of World War II, and in the equivalent period between now and the end of the century Australia’s projected population growth would fill about 50 new cities the size of Canberra.

3.5 Natural, physical and institutional constraints, to say nothing of the time needed for planning and developing new cities, make it inconceivable that more than a fraction of the population growth during this period will be accommodated outside the existing urban complexes. But dissatisfaction with living conditions in the cities is deep-seated and widespread, and there is already a substantial backlog of needs. It may be predicted that the situation will worsen as the existing cities become still more widely dispersed and as residential accommodation becomes more remote from places of work and recreation.

3.6 It is not our responsibility to concern ourselves with these problems of urban growth, except insofar as they have a bearing on the questions of land tenure which we have been asked to consider. We have indicated, however, that it seems likely that a predominating proportion of Australia’s new households and business enterprises will need to be located

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in and around existing cities. We therefore assume that the Land Commissions and other agencies which may be established in the States, for the purpose of acquiring and developing land with Australian Government assistance, are likely to be concerned with

the expansion of existing metropolitan areas as well as With the development of new regional growth centres. We therefore see it as incumbent upon us to examine and report on land tenure policies for existing metropolitan areas, at least insofar as Land Commissions and other agencies may operate in those areas with Australian Government

support, as well as for the Australian.Capital Territory, the Northern Territory and the proposed regional growth centres.

Urban Goals

3.7 Urban land policies need to be consistent with and to contribute towards the goals of urban policy. We have suggested that the over-riding goal o f urban policy is to accommodate and at the same time improve the living standards o f the growing number

of Australians inhabiting the cities. Within this broad objective we believe that the following goals have a bearing on questions we have been asked to consider: (a) the provision of residential accommodation and related services for all persons as a matter of right, at a cost within their means;

(b) the need to provide this accommodation in a variety o f forms consistent with the desires of the people for different kinds of life styles and social relationships; (c) the provision of adequate employment opportunities, transport and communi­ cation facilities, social services and recreational facilities; (d) the effective integration of residential accommodation with all other urban

facilities and functions in order to optimise the relationship between living, working and recreation; and (e) the achievement of better balance between urban living and the use which is made of the environment, for example by creating new cities to relieve the

pressure on metropolitan regions and by rejuvenating the blighted areas of existing cities.

3.8 The problem of meeting these objectives has been described, in the U.S. Task Force Report to which reference has already been made, in the following terms: ‘How shall we organize, control and co-ordinate the process of urban develop­ ment so as to protect what we most value in the environmental, cultural, and

aesthetic characteristics of the land while meeting the essential needs of the changing . . . . population for new housing, roads, power plants, shopping centres, parks, businesses, and industrial facilities?’

Land Policy Issues 3.9 Solutions to this problem depend in part on the land policies which are adopted, and for purposes of formulating land policies the following issues seem to us to be important: (a) How may private rights and obligations with respect to land be balanced against

those of society in general? This issue was discussed in Chapter II. (b) What action is needed to ensure that land is made available on a scale which is sufficient to meet residential, commercial, industrial, non-profit and public needs at reasonable prices?

(c) To what extent should urban growth be directed to new metropolitan and regional growth centres? (d) What measures are necessary to stabilise urban land prices?

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(e) What are the respective roles of the private and public sectors in urban development, land use and re-development? (f) Should government intervention in urban development processes be restricted to regulatory activity (for example, through statutory planning controls) and

taxation, or should it also take the form of direct entrepreneurial involvement (for example, through public acquisition of land, development for urban purposes and possibly also continuing ownership)? (g) To what extent should democratically elected governments delegate responsi­

bility for land use planning and controls to semi-autonomous statutory corporations, and to what extent should land use decisions be decentralised to local government areas? (h) Who should benefit from increases in land values resulting from (i) urban

growth, and (ii) actions by governments to permit changes in land use? (i) What action should be taken to preserve open spaces, protect historic buildings, prevent premature re-development and generally ensure that land use decisions

are taken with due regard to their environmental impact? (j) What forms o f land tenure systems are most suited to the needs o f Australia’s urban regions?

3.10 Although only the last of these issues falls directly within our Terms o f Reference, they all have a bearing on the questions we have been asked to consider. Because of this, it has been necessary for us to reach a number of broad conclusions about the kinds of strategies that are needed to resolve the issues and achieve the community’s land policy and urban objectives.

Policy Guidelines

3.11 In reaching these conclusions, we have used several yardsticks to test the relative merits of alternative courses of action. We recognise that the yardsticks will sometimes be difficult to apply, because there may be conflicts between one test and another and between the interests of different groups in the community. But we think it is likely that, other things being equal, there will be a preference on the part of the community for urban land policies which have the effect of:

(a) increasing the supply of land for urban purposes for a given cost; (b) reducing the cost of making land available for a given purpose; (c) allocating land in accordance with relative needs at prices which reflect both the needs o f users and their capacities to pay;

(d) stabilising the price of land; (e) eliminating the socially undesirable activities of land speculators; (f) avoiding premature development and re-development; (g) preserving buildings o f historic or intrinsic merit; (h) protecting the environment; (j) preventing wasteful or uneconomic forms of land use; (j) permitting public discussion and participation in land use decisions; (k) providing maximum security o f tenure for users; (l) eliminating windfall gains and losses as a result o f decisions to permit changes

in land use; and (m) minimising costs of administration and compliance with controls.

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Policy Constraints

3.12 The strategies which may be employed in order to achieve the goals of urban land policy are subject to a number of constraints which limit the freedom of government action. The principal constraints are political, administrative, financial and institutional. The political constraint derives from the extent to which proposed policies are likely to be acceptable to the public. The political acceptability of land policies is in turn likely to be influenced, not only by financial considerations, but also by the deep-seated

psychological attachment which many people have to land. Administrative constraints derive from the capacity of government agencies to administer proposed policies. Financial constraints result partly from imperfections in the capital market and partly from the fact that, to the extent that public funds are needed to implement land policies and programmes, these policies and programmes must compete with those in other

fields, such as housing, education, health and transport. Institutional constraints depend partly on the way in which organisations have evolved over time, partly on legal restrictions and partly on the tendency for institutions to resist change. Political, administrative and financial constraints all tend to operate through institutional rigid­

ities of one form or another.

Policy Imperatives and Strategies

3.13 It is not our responsibility to examine in detail the issues identified in Para. 3.9 above, except insofar as they relate specifically to problems of land tenure. Land tenure issues are considered in later chapters of the Report. However, having regard to those general issues and to the policy guidelines we have suggested in Para. 3.11, we have come to a number of conclusions about the broad strategies which should be employed in order

to achieve the goals of urban land policy. These strategies are, we believe, policy imperatives which should be accepted by governments and the community as the basis for all decisions about land tenure and land use.

3.14 The first requirement is that government agencies assume responsibility for land use planning and control through all stages of the development cycle, in such a way as to ensure prompt and orderly initial assembly and development of land for urban purposes, effective continuing utilisation of land and buildings, avoidance of premature degradation

or decay, co-ordinated re-development when renewal becomes necessary and the avoidance of speculative profit.

3.15 A second requirement is that private initiatives be encouraged in those areas where the private sector is likely to respond most effectively to the needs of users. Private initiatives are likely to be most fruitful in those sequences in the development process

which lend themselves to innovation in design and efficiency in construction and marketing. But re-development initiatives should not depend on the prospect of private capital gains arising out of changes in use. If re-development is unprofitable in the absence of such gains, it is premature and it is against the public interest to permit it to

take place.

3.16 Thirdly, it is the responsibility of governments to ensure that land is made available for residential purposes on a scale which will meet the demand for such land when it is priced at cost including a reasonable return on capital. For this purpose, cost needs to be interpreted to include the cost of acquiring broad acres in their rural state (the acquisition price being exclusive of any change in value associated with the intended change in use). To this wUl be added the cost of providing roads and essential services, also including a

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reasonable rate of return on investment. .The proposed strategy envisages that costs will be distributed in such a way as to recover relatively higher prices in favoured locations. As a corollary, land made available for income-producing purposes should be disposed of in such a way as to retain for the Crown the capitalised benefits which are derived from location.

3.17 Fourthly, land use planning and control must be carried out in such a way as to encourage the use rather than the hoarding o f land, use being interpreted broadly to include public as well as private productive purposes. Land which has been designated for particular uses must not be permitted to remain idle. The holding of land for

purposes o f speculative gain serves no useful social or economic purpose. Private gains from land must be restricted to gains from its development, use or enjoyment, thereby excluding the possibility of gains being derived from holding land as a commodity for

resale. '

3.18 Finally, land use decisions by government agencies must not only serve the public interest. They must also be neutral in their effects on private individuals or firms. ITiis means that those who, by chance or design, are affected by public land use decisions must not enjoy (or suffer) windfall gains (or losses).

3.19 These requirements have led us to some major conclusions about urban land policies. These conclusions, which we shall substantiate and elaborate in succeeding chapters, are: (a) All development rights should be excluded from any private rights attaching to

land, irrespective of the nature of land tenure systems which may be employed. As a corollary, all increases in land value resulting from changes in the use or permitted use of land should be appropriated in full for the benefit of the whole community. (b) All land which is designated for conversion from rural to urban uses or from

one urban use to another should be placed under the control o f a development authority with power to plan, control and engage directly in the processes of development and re-development. In particular, land designated for develop­ ment or re-development in urban areas should be subject to powers o f public acquisition, control and disposal, leaving open the possibility that the develop­ ment authority will exercise these powers by specifying changes in land use, selling development rights (while leaving private landholders to negotiate the sale or conversion of their existing rights) and controlling the timing and nature of the development. As a general principle, compensation for land which is publicly acquired and the valuation of development rights should be determined by reference to existing use value, exclusive of any development potential other than that which is reflected in market prices at the time the new policy is proclaimed or put into effect. In the case of residential landholders whose occupancy is disturbed as a consequence of re-development, the principle of re-instatement in comparable accommodation should be accepted as a basis for compensation. (c) Compared with the reservation of development rights and the public acquisition

and control of land for purposes of urban development, the form of land tenure is of secondary importance. Nevertheless, land tenure systems in the Australian Capital Territory, the Northern Territory and new growth centres may be readily adapted to the conditions specified in this chapter as necessary for the attainment of Australia’s urban land policy objectives.

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IV RESERVATION OF DEVELOPMENT RIGHTS

Land Value 4.1 The value of land at a particular point of time is equal to the capitalisation of the future net benefits which are expected to be derived from using or holding it. Insofar as land is used for a particular purpose, these benefits represent the expected returns

(financial or intangible), less the expected costs, associated with its future use for that purpose. This component of land value may be called its use value.

4.2 Insofar as the value o f land reflects expected future net benefits from holding land as opposed to using it for a particular purpose, the value is derived from an expectation that at some time in the future the land will be used for a purpose different from its present one. Because changes in use are usually associated with some form of community

development, the value component attributable to the holding o f land may be called its development value.

4.3 It will be clear that the distinction we have made between the use value and development value is similar to the distinction, which we made earlier in Chapter II, between private rights associated with land use on the one hand and public rights associated with changes in use (or development) on the other. Use value is derived from

the rights o f a landholder to use land for a particular purpose, whereas development value is dependent on any development rights which may be vested in the landholder by the grant of title. Under existing systems o f land tenure, all development rights are not universally or automatically granted to a landholder, one form of development rights,

namely mineral rights, having long been reserved to the Crown. Leasehold titles usually restrict development rights by the inclusion of appropriate covenants or purpose clauses.

4.4 Although it is possible conceptually to distinguish between use value and develop­ ment value as we have done, in practice the two components are likely to become intertwined as land which is being used for a particular purpose is simultaneously subject to expectations about future changes in use. The market value of land at a particular

point of time is thus likely to incorporate both use value and development value components. Land which is being used for farming on the fringe of a metropolitan area will thus have a value which reflects not only its earning capacity as farm land but also its potential value as residential land. The extent to which the market value of land at a

particular point o f time reflects this development potential depends on the strength of expectations about (a) the probability of a change in use, (b) the net benefits likely to result from the change in use, (c) the length of time likely to elapse before the development occurs and (d) the discount rate which is used for capitalisation purposes.

4.5 Because o f the uncertainty which normally surrounds these expectations, develop­ ment value may fluctuate as expectations wax and wane but increases in market value are likely to take place progressively on the outskirts of developed areas until such time as the expectations are confirmed (or denied) by actual planning decisions. Development

value is thus being adjusted continuously in expectation of a change in use. There is likely to be a creep in value which depends, not on an actual or even a designated change in use, but rather on an expected change in use. Market prices of land will reflect this creep in value until such time as a decision to approve a change in use is taken by the

prescription of a planning scheme, zoning by-law or other official action. At that time, the full development value o f the land will have been converted, in effect, into a new use value reflecting the designated change in use.

4.6 Looked at in this way, development value may be regarded as the difference 15

between the use value of land in its old use and its use value in its new use. Under most existing land tenure arrangements in Australia, development value accrues to the owner in fee simple and may be realised by sale. It is possible that there will be a succession of owners o f land which is subject to a creep in development value, each of whom will appropriate portion of the value increment for himself by sale. The prospect of such adventitious gains is itself likely to attract speculators. Indeed, because under present circumstances development value is based on expectations about future changes in land use, it is itself largely speculative in origin. It follows that the appropriation of development value by individual landowners is largely an appropriation by speculators of value increments which, in the last resort, depend on decisions or actions which public authorities make on behalf o f the whole community. Because development value depends on planning decisions or other actions by governments, it is a matter of chance whether land being used for a particular purpose will be subject to a develop­ ment value increment or, indeed, whether it will lose value (in the sense of having a negative development value) as a result of those decisions or actions. Landowners who hold land for speculative reasons are taking risks which, from the point of view of the community, are quite unnecessary; they certainly do not facilitate development processes through their own enterprise. Indeed these activities may be

regarded as inimical to true enterprise, in that they increase the uncertainty of genuine developers and confuse the issues on which land use and development decisions depend. The speculators in effect seek to ‘second-guess* the planners or to manipulate political and administrative processes for their own advantage.

4.7 We may conclude that, so long as governments permit development value to be appropriated by private landowners, development is based on expectations about changes in land use. Accordingly it is speculative, it is opposed to enterprise and it is inequitable in the sense that it benefits a few (who have done nothing to earn it) at the expense of the rest of the community.

Sources of Unearned Increments

4.8 Development value arising from changes in land use is a major source of what are usually called unearned increments, or increases in land values which result not from individual actions but from actions by governments or the community generally. But unearned increments do not result only from changes in land use. Even land which is used for a particular purpose may increase in value as a result of community action, for example through the extension of public facilities (such as transport services) or through the advantages which urban growth brings to particular locations.

4.9 In formulating land policies or designing land tenure systems, one of the most important issues is concerned with how these increments in land values are to be distributed among different members of the community. It is possible for governments to appropriate such gains for themselves, either by retaining ownership of land and leasing it at rentals which are adjusted as land values increase, or by levying taxes intended to recover all or part of the gains. The justification which is usually advanced for either policy is that, because the increments in value result from communal action, the community has first claim on the benefits of such action.

4.10 The present position in Australia is that there is little attempt by governments to appropriate for the public any increments in land value which result indirectly from community development and growth. Leasehold systems in the Australian Capital Territory and the Northern Territory were originally designed in principle to recover such

increases (through the reservation of rents subject to periodical adjustment), but in practice were largely unsuccessful in doing so and the attempt has recently been abandoned. It is, of course, one of our responsibilities to review leasehold forms of land tenure (including the basis of rental charges) and we return to this question in later

chapters. Land taxes and rates are imposed by both State and local governments but exemptions and differences in the tax base prevent such taxes from being regarded as systematic attempts to recover unearned increments.

4.11 Likewise, governments have not been conspicuously successful in appropriating increments in land values resulting from permitted changes in use. Substantial capital gains from changes in land use have been made even in the Australian Capital Territory and the Northern Territory, and the present situation in those Territories is that the government as lessor receives only half of any increase in value resulting from a change in the lease purpose, less $1,500. There have been some attempts in the States to impose betterment charges or taxes intended to recover part of the increases in land values which

result from the provision of public services or re-zoning of land for urban use. But these attempts have been at best partial in their effects and their incidence has frequently been avoided by those who received the gains and who were intended to pay the taxes. The history of the most recent attempt to recover unearned increments resulting from

permitted change in use (the New South Wales Land Development Contribution A c t 1970) is discussed briefly below.

Development Rights

4.12 As we have already indicated, the question: of unearned increments arising generally from urban development and growth will be deferred for consideration in a later chapter. In the rest of this chapter, we shall restrict our attention to the unearned increments resulting from changes in use which, as we have seen, are associated with the retention by

private landowners o f development (or urbanisation) rights, that is rights to convert land from rural to urban use or from one urban use (or intensity of use) to another. These rights are often referred to as development rights or re-development rights, but throughout this Report both will be embraced by the term ‘development rights’ and ‘development’ must be taken to include re-development or any change in use or intensity of use.

4.13 We argued in Chapter II that there must be a new attitude to land rights in general and development rights in particular, in recognition of the fact that land is a finite resource to be used for the benefit of the community rather than an object of speculative individual interest. This new attitude, we have suggested, should apply not only to land

which may be acquired by a Land Commission for development and disposal in a new growth area, but generally. We have argued that because development rights ensue from governmental action, it is the community generally and not individual landholders who should reap the benefits accruing from such rights. We therefore propose that all

development rights be reserved to the Crown and that all future increments in develop­ ment value be appropriated by public authorities for the benefit of the whole community. We regard it as especially important that this principle be applied to land which is likely

to be required for initial development or re-development during the predictable period of intense growth in the remaining years o f this century.

The Elimination of Private Gains from Land Use Decisions 4.14 We agree with the view, which was widely expressed by witnesses, that one of the major defects of existing fee simple tenures is the ‘lottery’ aspect of land ownership. That

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element we consider must be removed. Inevitably growth pressures dictate changes in the designation of land for particular purposes. These changes are normally associated with higher economic uses, but sometimes involve lower ones. The most dramatic example is that of rural land lying in the path of urban growth which is re-zoned for development and hence suddenly becomes worth thousands of dollars more per acre. But we also have in mind increments occasioned by an intensification of urban use, such as from single owner-occupied dwellings to commercial or multi-unit development, or by a change in permissible development limits in a city centre. Most witnesses who appeared before us (including many representing developers or other commercial organisations) contended or conceded that legislation should ensure that the financial benefits of permitted changes in land use should accrue to the public sector rather than be a matter for private fortune. The witnesses usually hastened to add that the same principle should hold for a reduction in value respiting from a planning decision, such as a reservation for a park or other open space or acquisition for a road. In such a case, it was argued, full compensation should be provided based upon the actual existing use of the land.

4.15 Such an approach is seen by us as having several major advantages. In the first place, elimination of private gains from planning decisions is desirable as a matter of social equity. The fact is that all land cannot (and should not) be developed to like intensity. It is, for example, universally conceded that some undeveloped rural land must be left in

or around metropolitan areas, that metropolitan areas must retain large residential areas (devoted to single dwellings) and that, within city centres, only some areas can be permitted to have intensive development in the form of high-rise office buildings. However, under the present system of land tenure the good fortune o f holding land within an area for intensive development is a matter of chance for the individual landowner; millions o f dollars are won or lost by a decision of an elected local governing

council or by the stroke of a planner’s pen. Those millions of dollars come from the collective pockets of the community and, especially in the case of outer suburban land, from the pockets of those groups in the community least able to pay - young couples purchasing their first homes.

4.16 Secondly, the reservation of development rights will improve the planning process. In Australia, town planning has long been treated with cynicism, no doubt because of the manner in which it has been conducted. Wherever there is the prospect of private profit from planning decisions two results follow : planning is necessarily performed in secret and there is a suspicion of manipulation for private ends. Pressures will be exerted to achieve planning changes which are profitable to individual landowners rather than desirable in the public interest. Where a decision is necessarily rather arbitrary, such as in drawing a boundary between the urban area and its rural hinterland, the pressures become almost irresistible. The fate o f the ‘Green Belt Zone’ in the County o f Cumberland Planning Scheme in New South Wales is a sufficient example. But if the expectation of private gain from land use decisions is removed the position wholly changes. No longer will it be to the advantage of the individual landowner to have his land re-zoned; no longer will pressure to that end be exerted by him. Because no private profit can be made the need for planning secrecy will disappear. Plans should be the object of public discussion at all stages of formulation. Planning decisions should be made on the basis of serving public needs rather than on the basis of accommodating private interests.

4.17 Thirdly, removal of speculation must reduce costs and prices. Because of uncertainty about planning decisions, speculators seek a high return over and above their holding costs to compensate for their risks. This return they are able to exact because of

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the planning process itself. When planners make land use decisions they in effect nominate the land which will be available for particular purposes within a limited period. To the extent that speculators have already acquired this land they are placed in the position of monopolists and they may be expected to seek monopoly profits. If, on the

other hand, the prospect of private profit from a change in land use is eliminated and development value is wholly appropriated by the public sector, several results follow. Insofar as land designated for residential purposes is concerned, governments may attack the vexed problem of land prices directly by returning the development value increment

on the land in question to the households to whom the land is allocated. The consequent­ ial reduction in land prices is then achieved, in effect, at the expense of the speculators who under the present system appropriate the development value increment for them­ selves. Insofar as land designated for other purposes (including public sector purposes) is

concerned, the land may be made available to users at the same cost as under the present system, but the development value increment is transferred to governments.

4.18 The effect tin government finances is thus a fourth beneficial consequence of the reservation of development rights. In a period of intense growth the demands on public revenues are immense, extending from claims for basic services such as water supply and sewerage through demands for public transport and road systems to the provision of community facilities such as schools, hospitals, parks and libraries. These huge expend­ itures are generated by community growth - that same growth which creates the

increment. So the anomaly arises that, under the present system, the financial benefits of growth accrue to private landowners while the financial costs are borne by the whole community in rates and taxes. One sees such effects as a State government having to pay

a hundred thousand dollars or more for a school site in an undeveloped area, because by its own decision that land has been re-zoned from non-urban to residential. Under the present system this it must, in equity, do; otherwise the owner of the school site is at a disadvantage compared with the owners of adjoining sites. The solution lies in removing

the private increments from all the land, thereby enabling the State to acquire the school site at non-urban values without discriminating against a particular individual. From the public point of view the present system is simply bad business and it has a serious effect on the finances of every State government.

4.19 Finally, it seems to us that the removal of the prospects of private gains from planning decisions wE reduce pressures for premature development. A number o f the witnesses who appeared before us expressed the view that the present pace and scale of development, especially of re-development for residential flat buildings and office

buildings, is excessive. They argued that many buildings are being prematurely demolished because, in effect, the costs of re-development are being subsidised by land profits. Further, the re-development is scattered and fragmented with adverse environmental effects. Some witnesses emphasised the loss of historic or other buildings; others the

threat to or loss of important park land or foreshore areas.

4.20 We agree that premature re-development is a major weakness of the existing system and believe that it is a matter of increasing concern to the community. Under our present laws it is almost inevitable that development and re-development will take place to the maximum extent possible. The system provides both a carrot and, in some parts of Australia, a stick; a carrot because all the rewards of maximum development remain with

the landowner, a stick because in many areas his rates and taxes are assessed on unimproved capital values and thus on the site’s maximum potential. Removal of the 19

private gain in maximum development will make much easier the control of the timing and scale o f re-development and the preservation o f the National Estate.

Reservation of Development Rights

4.21 The problem then is how the proposed change in land rights is to be implemented. We have said that a new attitude is necessary but we cannot overlook the fact that many people have invested considerable sums in properties on the basis of existing laws and attitudes. We have seen that, as a result of expectations about future changes in permitted land use, current market values may already incorporate increments in development value. The investments may have been speculative and undertaken at risk but it would be inequitable not to acknowledge current market values at the time the new policy is implemented. What is essential is that subsequent increments in development value be reserved for the public.

4.22 Insofar as publicly owned leasehold land is concerned, the reservation of develop­ ment rights may be specified in the lease agreement. But we consider that the new policy should apply to all land and that legislation should be enacted accordingly. The detailed approach may vary from State to State but we suggest that the main principle should be the re-assertion by governments of their right to control the use of all land for all purposes at all times, to reserve all future development rights and to dispose o f land rights in the public interest on such terms and conditions (including the payment of money) as they think fit.

Compensation

4.23 If future development rights are to be reserved to the Crown, the question arises whether compensation should be paid to landowners for the loss of those rights. The ownership of land is commonly regarded as conferring rights on the owners whereas corresponding obligations (for example, obligations to pay taxes and to conform to regulations intended to preserve the environment or to control land me) are accepted grudgingly by private landowners. Because of this and the common law principle that private property cannot be acquired without payment of compensation, it is commonly assumed that substantial restrictions must not be imposed on the ownership of land without compensating the owner for any diminution in value which such restrictions may produce. This has led to an anomalous position whereby restrictions on the use of land under statutory planning schemes are subject to the payment of compensation, but restrictions imposed under local government legislation to enforce building, health and sanitary standards are not. Further, we have seen that, while compensation may need to be paid by governments for the detrimental effect of a planning scheme, the governments are generally unable to recoup any part o f the betterment or beneficial effect which the scheme may confer.

4.24 There is therefore a difficulty, if existing conceptions o f compensation are accepted, in depriving landowners of increments in development value arising out of changes in land use. But we believe that this difficulty can be overcome by distinguishing between: (a) development values which have already become embodied in the market values

of land at the time the proposed new policy of reserving development rights is proclaimed or becomes operative; and (b) all future increments in development value which arise after the date the new policy comes into effect.

4.25 Insofar as the first of these is concerned, we propose that where land is resumed full

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compensation shall be paid on the basis that all land rights existing at the date of proclamation or of the policy becoming operative (the base date) are to remain unchanged.

4.26 We further propose, however, that no compensation shall be paid to a landowner for any future increments in development value, on the ground that the loss of development rights does not involve any diminution in the value of his land. Since all that is being taken away from him is a potential right, the exercise of which will in any

case depend on public action, he can have no claim for compensation for loss. No loss can be shown to have been suffered as a result of the implementation of the new policy. Whether the potential right might have conferred some future benefit on the landowner,

which he would lose as a consequence of the new policy, must be a matter of pure speculation and should not be regarded as a basis for compensation.

4.27 The Task Force Report sponsored by the Rockefeller Brothers Fund, to which reference has already been made in earlier chapters, discussed this question o f compensa­ tion by reference to British experience. After pointing out that British courts insist on full compensation being paid when land is compulsorily acquired, the Task Force Report noted that this does not include compensation for restrictions on the use of property unless Parliament so provides. The Report continued:

‘Generally the English have had no difficulty, in principle, in restricting the use of land without compensation. The basic justifications are these:

1. Potential development value is speculative or ‘floating’ and it is not possible to ascertain where the ‘float’ will settle,. To compensate for ‘probable’ develop­ ment results in over-valuation, as the ‘probabilities’ over a wide area are more than actual development can possibly be. Thus, property restricted to current use

is not considered reduced in value, since any other use is uncertain.

2. Land values are seen as largely created by public actions such as the construction of roads and utilities.’ 1

Legislation and Implementation

4.28 Legislative action in Australia can likewise ensure that compensation need not be paid for expropriation of future development rights, just as it is not payable for reservation of mineral or petroleum rights. We therefore propose legislation which will reserve to the Crown all future development rights without payment of compensation.

4.29 Insofar as privately owned land is acquired by the Crown or by a Land Commission or development authority on behalf of the Crown, we propose that compensation be paid in such a way as to recognise not only existing use value, but also any development value which has already become embodied in market value at the base date. Ibis may be done by providing that, where land is acquired after the base date, compensation shall be paid

on the basis of the higher of: (a) existing use value (excluding any development potential) at the date of acquisition; or (b) market value at the base date (including any development value incorporated

in market value at that date), accumulated at a rate of interest (to be determined) from the base date to the date of acquisition.

4.30 The effect of these provisions will be to preserve for existing owners any develop-

The Use o f Land: A Gtizens' Policy Guide to Urban Growth (op.cit.), p.170.

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mcnt value already reflected in market value at the base date, but to prevent development value being subsequently increased at the expense of the public. The interest provision is intended merely to maintain the value of compensation over time where, in effect, the owner operates as a land bank pending a development decision by the public authority. We envisage that the rate of interest to be allowed will depend on the time and circumstances of each acquisition, and that interest may be allowed for only a limited period of, say, five or ten years.

4.31 We envisage that land may be designated for a different use without being acquired by the Crown. Under these circumstances it is proposed that a development order will be issued to the owner of the land. (The proposed basis of development control is discussed

in detail in Chapter V.) The owner will then have three options. He can comply with the order, and pay to the development authority an amount representing the value of the future development rights resulting from the change of use (the incremental development value). If he does not wish to comply, he will have the right either to demand that the land be compulsorily acquired by the development authority on the compensation basis set out in Paragraph 4.29 above or, because the right of disposal will not be restricted, to sell the land subject to separate payment to the development authority for development rights. The second option will incidentally ensure that, where development value is negative, the owner will be compensated on the basis of the existing use value o f the land.

4.32 Where land is the subject of public acquisition or a development order, the compensation payable or the value of development rights will thus be determined by reference to the existing use value of the land at the date of the acquisition or develop­ ment order, subject to adjustment where this is below the compounded market value of the land as at the base date.

4.33 After the base date, there will be a transitional phase until such time as the existing use value of land reaches its compounded base market value. There are reasons for believing that the transitional phase will be relatively short. Most landowners have no reason to anticipate any change in the use of their land. Such land is therefore unlikely to incorporate any development value at the base date, and increases in existing use value over the base market value are likely to occur at a higher rate than the interest rate which is adopted for the purpose o f compounding the base market value. But to ensure that the proposed basis of compensation does not guarantee a speculative element in land values indefinitely, a time limit of, say, five or ten years could be imposed on the application of the base market value to the calculation of compensation.

4.34 The provision that, until such time as existing use value overtakes the compounded base market value, the latter will determine the amount of compensation payable is intended to apply irrespective of any changes in ownership that may occur between the base date and the date of acquisition or designation of a changed use.

4.35 Once the transitional phase has passed, any difference between the current market value of land and its existing use value should be minimal. If the Crown then acquires land for development the compensation payable will be based wholly on the existing use

value of the land, while the value of the land after acquisition will reflect its development value in its new use. Thus the Crown will have captured the whole of the increment in value - the development value - arising from the change in use. Likewise, the amount paid to the Crown for development rights, following a designated change of use without public acquisition, will after the transitional phase represent the whole of the difference between the old use value of the land and its value in the newly designated use. This is

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the essential long-term outcome of the proposals we are making for the reservation of development rights to the Crown.

Summary o f Proposals

4.36 We summarise pur conclusions regarding the reservation o f development rights as follows: 1. As a pre-requisite to achieving comprehensive land use reform in Australia, all future development rights (that is rights to future changes in land use) should

from a base date be acquired by and reserved to the Crown without payment o f compensation. 2. A ll land use rights existing at the base date should remain unchanged. 3. Where privately owned land is acquired by the Crown after the base date,

compensation should be paid on the basis o f the higher of: (a) the existing use value at the date o f acquisition; or (b) the market value at the base date accumulated at a rate o f interest (to be determined) from the base date to the date o f acquisition.

4. Where privately owned land is designated fo r another use after die base date, the owner should (a) pay to the Crown an amount representing die value o f the development rights, or (b) require that his land be compulsorily acquired on the compensation baas described above, or (c) sell the land subject to separate payment to the Crown for the development rights.

Evaluation o f Other Attempts to Reserve Development Rights

4.37 The proposals we have made are not philosophically unprecedented, either overseas or in Australia. Perhaps the best known attempt to expropriate development rights was that contained in the United Kingdom Town and Country Planning A c t 1947, which followed the Report of the Committee on Compensation and Betterment (the Uthwatt Committee). The Uthwatt Report itself followed a proposal which had been described in

the Report of the Royal Commission on the Distribution of the Industrial Population (the Barlow Commission)1, and which envisaged the creation of a National Development Board that Svould acquire by compulsory purchase, as from a specified date, the development rights o f all the undeveloped land of the country’. It was explained in the

Barlow Report that the value of the development rights to be acquired by the Board would be ‘the difference between the value of the undeveloped land for its existing use, or other use not involving development, and its value for development purposes. The freehold of the land would be retained by the owner but he would hold it subject to the

condition that no development of it might take place without the consent of the Board.’ 2

4.38 The proposal described by the Barlow Commission was similar to the scheme we have proposed except for the fact that it related only to undeveloped land and that it envisaged the payment of compensation for the development rights that were to be acquired. The 1947 Act likewise provided for the vesting in the Crown of all development

rights over land existing at the time of the legislation and established a fund of £300 million to pay compensation. In effect, the legislation provided for development rights to be acquired retrospectively, and required compensation to be paid to preserve all existing expectations about development potential which were reflected in market value at the

1 Cmnd. 6153, H.M.S.O., London, 1940, p.117.

2 Ibid., p.118.

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time o f the legislation. The fund proved inadequate to meet the claims which were lodged, and protests about compensation, difficulties in interpreting the terms of the Act and, eventually, a change o f government led to the legislation being repealed.

4.39 The proposals we have made will avoid the problems of the British legislation by preserving for private landowners the already vested development value at the relevant date. As the scheme will expropriate only prospective development rights, no compensa­

tion fund is necessary.

Betterment Charges and Development Initiatives

4.40 Within Australia, governments have sometimes attempted to collect portion of the development value increment arising from land use decisions, through so-called betterment or development charges. The most notable attempt was contained in the New South Wales Land Development Contribution A c t 1970, which provided for a development charge of 30 per cent o f the increment in value of non-urban land re-zoned to urban use. Attempts to appropriate development value increments through a betterment charge have often been frustrated because, with residential land in short supply, landowners have been able to pass on the charge to developers by adding a premium to the selling price. The New South Wales Government recently decided to repeal the 1970 Act on the ground that original vendors were able to pass the development contribution on to developers with a consequent increase in the cost of sub-divided land.

4.41 Betterment or development charges which appropriate only portion of the develop­ ment value increment in any case provide only a partial solution to the problems which have been described in this chapter. It is sometimes argued that, if the whole of the development value is appropriated by the Crown, private initiatives to undertake

development will be destroyed with adverse consequences for the public interest. This argument seems to us to confuse initiatives relating to land dealing with initiatives relating to the land development process itself.

4.42 We do not believe that the reservation of development rights will inhibit develop­ ment. The developer will pay the full value of the land in its new use, as he should do under the present system if the development is to be socially justified, but he will know, before he pays, just what his rights and obligations are and in particular what form of development he can undertake. He also will be able, as at present, to enter into conditional contracts to buy parcels of land for development. The developer is therefore likely to suffer less uncertainty, frustration and opposition than under present circum­ stances, when the wide permissive charter of planning schemes often runs foul of the views of local government bodies and residents. If the proposed system operates

successfully, development rights will be sold or land acquired for development only in those areas ripe for development or re-development. The developer will still make his profit, but this will be earned from the development process itself and will not include any increment in value resulting from the change in land use.

4.43 It will still be necessary to ensure that the proposed policy of appropriating development value is not frustrated by landowners or developers adding loadings to the prices which they charge ultimate land users. This will be especially important in those cases where a cash payment has been made for development rights in response to a

development order. The proposals we are making will prevent this possibility by the provisions for public acquisition and disposal of land for development, which will enable the public sector to operate directly in the market and thus influence prices, and by the development controls which we discuss in the next chapter.

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Implications of Proposed Scheme

4.44 We believe that the reservation of future development rights and the retention o f development value increments for the Crown will have a striking effect on the problems of land use, development and control. No other action is capable of achieving, at one stroke and with such important consequences for the efficiency and equity of urban

development processes, so many of the objectives of land policy. No other action will simultaneously meet so many of the tests suggested in Paragraph 3.11 as a basis for evaluating particular policies. The-specific results which will be achieved include: (a) the retention by the public sector o f the increments in value resulting from

changes in land use and the elimination o f speculative and unearned gains from that source in the private sector; (b) the stabilisation of the price of rural land required for future urban use, with the consequence that land will be available for residential purposes on the basis

of prices which exclude both speculative elements and development value increments; (c) the substitution of positive for negative land use controls by vesting all development rights in the Crown, and making a single authority in each State or

region responsible for land use planning and control through all stages of the development cycle; (d) a more equitable distribution of incomes; (e) the elimination o f incentives for premature development and re-development,

thereby avoiding wasteful forms of land use and helping to preserve buildings of historic or architectural merit; (f) the elimination of the need for secrecy in planning, with a consequential opportunity for participation by private groups in the planning process and a

weakening of the power of vested interests to manipulate planning decisions; and (g) substantial improvements in government finances as a result of the reduced cost of acquiring land for public purposes or the increased revenues from the sale of

development rights, thereby enabling governments themselves to benefit from the results of the development which they plan and finance on behalf of the community.

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V DEVELOPMENT CONTROLS AND PROCEDURES

5.1 In Chapter III we argued that it is necessary, if the objectives of urban land policy are to be achieved, for government agencies to assume full responsibility for land use planning and control through all stages o f the development cycle. This requires action to ensure effective assembly and development o f land for urban purposes, continuing control over land use and co-ordinated re-development when renewal becomes necessary. In Chapter IV we proposed that, as from a specified date, all future development rights be

acquired by and reserved for the Crown to enable either public acquisition to take place on a basis which excludes payment for those rights or, alternatively, the development rights to be sold under conditions of controlled development.

The Development Cycle

5.2 In this chapter we turn to a consideration of development controls, which we regard as an essential pre-requisite to the effective operation of any system of land tenure. We have it in mind that, following the acquisition and reservation of development rights which we have proposed, land rights will be restricted to rights to continue existing uses until such time as it is decided to undertake new development involving a change in land use. The new development may take the form either of conversion of rural land to urban purposes or of re-development of urban land. We shall therefore be concerned with

development in its several stages, beginning with the initial assembly of land and proceeding through sub-division and the provision of essential services, the disposal of land through some form o f tenure, the construction of buildings and the subsequent use of land until such time as re-development becomes necessary,

5.3 Our terms of reference relate specifically to the Australian Capital Territory, the Northern Territory and the Land Commissions which may be established in the States with Australian Government financial support in relation to the acquisition, development and use of land for urban purposes. As we have already indicated, we interpret these

terms broadly to include all urban areas in which Land Commissions may be required to operate, that is metropolitan and regional growth centres as well as existing cities in relation to the re-development phase of the cycle. We understand that some of the issues examined in this chapter are the subject of discussion between the Australian and State governments. Our chief concern here is to relate them to the problem of devising effective land tenure and land use arrangements. These will depend not only on the efficiency of development planning and control but also on the ability of governments to ensure, through the Land Commissions or other agencies, that adequate supplies of land are acquired well in advance of needs, by negotiation or resumption, on the basis of the principles outlined in Chapter IV.

Existing Development Controls

5.4 Existing controls over development have generally failed to ensure that land in urban areas is effectively used in the interests of the community. There have been problems even in areas such as the Australian Capital Territory, where development has been undertaken directly by public authorities and land use controls have been exercised

through the purpose clauses of leases; re-development in parts of Canberra has sometimes resulted from private initiatives motivated by individual gain rather than from planning decisions taken in the public interest. In older cities development controls have operated even less satisfactorily, partly because of the divided responsibility for such controls and partly because of the nature of the controls themselves.

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5.5 The planning authorities in the States have a general responsibility to control land use and development but have seldom undertaken the acquisition of land, participated directly in development activities or shared in the increments in land value which flowed from their planning decisions. State semi-government authorities and State departments

are responsible for the provision of public utility services and necessarily make planning and land use decisions in relation to those services. In so doing they frequently operate as autonomous agencies not subject to overall planning control. Financial or organisational constraints have impeded the ability of some semi-government undertakings to provide

services on a scale commensurate with the needs of the community; water supply and sewerage have been conspicuous examples in some cities. Local governing bodies are responsible for detailed land use and development control. They have been subject to

severe financial pressures, especially in rapidly developing areas on the urban fringe. Because of their subordinate level in government and small size, local authorities find it difficult to recmit staff on a scale and at a level which will support high standards of planning and development controls. Local government planning controls are also notoriously subject to political pressures and uncertainty.

5.6 Existing controls take the form of restrictions on land use, exercised through zoning, and controls over the nature and extent of development, exercised through building ordinances, height limitations on buildings, etc. Zoning is unsatisfactory as a means of land use control. It is negative or permissive rather than positive or compulsive in its

effects, in that it can only prevent particular forms of land use and cannot require land to be developed and used in accordance with planning decisions made in the public interest. The responsibility for building ordinances and regulations is scattered among so many public authorities as to impede rather than facilitate development planning and control.

Proposed Development Control Authorities 5.7 We believe that it is necessary for existing forms of development control to be replaced by new forms of control administered by organisations which will operate in accordance with policy and financial guidelines laid down by governments. As semi- autonomous institutions these organisations should have the following powers and

responsibilities: (a) in administering day-to-day policy, they should be removed as far as possible from political influence in order to ensure consistency, security and equity in their dealings with landholders and other members of the community; (b) in major policy matters, the organisations should be seen to be guided by the

best interests of the majority of the community whilst protecting the rights of minority groups; (c) the organisations should be capable of co-ordinating planning and development by both public and private sectors in urban regions; (d) the organisations should have powers and financial resources to acquire land, if

necessary compulsorily, to participate as principals in the development of land for all urban purposes and to manage leasehold estates; (e) the organisations should have responsibility to take action to ensure that all demands or needs for land for residential and other urban purposes are satisfied;

(f) the development rights should be vested in the organisations responsible for development; and (f) planning and land use decisions of the organisations should be subject to public scrutiny and, in matters affecting the interests of individuals, should also be

subject to appeal to an impartial tribunal.

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5.8 We have come to the conclusion that these requirements can best be met by vesting all rights and powers over urban development, including development rights and powers of acquisition, in regional statutory authorities which, for the purpose of this Report, we shall call Development Corporations.

Development Corporations

5.9 We envisage that in the States Development Corporations will be established by State governments, not only in regional and metropolitan growth centres but also in existing cities on a regional basis. The Development Corporations should be responsible to State governments but, having regard to the possibility of Australian Government

financial support and the interests of local governing bodies in their areas, it might be desirable to include representatives of all three levels of government on their boards. But membership of the boards should be considered in terms of the professional expertise, managerial skills and impartiality which individual members will bring to the Corporations

and not merely in terms of formal representation.

5.10 We envisage that the Development Corporations will be modelled on the National Capital Development Commission, which has operated successfully in the Australian Capital Territory, subject to three important modifications: (a) they should control all development in their areas, including development for

all public purposes; (b) they should take full advantage of the abilities of the private sector on the basis of criteria which we discuss in a later section; (c) they should have the responsibility for estate management within their areas.

5.11 Within their overall responsibility for development control, the role of the Development Corporations will be to determine the timing, scale and conditions of development of both public and privately owned land, and their powers must be adequate for this purpose. These powers will be exercised in two principal ways:

(a) Acquisition by negotiation or resumption of land followed by direct expend­ itures on sub-division, servicing and development. Such land will be made available for use in accordance with land tenure arrangements indicated in later chapters. (b) The issue o f development orders which will specify the conditions under which

development is required to take place. These conditions will include, in addition to those currently attached to development consents, other conditions considered desirable in the public interest such as payment for development rights.

5.12 As has already been indicated, on the making of a development order a landowner will have three options available to him. First, he may comply with the conditions of the development order within the time specified, in which event he will be obliged to pay for the development rights in accordance with the principle described in Paragraph 4.31. Second, he may elect to have his land resumed by the Development Corporation, in which case he will be compensated, on a basis which excludes future development rights, in accordance with the principle described in Paragraph 4.29. Third, because the right of disposal will not be restricted he may sell the land to someone prepared to comply with the order and pay the Development Corporation for the development rights. Develop­ ment orders will thus reflect the principle of public ownership of development rights and will give Development Corporations reserve powers of public acquisition. In effect, the sale of development rights after the issue of a development order may be regarded as

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public acquisition of the property at its existing use value followed by sale back to the original owner at its newly designated use value.

Development Defined

5.13 For purposes of development orders and the sale of development rights, we propose that development be defined to include only clear changes in use or significant differences in intensity of use. The mere replacement of one building by another designed for the

same purpose and containing the same facilities should be regarded as a continuation of the existing use and should not involve the owner in the purchase of development rights. The same should apply to minor alterations and extensions. It follows that no development rights will be affected by the replacement o f one single dwelling by

another.

5.14 No attempt should be made to levy any development charge for the erection of single dwellings on newly sub-divided and serviced land. Development value increments will not in any case accrue in this situation. The value of a block of land set aside for a

dwelling site will be represented by its potential for that purpose. If it existed as a separate lot at the base date its potential at that time will have been reflected in its base market value. If it did not then exist, its potential will have been included in the calculation of the development potential of the sub-division which created it. For these

reasons, and for ease of administration, it will be necessary to exempt the builders of single dwellings on single blocks of residential land from the necessity to acquire development rights.

Enforcement and Compensation Provisions for Development Control 5.15 For legal purposes, it will be necessary to take several steps to enforce the development control provisions which we have proposed and to ensure that development rights are effectively vested in the Development Corporations. These include:

(a) the use of each parcel of land must be restricted by legislation or by the instrument of title to a designated purpose which carries no implication of any right to depart from that use of such a character as will impart additional value to the site;

(b) compliance with that designated use must be ensured by administrative measures requiring all improvements to be carried out before grant of title and prohibiting transfer of the landholder’s interest until this has been done; (c) suitable legal processes must be established to prevent any departures from

development conditions; (d) the right to a change of use must be made to depend on the landholder making a payment for the development rights when an order for development is made; (e) the value of the site for the original designated purpose must be defined so as

to exclude all potentiality for development after the base date; and (f) there must be dear power to resume the land on terms which provide that the compensation for such resumption is limited to the value of the land for the original designated purpose only, excluding all potentiality for development

after the base date.

5.16 In addition to the several steps specified in the preceding paragraph, ancillary provisions will be necessary to regulate the processing of development orders and the making of necessary valuations. It will be necessary to enact other provisions to reinforce the basis of compensation suggested, for example, by spetifying that the possibility of

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development consent or approval of a change of use must never be assumed and that evidence of prices paid for other land must not be admitted unless these prices are shown to exclude all potentiality for development after the base date.

5.17 In order to allay fears that home-owners will be dispossessed and not receive sufficient compensation to enable them to re-instate themselves in comparable accommo­ dation, we suggest that special provision be made so that compensation for the resumption of dwelling houses will be assessed on a re-instatement basis, including an allowance for disturbance, but likewise excluding all potentiality for development.

5.18 We have in mind that compensation for improvements on land which has been resumed will be paid on the basis of the existing use value of those improvements at the date of acquisition, subject to the provision that, where the combined market value of the site and improvements at the base date exceeds the combined existing use value o f site

and improvements at the date of acquisition, the former (i.e. the combined market value) will be taken as the basis of valuation. This provision is intended to ensure that, where the base market value o f the site reflects development potential and that same develop­ ment potential has depressed the market value of improvements below their existing use value, landowners will not receive the higher of each of two separate calculations. If the base market value of the site exceeds its existing use value by a greater amount than the

existing use value o f improvements exceeds their base market value, compensation will be on the basis of the combined market value rather than on the basis of the base market value of the site plus the existing use value of the improvements.

The Functions of Land Commissions and Development Corporations 5.19 In the new growth centres, it would be possible to establish both Land Commissions and Development Corporations, with the former being given responsibility for land acquisition and the latter taking over land from the Land Commissions and being

responsible for development planning and control. But if, as we have suggested, acquisition is to take place either directly through compulsory or negotiated purchase or indirectly through the making o f development orders, there would be advantages, even in the new growth centres, in combining the functions of a Land Commission and a Development Corporation in the same body. The advantages would be even greater in existing city areas, where development control is more likely to be exercised through development orders than through direct acquisition. But we recognise that this question does not come within our Terms of Reference.

5.20 Irrespective of the formal organisation which is adopted for purposes o f land acquisition and development control, it is essential that appropriate financial guidelines be specified for pricing and profit policies and that, for purposes of financial control, appropriate methods o f land development accounting be instituted. Among other things, these should distinguish between: (a) income from land development transactions themselves; (b) income from financing transactions; and (c) income from operating transactions arising, say, from leasing properties which remain under public ownership. Some submissions and witnesses addressed themselves to the problem of land development accounting, which we are required to inquire into and report upon under Term of Reference (2) (m), but we propose to defer detailed consideration of this question until a later report. We assume that, to the extent that the Australian Government makes financial resources available for the purposes o f Land Commissions or Development Corporations in the States (either through specific purpose grants under Section 96 of the Constitution or by way of advances), it will have an interest in the financing and pricing

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arrangements which have been discussed in this paragraph.

Hie Role of Local Government in Development Control

5.21 We envisage that the existing local government structure will remain as it is at present, subject to such consolidation or amalgamation of local governing bodies as may be considered desirable for other purposes. But it is vital to the proposed scheme of development control that local governing bodies should have no power to make

development orders or grant development consents.

5.22 We nevertheless have it in mind that Development Corporations could delegate some of their powers to local governing bodies on such terms and conditions as may be considered necessary from time to time. One power which should be delegated as a matter of course is the issue of residential building consents. If accompanied by clear

policy guidelines, this power may most appropriately be handled at the local level and its exercise will not change existing arrangements for residential land use controls.

5.23 The removal from local authorities of the power to grant development consents will, we believe, insulate development control from political pressures and remove any imputation that vested interests are in a position to receive favoured treatment. In formulating development plans Development Corporations should obtain the views of local governing bodies within the areas o f their jurisdiction. But the final responsibility

should be vested in the Development Corporations and, subject to the qualification which has been made in respect of residential building consents, development orders should be issued exclusively by the Corporations.

5.24 We have indicated that it may be appropriate for local government interests to be represented on the boards of Development Corporations. Depending on the extent to which local governing bodies retain responsibility for developmental expenditure, there may be a case for the Development Corporations sharing with local authorities some of the revenues which are derived from the sale of development rights. When development is complete in a particular area, also, decisions should be taken on what basis, if at all, revenues earned by the Development Corporation from its property management

activities (e.g. rentals from leased commercial premises) might be shared with local authorities in the area. Such decisions should presumably be taken on the basis of guidelines established in accordance with Australian or State government policies. We shall so far as necessary consider these questions, and that of appropriate rating policies

for local government, in our next report. But we have it in mind that the Development Corporations will take over most of the local government functions which are concerned with developmental works, and that revenues from the sale of development rights may be used by the States through the Development Corporations to finance developmental

outlays in the areas for which the Development Corporations are responsible.

The Role of the Private Sector 5.25 We have proposed that, in planning and controlling urban development, Develop­ ment Corporations be authorised either: (a) to undertake land acquisition and development directly, or

(b) to issue development orders which will give landowners in the private sector the option of undertaking the development themselves, subject to payment for development rights and to control of development, if they wish to do so.

5.26 From the viewpoint of the Development Corporations, the relative desirability of

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these two courses of action in particular circumstances will depend on many factors, including: (a) the phase of the development cycle; (b) the location and scale of the area for development;

(c) the number of landowners whose land is affected by the development; (d) the purpose of the development and the types of land uses to which it is directed; (e) the availability o f finance; (f) the level of demand relative to the supply of particular categories of serviced

land in the region in which the development is to take place; (g) the stability of land prices; and (h) the comparative advantages, from the point o f view of such factors as quality

of design, costs, expedition, managerial efficiency and public control, of public and private initiatives.

5.27 The need to develop new urban areas is pressing and the scale of operations immense. Satisfactory results will be achieved only with maximum co-operation between the public and private sectors and with each sector playing that role for which it is best suited. It seems to us that the public sector is better equipped to assemble land, to determine broad planning and disposal policies and to enforce conditions imposed on the disposal of the land. These roles, allied to the collection on behalf of the community of the value increments arising from the development, should therefore normally be entrusted to Development Corporations. Organisations in the private sector are likely to be better attuned to market demands, more flexible in response, more innovative in

design and more efficient in actually carrying out development work. In general, and subject to supervision by the Development Corporations, these tasks should normally be left to the private sector.

5.28 This division of functions means that Development Corporations must be free to plan and develop new urban areas to best advantage without being distracted by present sub-division patterns. Where rural land is being assembled from many owners for conversion to urban use in a new growth centre and where financial resources permit, direct public acquisition by negotiation or resumption would generally appear the most advantageous. This is especially likely to be the case where there is a strong demand for land associated with rapidly rising land prices, because it will be easier for the Develop­ ment Corporations to control prices directly by acquisition, sub-division and sale of land

than to attempt to do so indirectly through the conditions attached to development orders. Where land is required for public purposes, direct acquisition is in any case obligatory, and it will be argued in later chapters that in the new growth centres continuing public ownership is also necessary in respect o f land designated for commercial, industrial or non-profit purposes. Such land should therefore be acquired by the Development Corporations whether or not land is purchased by the Corporations for residential purposes. Where the land is required for residential purposes and where the prices and conditions on which land with or without buildings is made available to households can be effectively controlled, there will be a case for the Development Corporations selling the development rights and controlling the development indirectly in the manner outlined below (see paragraph 5.32).

5.29 Where Development Corporations are planning re-development in existing cities, financial considerations, efficiency considerations and ease of development control are all likely to combine to make the use of development orders more appropriate than

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direct acquisition as a means of bringing private initiatives into the planning process. But in the event of a development order not being complied with, the resumption of the land will need to be undertaken.

5.30 Even where land is acquired directly by negotiation or resumption, the Development Corporations should seek ways of encouraging private entrepreneurial activity in order to ensure that their monopolistic powers do not stifle initiatives or fail to meet market

needs. Methods of doing this might include special performance contracts to develop land, lease-back arrangements, joint ventures and competitions.

5.31 Development Corporations should thus actively seek conceptual proposals from private enterprise for designated areas, or parts thereof, irrespective of whether those enterprises have an interest in the land or not. Total planning by a single authority is bound to lead to mediocrity and repetition. It seems to us that there is considerable opportunity for private design initiatives in new urban areas. For example, it may be

thought desirable for a Development Corporation to contract out a large area to a private developer for complete design, subject only to broad guidelines such as the total number of residential units to be provided, minimum requirements as to public facilities, including open space, provision of commercial areas and the like. This would leave the developer to

determine (subject to ultimate approval by the Corporation) the type and location of residential accommodation, the optimal street and open space system and so on. Boldness in such ventures should pay off, not only in speeding up the planning and development process, but also in the ultimate result.

5.32 When market conditions warrant such a step, land intended for residential purposes might be left to the private sector to develop on the basis of development orders with special conditions attached in lieu of cash payment for development rights. We have it in mind that these conditions could require a percentage of sites to be developed to

standards specified by the Development Corporation and transferred to the Corporation at a predetermined price approximating the cost of development. The private developers would also be required to develop the remaining sites in accordance with conditions specified by the Development Corporation, but they would be able to earn profits on these sites sufficient to provide a reasonable return on their total outlays (without however receiving the effective benefit of the development rights).

5.33 Provided the Development Corporation is able to pass on a sufficient supply of developed sites to final users at cost, land prices generally would be effectively stabilised as a result of such action. Other land prices would be automatically influenced by the availability of these sites at cost and, provided the overall supply of serviced land was sufficient to meet the demand at prices which reflected a reasonable rate of return on

development outlays, could be allowed to find their own level in the free market. A scheme similar to the one we have proposed was introduced recently in Western Australia and evidence indicated that it was influential in stabilising land prices in the metropolitan area o f Perth.

Disposal of Land 5.34 In the new growth centres, we have it in mind that land developed for commercial and industrial uses will remain under public ownership and management in accordance with proposals which are outlined in Chapters VII and VIII. In those chapters we also

discuss proposed tenure arrangements for residential land, which envisage the sale of land use rights for residential purposes in the new growth centres in the States and in the 33

Northern Territory, after development conditions have been met, on the basis of what may be called ‘residential grants’ or ‘residential freeholds’. In effect, these will be freehold or fee simple grants with development rights excluded. The leasehold system in the Australian Capital Territory can be adapted in such a way as to achieve the same results.

5.35 Insofar as the disposal of residential land by Development Corporations is con­ cerned, we propose that preferential allocations be made to households in which neither spouse has previously owned a residence in Australia. This eligibility criterion is intended to reconcile the desire o f most Australians to own their own homes with a land and housing market situation which is making it increasingly difficult for them to take the vital first step of land acquisition. Provided land is available to young couples on

reasonable terms, they can acquire an equity in house and land which will be preserved during subsequent periods of rising prices. This in turn will enable them to continue to operate in the land or housing market effectively if, at any time during the remainder of their lives, their housing needs change or they shift homes to other locations.

5.36 No means test should apply unless the applicant requests financial assistance for the purchase of the land and/or house. The Development Corporations could provide this assistance to eligible applicants by making the land available on terms (their security being subordinated to any first mortgages) or by issuing mortgage guarantees. Any households which cannot be accommodated in this manner should be taken care of by social housing organisations, for example through subsidised rental housing provided by government housing authorities. Under no circumstances should Development Corporations become

social welfare organisations or be obliged to carry the burden of subsidised housing for lower income groups.

5.37 No restrictions should be placed on successful applicants other than a requirement that they build approved houses in a specified time. Titles should not be issued until this is done. We see no need for any restrictions on the sale of house and land, because this privileged allocation will be made only once to any household.

5.38 Home building sites are not uniform and preferences for individual sites will vary among different applicants. It is therefore necessary to consider the question of how to allocate individual blocks to individual applicants. Our Terms of Reference require us to examine alternative methods of allocating land, including auctions, ballot and direct allocations. In this Report we are concerned only with questions of broad principle in relation to policy objectives, which we consider in the case of disposal of residential land should be directed towards:

(a) providing maximum scope for individual preferences to be expressed; (b) making provision for preferential allocation to groups judged to have special needs; (c) achieving fairness as between different households; and

(d) minimising administrative costs.

5.39 As a matter o f principle we do not favour allocations by ballot, because the introduction of chance into the allocation process would make it difficult to achieve most of the foregoing objectives. We accept that direct grants may be necessary for some purposes, but consider that the main choice of allocation systems lies between over-the- counter sales (at list prices) and auctions. If the supply of serviced land is short both involve disadvantages, the former because of the need to introduce waiting lists or rationing and the latter because of the substantial price increases which are likely to occur, with adverse consequences especially for those on lower incomes.

5.40 Provided sufficient stocks of serviced land are available, most of the foregoing criteria can be met by over-the-counter sales but choice is likely to be restricted in tire interest of administrative convenience. Auctions take advantage of the market to allocate land, but it was submitted that because each household requires only one site an auction is not an efficient method o f enabling the family to express its preference in the market.

Auctions also tend to favour those with substantial purchasing power rather than those with special needs. We consider that the advantages of both over-the-counter sales and auctions can be achieved, and the disadvantages largely avoided, by conducting restricted auctions for those eligible to receive preferential allocations, but limiting the number of

applicants attending each auction, in accordance with some priority system, to the number of sites being made available. No site should be sold below the pre-determined reserve price. Sites passed in should be available to participants in the auction at their reserve prices. Under these circumstances, the competition between applicants would be

confined to the relative attractiveness o f different sites. The possibility of extending such a system to the provision of both land and house should be explored for the benefit of home seekers who are unable or unwilling to engage in two separate transactions.

Re-development in Existing Cities

5.41 The principles of development control described in earlier sections may also be applied to re-development in existing urban areas, including city centres. Provided development rights are reserved to the Development Corporations, development orders will only have to be issued where the need for re-development is indicated by planning or market considerations. Planning may then be implemented with full public participation, thereby avoiding many of the present protest actions which follow decisions of private

developers to re-develop older urban precincts.

5.42 In order to prevent scattered development and ensure maximum benefits from collective action, no development should be allowed to take place outside areas designated for re-development. This will ensure controlled and economical renewal of those parts o f the city considered ‘ripe’ for development. The result will be not only a greatly improved urban environment, but also greater efficiency in the operations of public utilities. The

sale of development rights will bring in considerable revenues to the Crown, but the private sector will also benefit by sharing in the advantages which flow from co-ordinated and integrated as opposed to scattered and piece-meal development.

5.43 In their planning the Development Corporations should ignore existing property boundaries if they are likely to prevent or inhibit proper development. In such cases development orders should be imposed on all affected owners, who should be given time

to co-ordinate their compliance with the development orders. Failing agreement within a prescribed time, the Development Corporations should compulsorily acquire the properties in accordance with the principles enunciated above and allocate the land to such organisations as might be prepared to participate on stipulated terms. As in the case of

new growth centres, Development Corporations should encourage private initiatives in design and construction when formulating plans for re-development.

5.44 The proposals we have madfe for the exercise of development control through Development Corporations have many precedents in other countries (such as the United Kingdom, Israel and Holland) as well as in Canberra. In general development authorities organised along the lines indicated have succeeded in achieving good planning, co­

ordination of urban policies with national objectives and effective private enterprise participation. 35

Summary of Recommendations

5.45 We conclude this chapter by summarising the recommendations we have made for development control in urban areas: /. A ll development rights should be vested in metropolitan and regional Develop­ m ent Corporations, which should also have full and effective powers to control

all urban development and re-development. 2. Development Corporations should be given powers and financial resources to enable them to acquire land by negotiation or resumption, to make direct outlays on sub-division, servicing and development, to make serviced or

developed land available fo r use in accordance with the land tenure arrange­ ments recommended below and to ensure that all demands or needs for land fo r residential and other urban purposes are satisfied 3. Development Corporations should also be given clear powers to define the conditions and timing o f development and re-development fo r both public and privately owned land through the issue o f development orders. 4. Development orders should require landowners (a) to comply with the conditions specified in the orders within a specified time, or (b) to accept compensation fo r the acquisition o f their properties by Development Corpor­ ations on the basis indicated in Chapter IV, or (cj to sell the land to purchasers prepared to comply with the orders. 5. Development orders should reflect the principle o f public ownership o f development tights by including among the conditions a requirement that owners or developers make payments fo r the development rights on the basis ■ indicated in Chapter IV. Payment fo r development rights in respect o f

residential land might, however, take the form o f a requirement that a specified proportion o f home sites be transferred to the Development Corpor­ ation at a pre-detemdned price.

Implications of Proposals

5.46 We believe that the recommendations we have made for development control will, if implemented, make a substantial contribution towards achieving the urban land policy objectives which were spelt out in Chapters II and III. In testing the proposed system against the policy guidelines suggested in Paragraphs 3.11 and 5.7, the following results will be seen to flow from the adoption o f the recommendations:

(a) Planning and development by both the public and the private sectors can be effectively co-ordinated. All land use decisions in urban areas can be controlled in a rational and positive way, with beneficial consequences for the quality of the urban environment and for the preservation of areas or buildings judged to be worth preserving. (b) Community participation in the planning process can be facilitated. The

proposed powers of public acquisition of land for purposes of public policy can be accompanied by increased opportunities for innovative private sector participation in the development process. (c) The introduction of positive development controls in association with public ownership of development rights will eliminate the activities of speculators in land, permit the price of new residential lots to be effectively controlled and make it possible for home sites to be allocated to eligible applicants at cost. (d) The financial benefits flowing from public ownership of development rights

36

will accrue automatically to the public sector as changes in land use are designated in accordance with development controls. (e) Hanning decisions will be removed from day-to-day political control and administration will be simplified on a basis which reconciles centralised

direction of policy decisions within a region with decentralised administration.

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VI LAND TENURE SYSTEMS

6.1 The principal task of the Inquiry has been to review alternative land tenure systems in order to suggest the most appropriate form o f land tenure for use in the Australian Capital Territory, the Northern Territory and the new metropolitan and regional growth centres which are to be established with financial support from the Australian Govern­ ment. Land which has been acquired by Land Commissions or Development Corporations may be either retained by public ownership (and made available for use through some

form of leasehold tenure) or disposed of by selling some or all of the rights which are associated with ownership. The case which we have made for public ownership during the development phase o f the cycle does not necessarily extend to the period of subsequent use. In this chapter, we are concerned with the means whereby land is made available for use after acquisition and development. We therefore turn to an examination

of the nature and objectives of land tenure systems and the alternative forms of tenure which are available to meet those objectives. It is possible to distinguish conceptually between two polar prototypes or model land tenure systems, which correspond to what are popularly called freehold tenure on the one hand and leasehold tenure on the other.

Freehold and Leasehold Models

6.2 The essential characteristics of what may be called pure freehold systems (conferring titles in fee simple) and leasehold systems may be contrasted as follows: (a) Rights over freehold land are acquired by payment of a capital sum whereas rights over leasehold land are obtained by payment of a periodical ground rent.

(b) Land use rights are derived from ownership of freehold land whereas the use of leasehold land is separated from its ownership. (c) Freehold land may be used for any purpose determined by its owner whereas the use of leasehold land is controlled by the lease agreement and must be in

accordance with the purpose designated in the agreement. (d) The owner of freehold land may re-develop the land on the basis o f his own individual decision whereas a lessee must obtain the lessor’s consent before he can change the form or intensity of land use. (e) Rights over freehold land belong to the owner and his heirs in perpetuity

whereas a lease is for a fixed term. (f) Ownership of freehold land carries with it consequential continuing ownership of structural improvements on the land whereas buildings and other improve­ ments on leasehold land revert or pass to the lessor at the expiration of the

lease.

(g) Unearned increments, or increases in the value of land associated with either community growth or changes in land use, automatically accrue to the owner of freehold land, whereas under leasehold such increases are appropriated by the lessor as a result of adjustment to the rentals which the lessee is required to pay.

6.3 Having made this distinction between freehold and leasehold land, we should emphasise that the distinction is a conceptual one and that it is unlikely that, in practice, a particular form of land tenure system will ever exhibit all the characteristics of either freehold or leasehold land as we have described them. A major reason for this is, as we have seen, the interest which governments have in land tenure arrangements and their intervention in the public interest in order to restrict land use rights (for example, by excluding mineral rights), to control re-development (for example, by zoning regulations)

38

or to levy taxes or charges intended to appropriate increases in land values for the benefit of the community. But freehold and leasehold tenures may also tend to converge as a result of contractual arrangements between the parties to land transactions. For example, financing arrangements may be entered into which have the effect of permitting payment

of the purchase price of freehold land by instalments over a long period, while the rights to the use of leasehold land may be acquired by payment of a lease premium or capital sum. Lease agreements may permit changes in land use (by containing very wide purpose clauses), give rights to land use in perpetuity (in so-called perpetual leases) and

even permit unearned increments to accrue to the lessee (by making no provision for rental adjustments).

6.4 It follows that there may be many different forms of land tenure. Apart from the restrictions imposed by governments and some exceptions noted below, the freehold system is reasonably uniform throughout Australia, but it may be assumed that there are almost as many forms of leasehold tenure as there are leasehold systems. Although only

about 10 per cent of all Australian land is held under freehold title (or more accurately, as we shall soon see, under estates in fee simple), most urban land is held under this form of tenure. The most significant exception is Canberra, where the Seat o f Government (Administration) A c t 1910 specifies that no Crown land shall be sold or disposed of for

any estate of freehold. (The Commonwealth Constitution itself provides that the seat of government ‘shall be within territory which shall have been granted to or acquired by the Commonwealth, and shall be vested in and belong to the Commonwealth. . . *) But even the Canberra leasehold system does not display many o f the essential characteristics of

pure leasehold described in Paragraph 6.2. F o r example, payment for land use rights in the Australian Capital Territory is now made by means of a lease premium or capital sum instead of by rent, compensation for improvements is paid to the lessee at the expiration of a lease, there is considerable flexibility in the interpretation of lease purpose clauses

and in the opportunities which are provided for re-development of sites, there is no attempt to collect the unearned increment arising from community growth and there is only a partial attempt to collect the development value increment arising from permitted changes in land use.

The Evolution of the Law of Real Property in Australia

6.5 No doubt as a result o f the variety of forms of land tenure, but also partly arising out of the emotional attitude which many people have towards what they regard as important attributes of freehold or leasehold land, there is a good deal of confusion and misunderstanding as to the nature and incidents of land tenure systems. The inaccuracy

of the terms ‘freehold* and ‘leasehold’ to describe particular systems will be evident from a close study of the evolution of the law of real property, because in Australia all landowners are, strictly, tenants of the Crown. It is the incidents attaching to their tenures rather than the names identifying them which are important. A ‘tenant in fee

simple* has a freehold estate in land which is the largest estate known to the law, whilst a ‘tenant for a term’ has an estate which is limited to a period of time and which is not a freehold estate. Between these extremes the law provides for many different estates and tenures, some of which have the characteristics of freehold and some of which have not.

Thus an estate for the life of a purchaser or for the life of a third person is an estate of freehold but because it terminates on death it is not an estate of indefinite or even long duration. Alternatively, a tenancy for a term may be as long as 99 years or 999 years and is a leasehold and not a freehold estate. There is also an anomalous estate or interest in

39

land, the creature of statute, called a ‘lease in perpetuity’. This has some of the qualities of a leasehold estate but in a practical sense may be no less advantageous to the lessee than an estate in fee simple.

6.6 In point of historical development, there were special and technical legal aspects which distinguished various kinds of estates one from the other. Many of these have ceased to have much significance today because o f the effect of statutes which define or allow the definition o f the rights and incidents of an estate in land. There were also some

similarities in the incidents of estates of different qualities which have been destroyed or modified by statute or administrative measures. Chief among these is the obligation to pay rent which, at one time, was reserved in grants by the Crown of estates in fee simple (when it was called ‘quit rent’) just as a periodical rent might be reserved in a lease by the Crown to a private lessee (or in a lease between private persons). Quit rents of a substantial amount are not now reserved in Crown grants and, except for the anomalous position of grants reserving a nominal or a peppercorn rent, the reservation of a rent is today perhaps the most significant distinguishing feature between estates in fee simple and leasehold estates respectively. Even so, the distinction is not universal as grants of estates in fee simple may be made under statutes in force in some of the States subject to payment of moneys which may represent purchase prices or rents. On the other hand, leases which do not operate to give an estate in fee simple are granted by the Crown for long periods, even in perpetuity, at merely nominal rents.

6.7 An estate in fee simple is said to be the greatest estate in land known to the law; it represents in lay language full ownership of the land. However, it has always been possible for the Crown, in making a grant of an estate in fee simple, to make reservations out of the subject matter o f the grant. It has always reserved the Royal metals, gold and silver, and in recent years rights to most other minerals have also been reserved. Indigenous timber for building naval ships and bridges, and stone for road construction were frequently reserved from most grants by the Crown. As we have already observed,

quit rents, payable annually, were also commonly reserved in early Crown grants, some of which provided for discharge of the rental obligation on payment of twenty times the annual rent. There are still in existence many grants of land for special purposes which reserve a nominal or peppercorn rent, a device which was designed to ensure that the land is used for a particular purpose (cf. Gollan v. Randwick Municipal Council (1961) A.C., 1882; Sydney Exchange Company v. Valuer-General, 19 L.G.R., 111). It is also common, under statute or otherwise, for grants of land purchased from the Crown to impose restrictive conditions as to the use of the land granted, to require ministerial consent to the transfer of the land and even to limit the compensation which is payable on resumption. Moreover, as already mentioned, some anomalous tenures under Crown lands legislation of the States, like the early grants made in New South Wales, take the form of grants of estates in fee simple by the Crown, subject to obligations to pay annual rents so framed that in default of payment steps may be taken for the forfeiture of the grants.

6.8 From the foregoing outline of some of the incidents of the law of real property in Australia it will be apparent that a simple distinction between a freehold system and a leasehold system of land tenure cannot be made in law. Nor is it accurate to assert that the main alternative systems of tenure are those which distinguish an estate in fee simple from some other lesser estate. It seems to us, therefore, that such terms as ‘freehold’, ‘leasehold’ and ‘estate in fee simple’ are used to denote philosophical differences which are not definitive in describing the true character of the rights and obligations which exist

40

or should exist under a given system of land tenure. These philosophical differences between so-called freehold and leasehold estates in land have long ceased to be o f much significance in relation to tenures of rural land. In 1924 S.H. Roberts perceived this and, in his work History o f Australian Land Settlement, 1 said that:

‘the difference between the two tenures has narrowed until it has become almost infinitesimal. Australian tenures have all accepted the idea of limited freehold, that is, a title dependent on the performance of conditions such as residence or improvements, these conditions applying to the transferee as to the original

holder’.

Roberts quoted the statement of a Labor Premier o f New South Wales (W.A. Holman), who said in 1917 that ‘it was a very short step from the perpetual lease with its nominal rental which the Labor Party called a leasehold to the fee simple which the National Party called a freehold’. Roberts added:

‘The difference was largely one of nomenclature; the imposition of improvements had bridged the gap; and the point was whether purchase money should be paid at once or spread over a number of years. Provided that the conditions suffice,

aggregation is not more possible under the one than the other, while the large resumption powers of the Australian Governments still further narrow the gap. The issue, a troublesome one for forty years, has assumed a changed form.’ 2

6.9 In expressing the belief that similar considerations now apply to urban land, we think that the main issues are to decide what restrictions are to be placed on land titles in the public interest and what value is to be attributed to land subject to these restrictions. More positively, we see our task as being, not to assign a name to a system of tenure or to

state a preference for a particular system which is presently known to the law, but rather to attempt a specification of the rights and obligations which should be incorporated in a system of land tenure in order to serve both private and public interests. For this purpose, it is necessary to determine the objectives which a system of land tenure should achieve and to specify the rights and obligations to be incorporated in particular forms of tenure.

Objectives of a Land Tenure System

6.10 Land tenure systems, like other aspects of land policy, must be directed towards achieving efficiency in land use and an equitable distribution of the costs and benefits associated with enjoyment and use of land. It follows that the objectives o f urban land policies which were spelt out in Chapter II (Paragraphs 2.4 to 2.7) and Chapter III (Paragraphs 3.7 and 3.11) are all relevant to the task of devising appropriate forms of land tenure.

6.11 However, it is also necessary that we should identify more specific objectives associated with land tenure systems themselves. To this end the Commission invited evidence from interested persons and organisations relating to the objectives against which a land tenure system should be tested, and indicated that the following objectives had been suggested in submissions and hearings:

(a) security of tenure for user; (b) security for financing; (c) land use control, including control over timing of development;

1 Macmillan, South Melbourne, 1968 Edition, p.409.

Ibid., p.409.

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(d) elimination o f speculation by the acquisition o f land with the intention of selling it as land for capital gain; (e) appropriation by the community of the financial benefit of any increase in value resulting from urban growth or from a change in permitted use, e.g.

re-zoning from residential use to higher density use or commercial use; (f) mechanisms for official appeal against planning and administrative decisions; (g) public participation in planning, development, and re-development; (h) easy transferability; (i) efficient and predictable administration; (j) economic re-development capacity;

(k) generation of funds for future servicing of raw land and the provision of community facilities; (l) provision of growth incentives and disincentives where required; (m) just and equitable compensation in cases of compulsory acquisition; (n) legal certainty;

(o) provision of adequate land for development to meet user demand.

6.12 Some of these issues have been discussed elsewhere in this Report because they concern wider aspects o f land use planning and control. Others will be deferred for later examination and report. But on the basis of the submissions and evidence which we received in response to the foregoing invitation, we consider that there is substantial support for a number of specific objectives against which particular land tenure systems may be judged. These include:

(a) security of title and ease of transferability; (b) security for financing; (c) security during development phase; (d) security of designated use; (e) the reconciliation of legal, political and administrative certainty with effective

land use controls; (f) the provision of cheap land for residential purposes; and (g) the appropriation by the public sector of unearned value increments.

6.13 Some of these objectives are concerned with the interests of individual landholders while others reflect the public interest. For that reason submissions and witnesses were not necessarily unanimous in their attitudes towards them. As will be seen below, however, there was general agreement about the desirability in principle of the first six objectives listed in Paragraph 6.12; only the last evoked significant opposition.

Security of Title and Ease of Transferability

6.14 Two basic requirements for any system of land tenure are security of title and ease of transferability. These primary objectives can, in our view, be achieved in relation to any form of tenure under existing legislation in force in the States and Territories or by appropriate amendments to such legislation. Existing systems for the registration and certification of title in force in the States and Territories are adequate to give security of tenure for all titles in land and to provide for their transfer in a simple manner, be they for estates in fee simple or lesser estates. The Torrens Title system of registration and certification is in general use throughout Australia and it has been adapted to leasehold estates in perpetuity in some States and to leasehold estates for terms of years in the

Australian Capital Territory and the Northern Territory. The adaptability of the Torrens system has been demonstrated by the Strata Titles legislation in the various States under

42

which titles are registered and certificates issued for individual units in multi-storey, cluster and community developments for both residential and commercial use. We are, accordingly, satisfied that any new system of land tenure which may be devised will, by the application o f existing provisions in the legislation, provide security of title and ready transferability, where appropriate, for all relevant interests including those of mortgagees.

Security for Financing

6.15 Another basic requirement is the capacity to use the title as a means of financing the erection of dwellings or other improvements. Many submissions and witnesses expressed the need for the system of land tenure to provide security for financing. Fee simple titles were cited as providing the best security for transactions involving the loan

of money for the purchase of land or the construction of improvements on the land. Security for financing is especially important for young married couples whose housing needs for themselves and their families commence when their incomes are relatively low and extend over a long period of years. It cannot be denied that a mortgagee or lender

of money will prefer the best security he can obtain and that a larger estate will tend to support a larger loan or mortgage and more favourable terms.

6.16 This does not mean, however, that adequate financing arrangements will not be provided under systems of tenure which adopt, even universally, some smaller estate or some estate less than an unrestricted fee simple. Many factors lead to the opposite

conclusion, such as the growth of the building society movement, the existence of mortgage loan insurance and preferential home purchase schemes, the average life of mortgages over dwelling houses (estimated at about 8 years) and the tendency for rising

land and housing values to increase the equity o f borrowers. Moreover, experience in the Australian Capital Territory has shown that so long as some legal requirement exists for a mortgagee to be notified of any default or proposed forfeiture, a long-term leasehold is accepted as providing adequate security for financing. The experience of the Northern Territory and some States indicates that a form of perpetual lease is likewise accepted as giving adequate security.

6.17 By the same token, however, it must be conceded that a lease for a short term, or one which imposes onerous covenants on the lessee, or one which entails unpredictable or open-ended obligations to pay rent, may not be readily accepted as security for a loan to finance the cost of erecting a dwelling or other improvements.

Security during Development Phase

6.18 One aspect of the imposition of conditions or covenants directed to the control of land use is also of relevance to the financing problem. This concerns the nature o f the rights which the lessee or grantee may have pending compliance with conditions of a

positive nature such as a requirement to construct a particular type of building or to undertake specified improvements within a given time. It is essential that the rights during this period be adequate to enable appropriate financing arrangements to be made. Failure to ensure this may prevent the lessee or grantee from being able to fulfil the

conditions.

Security of Designated Use 6.19 The objectives of land tenure arrangements may differ according to the nature of the purposes for which land is used. By way of illustration, a distinction may be made between: (a) land which is dedicated to public or community purposes, such as roads,

43

public places, recreation areas, hospitals, schools and clubs; (b) land which is used in order to produce income for commercial or industrial enterprises; and (c) land which is used for residential purposes. Some of these purposes may require a longer or more secure tenure than others, and it may be proper for the form o f tenure to specify or limit the purpose for which the land is to be used. The terms on which land is disposed of or acquired may also need to be controlled by the system of tenure in order to ensure an expeditious dedication of the land to the designated purpose. In other words, in order to facilitate development control and thereby meet more general land policy objectives, the form o f tenure may need to incorporate conditions requiring that the purpose be fulfilled within a prescribed time and in conformity with such other criteria or standards as may be specified.

6.20 In the case of lands which are dedicated to public or community purposes, the system of land tenure should ensure that there is continuity or security of the designated use and no alteration in that use save in circumstances which render the use originally designated inappropriate. In the case of land which is used for commerce or industry there is not the same necessity to ensure continuity of use for the particular purpose, but intensity of use needs to be controlled. Subject to the profitability of the enterprise conducted on such land not being jeopardised, a system of land tenure should allow

flexibility o f dealing and the return to the community o f some part of the reward which ensues from profitable use;; it should also ensure that industrial pursuits are controlled in the interest of a stable and healthy environment. On the other hand, where land is used exclusively for residential purposes and especially for single dwelling houses, the land tenure system should lend emphasis to the security of tenure and avoid casting on the occupier unpredictable financial obligations which would be prejudicial to that security. Except in circumstances where wider community interests need to over-ride those of the individual occupier, continued use for the residential purpose should be guaranteed and diversion to different uses should be prevented. We have discussed elsewhere the basis on which compensation should be paid in the event of occupancy being disturbed.

Legal, Political and Administrative Certainty Under Land Use Controls

6.21 In earlier chapters, we have discussed at some length the role of land use controls in achieving urban land policy objectives. It seems to be generally agreed that legal, political and administrative certainty should be included among the objectives of land tenure systems, but the question was raised whether these objectives can be better achieved through systems o f land tenure than by legislative means involving, for example, planning schemes which designate permissible uses to specified areas of land. Some existing planning schemes are highly complicated and have proved very unsatisfactory because of lack of definition of permissible uses; this leads to uncertainty and when there is also administrative discretion this uncertainty is accentuated.

6.22 It was widely accepted in the submissions and by witnesses that, for these and other reasons, statutory planning schemes have proved unsatisfactory and we have already proposed an alternative form of development control. But the question still arises whether some form o f land tenure arrangement, involving, say, a lease contract between a public authority and the person seeking to acquire and use the land, may be used as a means of supplementing the direct controls which we envisage Development Corporations imposing. The incorporation of land use controls in lease agreements, it was argued by some witnesses, would impose on lessees positive obligations, capable of enforcement by legal process or forfeiture. But a leasehold form of tenure is not necessary for the

44

achievement of the objectives which have been specified. The control of the use o f land to be disposed o f by Development Corporations could be similarly effected, and appropriate obligations or restrictions imposed, through the inclusion of appropriate provisions and conditions in grants of estates in fee simple. As we have already indicated,

it was a regular practice for the earliest Crown grants in Australia to specify a purpose for which the land was to be used and to include positive conditions requiring the improve­ ment or cultivation of the land. Development Corporations could therefore dispose of land either through leaseholds or grants in fee simple, and by imposing covenants or

conditions make use of the tenure system to reinforce their land use controls.

6.23 The instrument o f title - be it a lease, grant or some other document o f public record - may thus be the source from which the obligations and restrictions pertaining to the use of the land are to be ascertained by purchasers, mortgagees and, for that matter, members of the public generally. Provisions of this sort were usually described as

‘purpose clauses’ in submissions and evidence and they seem to us to provide a useful means of ensuring land use control. It will be appreciated that once the initial decision has been taken to designate a use or uses for particular areas or parcels of land, some administrative and legal means must exist to ensure that there is no deviation of substance

from the defined uses, at least not until shifts of population or changes in the character of the area or environment justify the alteration of those uses. The extent to which Development Corporations should use the tenure system rather than statutory controls

for this purpose will depend on administrative convenience, relative ease of enforcing compliance with planning controls and the degree to which it is desired to maintain continuing controls over land use following the initial phases of the development cycle.

6.24 It also does not seem to us to be very material to the enforcement of purpose clauses or conditions whether they are included in a lease, a grant or some other instrument. The remedy to ensure compliance is a legal one, involving proceedings for an injunction to restrain any departure from the prescribed use. Ultimately this will

lead to forfeiture of the estate or interest, whether it be in the nature of a leasehold or an estate in fee simple. What is important, however, is that an administrative system should exist to ensure supervision o f the purpose clauses or conditions and also that neighbouring

landholders should have some individual and independent right to take legal proceedings to ensure compliance by others of clauses and conditions which are of common benefit to an area or locality. Such a right does not exist under statutory planning schemes in the States or, so far as we are aware, in the Australian Capital Territory or the Northern

Territory. But it would be of assistance in ensuring that the environmental or planning basis of any locality is preserved.

Provision o f Cheap Land for Residential Purposes

6.25 Although there was general support for this objective in the submissions and evidence we received, there was less agreement on the extent to which the land tenure system can contribute to the provision of cheap land. There are several ways in which the form of land tenure can affect the cost at which land is made available for residential

purposes, but these depend more on the financing arrangements and pricing policies which are adopted than on the form of tenure itself.

6.26 The factors influencing the availability of cheap land include the nature and extent of government intervention in the land market, the relationship between prices and costs (which in turn is likely to depend on the extent of government intervention and on the quantity of serviced land being made available relative to need), the forms and r.o->s of

45

finance which are available and the extent .to which pricing policies incorporate provision for capturing the unearned increments which arise from community growth or changes in land use.

6.27 Hie relationships between these factors and land prices are not always clear-cut. A plentiful supply o f cheap finance does not necessarily contribute to cheap land where, as in Australia recently, it stimulates demand well in excess of the capacity of the urban land market to meet that demand. For our purposes, however, we are interested in the question whether, starting from a position of public ownership o f land, financing and pricing policies under one form o f land tenure are likely to be associated with lower costs to users than under another. Leaving aside the question of unearned increments (which is discussed in the next section), this is essentially a matter of deciding whether a lump sum payment for land rights is to be preferred to a series o f periodical payments so long as those land rights continue to be exercised.

6.28 In terms of the polar prototype models which were distinguished at the beginning of this chapter, the lump sum payment may be identified as a characteristic of the freehold (or fee simple) system and the periodical payment (or rent) as a characteristic of the leasehold system. Proponents o f leasehold tenure argued in submissions that one of its most important advantages is the opportunity it provides to make land available on easy terms to those whose ability to borrow capital sums for land and housing is constrained by low levels of income and wealth.

6.29 The choice between the payment of a capital sum and a periodical rental payment, while it may depend on the availability of finance, does not necessarily have very much significance in relation to the cost of land. This is because the price fixed for land in terms of a capital sum is equivalent, at some rate of discount, to the present value o f the periodical rental payments. In a perfect capital market situation, under conditions of stable prices, we would expect the rate of discount to be equal to the rate at which money could be borrowed to permit payment o f the capital sum. Under these circumstances, land users would be indifferent whether they borrowed to finance the payment of the capital sum or paid rent; the periodical payment for interest and rent would be the same. But of course the capital market is not perfect, prices are not stable, and in any case the need to amortise debt over a relatively short period requires payments which are additional to the interest on the debt itself and which have no counterpart in rental payments. The choice between land tenure systems may thus appear to be one between relatively low rents, calculated on the basis of government interest rates over the lease terms, and relatively high debt redemption payments and interest charges which are related to the credit facilities available and the standing of individual borrowers.

6.30 Even this distinction overstates the difference between leasehold and freehold systems, however, because it is possible for governments to provide finance for the outright purchase of land on terms which include both a long repayment period and low rates of interest. There are other reasons for believing that it is the method of financing, rather than the form of land tenure, which is the important factor in determining the level

of periodical payment. These include the possibility that rights to land use under leasehold tenure may be purchased by means of a capital premium instead of a periodical rental payment. The present Canberra system may thus be described as a premium leasehold system as opposed to the traditional rental leasehold system.

6.31 The propensity o f individuals to prefer present consumption to future consumption can also be exploited by landlords so as to raise the interest charges which are implicit in

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rental payments substantially above the costs of making finance available. This is presumably one of the reasons why consumers are prepared to pay very high interest rates to finance the purchase of durable consumer goods under hire purchase arrange­ ments or, for that matter, land acquired on the basis of instalment purchase. Public authorities are not likely to exploit this preference but it nevertheless needs to be remembered that, leaving aside the debt redemption payments which have their counter­

part in the acquisition of an asset, periodical rents do not necessarily constitute a source of cheap finance for the purchase of land rights. This conclusion is reinforced if rents are subject to re-appraisal; this issue is discussed below. .

6.32 There are two other factors which have a bearing on the relative advantages of different kinds of tenure systems and financing arrangements. The first is the availability of finance to the public sector itself. Because governments have only limited funds for all the things they wish to do, they must determine priorities or make policy choices

which have the effect of restricting expenditure on, say, land acquisition, in order to undertake more expenditure on other fields such as education or defence.

6.33 It was argued in some submissions that any financing advantages which rental payments might have for landholders are offset by financing disadvantages to the public authorities which make the land available. Because of the financial constraints likely to face Development Corporations, for example, it was suggested that capital payments for

the sale of land use rights, on the basis of either a fee simple or a premium leasehold system, would provide advantages by way of increasing the cash flow of the Corporations and enabling them to increase the scale of their activities.

6.34 Given the rate of urban growth which needs to be accommodated, this is obviously a factor of some importance in Australia. It affects not only the priority which governments accord to investment in land relative to other programmes, but also the pattern of land investment itself (as between residential land on the one hand and income-

producing land on the other), The nature of the choice which is made will depend not only on the cheap land objective but also on the other urban policy objectives which governments seek to achieve.

6.35 The other factor affecting choice of land tenure and financing arrangements is the possibility, which is available under a rental leasehold system (but not under a form of tenure which is purchased by means o f a capital or lump sum payment), for diverting to the community the unearned value increments resulting from community growth and

land use decisions taken on behalf of the community. This was considered by many witnesses to be one of the main objectives which a land tenure system should be designed to achieve and is therefore discussed separately.

Appropriation of Unearned Value Increments

6.36 Arguments for the appropriation by the community of unearned increments have been discussed in earlier chapters. These arguments are essentially based on the view that land policies should seek to ensure that the benefits of community actions flow to the community and not (by way of windfall gains) to individuals. We have also seen that

there are two types of unearned value increments, the first resulting from increases in land values associated with growth and the second resulting from planning decisions involving changes in land use.

6.37 It will be clear that a rental leasehold system can capture both kinds of unearned increment, merely by adjusting rents in proportion to the increases in land values, that is

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by charging economic rents at all times. It needs to be emphasised, however, that a rental system does not necessarily achieve this objective. Whether it does so will depend on the frequency and adequacy of the rental adjustments. Where land and other prices increase during the period o f occupancy, a periodical rent expressed as a fixed money sum is worth less in real terms than the capital sum which, at the beginning of the period of occupancy, was equivalent to the present value of the stream of rental payments. This means that rental payments will not necessarily recoup even the original cost of the land in real terms; in order to achieve this result and also obtain the benefit o f unearned increments, rents must be adjusted in accordance with changes in the market value of the land.

6.38 Failure to adjust rents in this way explains the seeming paradox in some of the evidence which was placed before the Commission in the Northern Territory and one or two o f the .States. While many witnesses argued that there is a strong psychological preference on the part of most landholders for freehold (or fee simple) land, there was strong evidence that landholders have not always sought to convert from rental leasehold to fee simple tenure even when they have been presented with an opportunity to do so. The explanation presumably lies in the terms under which the conversion was to be made. Where conversion required payment of a capital sum equal to the then current market value of the land, whereas leasehold rental payments were based on an earlier market value (because of failure to adjust rents in accordance with changes in market value), the financial disadvantages of conversion were apparently considered to outweigh any psychological advantages which might be associated with freehold tenure. Financial considerations also explain the preference which many business firms have for leasing rather than owning land and buildings; they are making a judgment that capital invested in land and buildings can earn less, in terms o f rental savings, than investment in other kinds o f operating assets.

6.39 As with so many other aspects of land tenure, the effect o f differences in tenure arrangements can be modified by government policies in other fields. Thus particular forms of taxation, such as land taxes based on unimproved capital values or betterment levies, can be applied to fee simple land with the aim of diverting to the public sector the same kinds of unearned value increments which leasehold forms of tenure may obtain through rental adjustments.

6.40 There was much less agreement about the desirability of capturing unearned increments than about the other objectives of land tenure systems which have been discussed. The disagreement was concerned not so much with the treatment of increments arising from changes in land use as with increments resulting from growth and inflation. In the case o f land use changes, opposition to the notion o f public appro­ priation of unearned increments came mainly from those with vested interests in appropriating the gains for themselves - land dealers and some (but not all) developers. In the case of community growth, however, the disagreement was philosophical and derived partly from psychological attitudes towards leasehold and freehold systems of land tenure and partly from value judgments about social equity. The disagreement was centred on residential land and for that reason it is necessary, in the following chapter, to distinguish between forms of tenure which are appropriate for residential land on the one hand and non-residential land on the other.

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VII TENURE ARRANGEMENTS FOR DIFFERENT LAND USES

7.1 Although, as we have seen, there are many characteristics which serve to distinguish leasehold forms o f land tenure from freehold (or fee simple) tenure, there is little doubt that the main philosophical difference stems from the notion that, through a leasehold system in which rents are regularly adjusted to take account of changes in the market

value of land, the public sector may participate in the unearned value increments that result from communal growth or decisions by public authorities to change the nature of land use.

7.2 In earlier chapters we have indicated our firm belief that, irrespective of the form of land tenure, all increases in value resulting from changes in land use should be appro­ priated by the Crown on behalf of the community. We have suggested that, in the case of fee simple land, this may be achieved either by public acquisition on terms which exclude

the value of development rights or by requiring payment to the Crown for development rights conferred by designated changes in use. In the case of leasehold land, the same effect may be achieved by adjusting the rent in accordance with the market value of the land in its new use whenever permission is given to vary the purpose clause o f a lease. In

this chapter, we therefore propose to restrict our attention to the question o f unearned increments arising from community growth generally.

Rental Leasehold Tenure in Relation to Residential Land

7.3 Because this issue is usually discussed principally in relation to the equitable effects of different forms of land tenure, we shall be concerned especially with equitable aspects of the proposal that land tenure arrangements in the Australian Capital Territory, the Northern Territory and the new metropolitan and regional growth centres should be

based on a leasehold system in which provision is made for rents to be adjusted regularly in accordance with changes in the market value of land. The problem is literally one of the equity which landholders are to have in the value of their land. Because equitable considerations differ as between residential and non-residential land, we shall distinguish

between these types of land use in examining the arguments for different forms o f land tenure. Finally, it is necessary to distinguish between land which is made available, on either a leasehold or fee simple basis, for owner-occupied housing and land which is made available for rental housing. In particular, it is necessary to ensure that any advantages which are given, through the land tenure system, to owner occupiers are also given to tenants who, in most cases, are likely to come from the lowest income groups in the

community.

7.4 The use of land for residential purposes differs from its use for other purposes in that it represents a form of final consumption by households. In the other cases, it is in the nature o f an intermediate good, or a means of producing goods and services - such as food and clothing - which will be sold for later consumption. Shelter is a basic human

need and the community, as well as the individual, has an interest in ensuring that citizens are accommodated in comfort, security and privacy.

7.5 The increase in land values that is associated with urban growth is only partly due to the general locational advantages which established properties gain over properties on the fringes of development as a result o f population growth. It may also be a consequence of public investment, or of the efforts of individual landholders (or local communities) to

improve their neighbourhoods, or of inflation generally.

7.6 There are strong arguments for concluding that changes in land values resulting from

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public investment should in principle accrue to the public sector, whether the investment takes the form of services to particular sites (such as water supply and sewerage) or major investment projects (such as freeways or public transport projects) which have the effect of conferring substantial locational advantages on particular sites. The identifi­ cation of value changes is likely to be difficult but the techniques which we proposed in Chapter V (public acquisition or development orders which reserve unearned value increments for the Crown) should, we believe, facilitate the accomplishment of the foregoing principles.

7.7 Properties in a particular area may also increase in value because of the actions of local residents in improving their houses, landscaping and caring for their gardens and generally manifesting a pride of possession. Even a co-operative community spirit in a

locality may contribute to the desirability of properties in that locality and thereby enhance their value. We do not consider increases in property values arising from the actions o f residents to be unearned increments from the point of view of the residents of that locality and we therefore do not believe that society as a whole necessarily has a stake in those increases. A tax on gains from this source would in effect tax pride in home ownership and community co-operation and would be especially difficult to justify in the absence of taxation on other forms o f capital gains.

7.8 Finally, the increase in land values may be merely one aspect of a general inflationary increase in prices and, as such, more apparent than real insofar as any. increase in the wealth or purchasing power of landowners is concerned. The case in equity for appropriating increases in land values which are associated with general price increases is

by no means clear and is one we do not accept. Historical knowledge of and personal experience with inflation is a widespread phenomenon. Not only is the purchase of a home seen by many Australians as one of the best means o f hedging against inflation; for most it is the only means. Although a home owner’s equity increases as land values and prices increase, any gains in terms of higher monetary values cannot be realised by him unless his property is sold; even then the proceeds will normally be required to re-establish his home in a new location at current prices. Because any increases in land values

incorporate changes in the value of money as well as gains in real wealth, we are of the view that, even in the absence of the other considerations to be discussed below, any public participation in the value increments resulting from growth and inflation must have regard to the effects of inflation on the money values of home owners’ investment in their land.

7.9 We consider that it would be unjust to appropriate for the public sector the money gains revealed by the arithmetical differences between the values of residential land at two points of time, because such differences necessarily include factors representing the depreciation of the value o f money"and the efforts of individual citizens to improve their homes and neighbourhoods. But we also believe that there are more general arguments

against public appropriation of value increments accruing to residential land. We now proceed to discuss these arguments in the context of the proposals, which were made by several submissions and witnesses, to use a rental leasehold system of land tenure as a means of appropriating the value increments.

7.10 Although the case for charging economic rents as a means of appropriating unearned increments is itself based on equity, we find the following arguments completely convincing as reasons why such action would, in practice, be inequitable in the senses in which we discussed the equity objectives of land policy in Paragraphs 2.5 and 2.7. In particular, we believe that the adoption of a leasehold rental system would increase 50

inequalities between rich and poor, and fail to treat similarly persons in similar circumstances, by: (a) reacting adversely on the distribution of national wealth; (b) absorbing a higher proportion of household income at the lower end of the

income scale and imposing insecurity on all home owners on relatively low incomes; (c) creating comparative injustice and insecurity for particular classes of income recipients, especially wage and salary earners, and for particular age groups,

notably those in or approaching retirement; (d) discriminating against households taking up land in the new growth centres and in favour of those who already own land in existing cities; and (e) providing opportunities for political decisions which will have the effect both

of giving windfall gains to particular groups of landholders and of destroying the stability of the land tenure system.

7.11 In the first place, the high incidence of home ownership in this country has been the chief factor responsible for the fact that Australia has one of the most even distributions of national wealth in the world. Any participation by the public sector in increasing residential property values would run counter to the objective of achieving a more

equitable distribution of the national wealth. This is because, as we have already indicated, home ownership is one of the few forms of investment available to low income groups as a means of preserving the real value of their financial resources. Houses depreciate in value through wear and tear even though, simultaneously, their market values may change as a result of changes in the value of money. For most Australians,

this leaves only the land component of their homes as a hedge against inflation.

7.12 Secondly, because land rents necessarily absorb a much higher proportion of household incomes at the lower end of the income scale, a rental leasehold system in which rents were regularly re-appraised would impose a much greater relative burden on those households. The average family unit is in no position to absorb increases in rent

and, unlike business enterprises, it cannot pass on such increases through higher prices. The inevitable consequence of frequent rental re-appraisals would be to impart a grave sense of insecurity to the lives of all home owners on relatively low incomes. But rental adjustments would need to be frequent in order to achieve the objective of appropriating

the value increments; long delays between rental revisions would not only result in a failure to capture unearned increments during the intervening intervals but, as Canberra experience has shown, would create problems of equity as between different lessees which must ultimately threaten the stability of the rental leasehold system.

7.13 The insecurity which is likely to be generated by frequent rental adjustments is of particular significance to households in which wage and salary earners have ceased active work, for example because of unemployment, invalidity or retirement. Recipients of other incomes are likely to have the value of their incomes maintained in real terms even

after they reach retirement age, but retired wage and salary earners would be faced with the prospect o f having to meet escalating rents out of fixed money incomes. For many this could mean a danger that, just as they were looking forward to secure retirement, they would be forced out of their homes by excessive rents. But the hardship would not necessarily rest there because the equity in their properties would be restricted to the

depreciated value of their houses, diminishing assets which could not by themselves constitute sufficient reserves to provide security in old age. The third major objection to a rental leasehold system is thus based on its comparative injustice to particular classes of 51

income recipients, especially wage and salary earners, and to particular age groups, notably those in or approaching retirement.

7.14 In advocating economic rents under a leasehold system, most submissions and witnesses recognised that hardship would probably result to particular sections of the community. But it was argued that rents were not likely to escalate sharply and that, even if they did, hardship could be alleviated by the granting of appropriate concessions such as deferment or waiver of rent. In the light of recent history, the likelihood of continuing inflation and the inevitability o f population growth during the remaining years of this century, we have no confidence in any predictions that land values (and therefore land rents) are likely to be stabilised. The suggestion that hardship be relieved through rental concessions we regard as unacceptable on both equity and administrative grounds. A system of land tenure which both creates hardship for those least able to afford it and at the same time seeks to alleviate the hardship through charitable concessions has, we believe, little to commend it and would not be acceptable to the Australian community.

7.15 Some proponents of a rental system of leasehold tenure argued that it is more important to provide financial assistance to young married couples when they establish their homes than to make provision for those who have readied the end of their working lives, and the substitution of rents for the payment o f capital sums would be an effective way of achieving the first objective. We emphasise that we do not regard justice for the young and for the old as mutually exclusive objectives and believe that, if our other

recommendations are adopted, young married couples should be able to acquire residential land on reasonable terms without the need to resort to rental leasing.

7.16 The fourth argument against the introduction o f a land tenure system in which economic rents are charged is one which has particular significance for the new growth centres on which, along with the Australian Capital Territory and the Northern Territory, we have been asked to report. This is the geographical discrimination which it would introduce into land tenure arrangements, by requiring those in the new centres of urban growth to suffer financial disadvantages (in effect, to pay taxes on the betterment of their properties) which are not also borne by landowners in existing metropolitan areas. Under circumstances in which governments are seeking to encourage decentralisation by making the new growth centres relatively more attractive than existing cities, such discrimination would be perverse in the extreme. We can see no case for requiring households in the new centres o f urban growth to pay subsidies, through their rents, to

the general body o f taxpayers. If governments sought, as a matter of political philosophy, to tax unearned increments resulting from all community growth, it would be more equitable to do so by means of land taxes than through the land tenure system. In this way the unfair geographical discrimination would be avoided, although the other disadvantages we have described would remain.

7.17 In one submission it was argued that prices paid for fee simple land reflect expected unearned value increments so that, in effect, the purchasers of estates in fee simple are not in any case able to gain the benefits of the value increments for themselves. If this were true it would mean that the payment of economic rents was not subject to the disadvantage of geographical discrimination. This is because an equivalent dis­ advantage would attach to purchasers o f land in existing cities at the times they made their capital payments. We do not accept this argument in relation to residential land, partly because any such expectations are themselves subject to much uncertainty and

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will presumably be heavily discounted, and partly because the prices which most people (for example, young married couples seeking land for their first homes) can afford to bid for land are necessarily related to their current incomes and not to the higher incomes they may be earning at the times the value increments are expected to accrue.

7.18 The final reason for believing that a residential rental leasehold system is likely to be inequitable is related to the political sensitivity and hence the stability o f such a system. We believe that in the long run it would prove to be politically inexpedient to

exact full economic rents from residential land. So far as we know, no government has ever succeeded in doing so consistently over a long period. The reason is simply that a lease is a contract between two parties, and if one of the parties is the government (or a government agency) and the other the voter who determines whether the government

stays in office, the system is inherently unstable. Even if a rental leasehold system were to be introduced and economic rents charged by a government, it would be tantamount to inviting the opposition to promise to change the system in order to win votes and help unseat the government at the next election. If the system were changed in this way, the abolition of rents would result in windfall gains which would be capitalised in the land values of all existing landholders, who would then benefit at the expense of future

landholders. ,

7.19 It is more likely, however, that economic rents will not be charged by governments. The residents o f Canberra, which seems to be the only city in Australia where there is a strong attachment to land rents, have never paid economic rents over a period. When faced with the need to adjust rents in accordance with the twenty-year re-appraisals that were required under the old Canberra leasehold system, the Government of the day

avoided the issue by reducing land rents to a nominal sum. The resulting capital gains to existing lessees were estimated by some to be as high as $100 million. The experience of Canberra thus suggests that a rental leasehold system will only survive if it generates

progressively increasing benefits to lessees at the expense of the Australian community. Far from serving the public interest iri the way which the proponents of leasehold tenure claim, as a result of political decisions rental leasehold systems may be expected to subsidise lessees at the expense of taxpayers.

7.20 Overseas experience supports the conclusion that governments are unlikely to charge economic rents, although conditions in such countries are usually very different from those in Australia, partly because o f the much lower incidence of home ownership in the countries concerned, partly because o f the interposition of intermediaries (such as

churches, property trusts, insurance companies and municipalities) between governments and tenants, and partly because leases usually cover land and buildings and not merely land. Even so, the level of rents is often held artificially low by governments by means of subsidies or rent controls.

7.21 Other arguments were advanced in submissions and by witnesses against the use of economic rents based on market values. One drew attention to the imperfections in the land market and the fact that, when assessed by reference to the high prices caused by insufficient supplies of land coming on to the market, the market value of all existing land would be artificially inflated. Development Corporations would then be in a position to

reap substantial gains (through higher rentals in the whole of their areas) as a direct consequence of their own failure to provide land on a scale commensurate with needs. In order to prevent this situation from arising, it would be necessary either to ensure that shortages of serviced land did not occur or to relate rental adjustments to changes in costs

of providing land. A similar kind of problem results from the difficulty of establishing market values for the purpose of determining rents, when all land is leased and there is no freehold land to use as a valuation base. The problem arises in a more acute form in the case of non-residential land, and we suggest below a different basis of rent determination which relates rents to the income-earning capacity o f properties. But the problems we have discussed in this paragraph reinforce our view that an effective system of rental leasehold for residential properties is unlikely to be achieved.

7.22 We conclude that a rental leasehold system is likely to be both inequitable and politically impracticable for residential land, and that the interests of equity and stability in land tenure arrangements are most likely to be served by a system of land grants requiring payment of capital sums when land is originally allocated. Provision could be made for the capital sums to be paid by instalments over terms of years at rates of interest comparable with those used for housing loans.

Grants in Fee Simple for Residential Land

7.23 If, as we recommend, the case for economic rents is rejected and the case for the reservation of development rights is accepted, the question arises whether there is any need for residential land to be made available for a limited term o f yean. We can see no justification for restricting the period o f residential tenure provided that development

rights are retained by the Crown, but we believe that the desire by home owners for security of tenure provides a strong positive reason for not limiting the period of tenure. This means that, in those places where residential land continues to be made available on leasehold tenure (as we assume will be the case in Canberra) the leases should be perpetual leases (or, more accurately in the light of the possibility of resumption for re-development, leases of indefinite duration). In terms of the characteristics we have now specified as desirable for purposes of residential tenure, residential leases would then be purchased for capital premiums (which might be payable by instalments over a period); they would not be subject to rent; they would be for an indefinite term; and they would be restricted in

the use o f land to single dwelling houses.

7.24 On the assumption that these specifications for leasehold tenure are virtually identical with the characteristics of fee simple titles with development rights removed, it is necessary to ask whether there are any other factors which warrant the continuing use of leasehold forms of residential tenure? One factor which obviously needs to be considered is the contribution which leasehold tenure may make to the planning and control of initial development and subsequent re-development. It was argued before us that development controls are greatly facilitated by the leasehold system.

7.25 Effective control over initial urban development depends primarily on public acquisition of rural land prior to its conversion for residential purposes. The tenure system is not of any significance in relation to public acquisition, although leasehold tenure does provide an effective means for stipulating and enforcing the form of land use (through the purpose clause) and the time within which development must take place. But evidence placed before the Commission shows that this desirable objective may be (and is being) achieved in Australia in ways which do not involve continuing leasehold tenure when the development phase has been completed.

7.26 Leasehold tenure would give Development Corporations greater control over residential properties subsequent to the development period, but on balance we believe that such control would conflict with the rights of individual landholders for security,

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peaceful enjoyment and privacy in the use of their land. The rights of neighbours may be protected in other ways.

7.27 Given the strong psychological attachment which most people have to so-called freehold land and the predominance o f this form o f tenure in existing cities, the Commission has concluded that compelling reasons would need to be advanced to justify a change to residential leasehold tenure in the new centres of urban growth. In the light

of the foregoing discussion, it will be dear that we are not persuaded that such reasons exist. We therefore recommend that all grants of residential land in the new metropolitan and regional growth centres be made on the basis of fee simple title, subject to the specification of the purpose for which the land is to be used, the enforcement of

improvement conditions prior to the issue of title and the reservation of development rights. If general legislation is enacted, as we have recommended in Chapter IV, to vest all future development rights in the Crown, the form of tenure in the new dries will be the same as that in existing dries and grants may continue to be described as grants in fee

simple. Until sudi time as general legislation reserving development rights is passed in a State, however, we recommend that grants o f land for residential purposes, under which development rights are reserved, be issued under a new title, such as ‘residential grant’ or ‘residential freehold’. These would then be the form of tenure adopted in the new growth

centres, and such titles would become grants in fee ample when devdopment rights were removed from all land held in fee simple in other parts o f the State.

Residential Land for Tenant-occupied Housing

7.28 Tenant-occupied housing comprises permanently or temporarily rented single dwellings, flats, strata title units, guest houses, boarding houses and holiday housing We have considered the question whether land made available for rental housing should be treated differently from land for owner-occupied housing insofar as land tenure

arrangements are concerned. We have come to the conclusion that there should be no distinction and that land should be made available for tenant-occupied housing o f the relevant character (that is, single dwellings, flats, etc.), on the basis of fee simple grants with development rights removed. The need for residential accommodation of all kinds is likely to exceed its availability for a long time to come. As the provision of an adequate

variety and quantity of housing is a major goal of urban land policy, any impediment to the production o f residential accommodation should be avoided. It goes without saying that the prices charged for land designated for rental houang of the relevant character should reflect the permitted intensity of use, in order to ensure that all development

value increments are retained by the Crown.

7.29 There are also strong arguments in equity for treating residential tenants in the same way as owner occupiers. Site rent adjustments reflecting unearned value increments arising from growth would obviously be passed on to the tenants of rental residential accommodation; they would thereby suffer a disadvantage relative to those who owned

their own dwellings. In many cases tenants are likely to come from the lowest income groups in the community. It will, of course, be necessary to ensure that tenants benefit from the tenure arrangements proposed for tenant-occupied housing. In the case of existing rental accommodation, excessive rents or speculation can be controlled throu^i

rents charged for government housing and rent controls. In the case of future develop­ ments, rental conditions can be imposed on the disposal of the land or on the granting of development rights.

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Land Used for Commercial Purposes

7.30 Commercial premises comprise office buildings, banks, warehouses, retail stores, transport depots, theatres, hotels, motels and other property used for purposes of supplying commercial, administrative or personal services. Business enterprises in this category serve the residents o f a particular community. The premises they use are a means

to an end, not (as in housing) an end in themselves. Nevertheless, commercial enterprises often express a preference, based on both psychological and financial considerations, for fee simple rather than leasehold tenure. But leasehold tenure has been adopted by a significant number of commercial enterprises, especially those whose future growth and security seem to be assured and whose profitability is greater than the rate of return that can be achieved on real property. Although the prospect o f future capital gains from unearned value increments is very real, the quantum and timing o f such gains are usually uncertain. It therefore appears to the Commission that any preference for fee simple title on the part of commercial enterprises is a question o f the degree of confidence in the future, rather than one o f logic or principle.

7.31 The history of Canberra suggests that the low level of private investment in its early years was the result o f lack of confidence in the city’s future and was not attributable to doubts about the leasehold system. As confidence grew, the level of investment grew. We believe that it is essential, if the leasehold system is to be accepted by commercial enterprises in a new growth centre, that the public sector take such actions as will generate confidence in the growth of that centre. Private investment will not take place, even under a fee simple system, unless there is a general belief that the area chosen for development offers a secure investment opportunity.

7.32 We believe that business enterprises accept the fact that the cost of acquiring rights over land use, involving either capital payments or annual site rent charges, is a cost of doing business. It may reasonably be accepted that commercial undertakings have a far greater understanding of leasehold tenure than most other users. While they may be expected to be attracted by the prospect of capital gains from increased land values, they are more likely to accept the obligation to pay economic rents at all times. Except for the need to ensure comparability between the new growth centres and existing cities (which is discussed below), the equity arguments against rental leasehold tenure (which were listed in Paragraph 7.10) do not apply to non-residential property. Leasehold tenure also has advantages in relation to controlling development, use and re-development by commercial enterprises. We therefore consider that the ownership of all land to be

used for commercial purposes should be retained by Development Corporations and leased at economic rents.

Economic Rents on Commercial Leasehold Properties

7.33 In determining economic rents on properties which they lease to commercial enterprises, Development Corporations will initially have regard to the site value of the land in its designated use. Site value differs from unimproved value (which has been used for purposes of rental determination under some leasehold systems) by reflecting the value of land in its existing undeveloped state and not in its original state. The Corporations will need to abandon the notion that rental adjustments over time must reflect changes in either the site value or the unimproved value o f properties. This is because the character of the properties changes as soon as improvements have been erected on them under leasehold agreements. Rental reviews based on changes in site or

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unimproved value assume that the land is in an undeveloped state, but both the physical presence of improvements on the site and the existence of a binding legal contract negate the assumption. Evidence placed before the Commission indicated that the use o f site or unimproved values for purposes of rental re-appraisals progressively places lessees at a

disadvantage over the life o f the leases. This is because th e value of sites increases with urban growth while the value of buildings diminishes as a result of wear and tear and obsolescence. The income-earning capacity (or market rental value) of properties may also be expected to decline as they become older, with the result that a lessor charging

rents based on site or unimproved value gains a steadily increasing share of a diminishing income stream. This is patently inequitable to lessees, who unlike the owners of estates in fee simple are not at liberty to demolish their buildings or restore the sites to an undeveloped state.

7.34 It would be equally inequitable for rents to remain fixed in money terms through­ out the periods o f the lease agreements, because rents determined by reference to site or unimproved values at the beginning of the lease terms would become progressively inadequate from the viewpoint of lessors. It needs to be recognised that the interests of

lessors and lessees are indissolubly linked during the periods of the lease agreements and that rents based on site or unimproved values fail to recognise these common interests. Once improvements have been erected it is impossible to separate the value of improve­ ments from the value of sites for purposes of rental determination.

7.35 The Commission was therefore attracted by the suggestion which was made, in one or two submissions, for treating a commercial lease as a joint venture, in which the mutual interests of lessor and lessee during the lease term would be recognised by arrangements to share the income represented by the rental value of the whole property (land and buildings combined).

7.36 In the light of this concept, the total rental income could be seen as providing a return to the lessor on the capital invested in the land and to the lessee on the investment in improvements. The joint venture relationship would continue for the duration o f the lease, but after development had been completed the market rental value of the property

would be affected by economic factors such as inflation or recession and the growth of the community as well as by the income potential of the property itself. Until the joint venture relationship of lessor and lessee was terminated at the end of the lease term or by mutual agreement, they would have a common interest in the full rental value o f the

property as it changed over time. We therefore believe that the determination of economic site rents throughout the period of the lease should reflect this relationship.

7.37 Specifically what we propose is that the site (or ground) rent of the land should be determined at the beginning of the lease by auction, tender or negotiation in such a way as to ensure that at that time it represents the market rental value of the land in its undeveloped state. The rent so determined will represent an agreed annual payment by

the lessee to the Development Corporation for the right to use the land for the designated purpose. After the lease agreement is signed, the lessee will proceed to construct the buildings which will be used to produce income. The land and buildings together will thus contribute to a market rental value, which we suggest should be distributed between

the Development Corporation (as lessor) and lessee in proportion to their relative investment contributions. The contribution by the lessor will be measured by the site rent the lessee has offered for the use of the land. The lessee’s contribution will be measured by the total market rental value less the site rent; this is the amount that may

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reasonably be attributed to the building investment. If it is accepted that the lease agreement and the existence of the building circumscribe the use of the land until the expiration o f the lease, it follows that the lessor and the lessee have continuing interests in the property proportional to the ratio o f (a) the initial site rent to (b) the initial market rental value net o f the initial site rent.

Rental Reviews

7.38 We consider that these proportions should be used throughout the period of the lease to determine the share which each party to the lease agreement should obtain of the changing market rental value. The view has often been expressed that there can be only one rent for a property and that, under leasehold tenure, the division of that rent between the landlord and the owner of the building must be arbitrary. It will be clear from the foregoing that we believe that the joint venture concept provides a logical basis for distributing market rental value throughout the period of lease. All that is necessary is to give the lessor a fixed share of the rental value at all times, the share being determined by the proportion of the initial site rent to the initial market rental value.

7.39 We have it in mind that, for purposes of rental reviews, the market rental value should be re-assessed as frequently as is necessary to reflect material changes in value. It must be emphasised that it is the market rental value which ought to be shared between the lessor and lessee, and not necessarily the rents actually received. It is appropriate that the Development Corporation as lessor should share the risks associated with the land use specified under the lease agreement, but not that it should suffer from inefficient property management on the part of the lessee. For the purpose we have in mind market rental value may be defined as gross rental value before charging depreciation on fixed improvements. These matters are still under consideration and will be discussed in a later report.

7.40 The basis o f rental review which we have proposed has the advantage that it will ensure a fair distribution of the risks which are attendant on development in new centres. This is of particular significance in the light of the need to make investment in those areas attractive to the private sector. By making it unnecessary for commercial enterprises to discount risks so heavily, the proposed rental review formula is also likely in the long run to provide a higher return to the Development Corporations, as the following analysis shows.

7.41 If it appears that the basis of rental review shifts future risk to the lessee, it will reduce the initial site rent offered. A rental review formula which promises only upward revision of rents will have the same effect. If subsequent reality (in terms of profitability) exceeds the lessee’s expectations, he will benefit to a greater extent than the lessor. If, on the other hand, the formula shifts risks to the Development Corporation, then the initial site rent offered will be higher. If subsequent reality exceeds the lessee’s expectations, the lessor will benefit to a greater extent than the lessee. If the mutuality of interest between lessor and lessee is accepted, it follows that the rental review formula should not attempt to shift risk in either direction. We believe that the rental review formula should ensure that, if the lessee’s original expectations are exceeded by reality, the lessor will share the benefit. If the reverse situation subsequently occurs, the Development Corporation should bear some share o f the loss.

7.42 We believe that the expression of this mutual risk-taking philosophy in the rental review formula will benefit Development Corporations by encouraging higher bids than

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would otherwise occur. Lessees will be able to bid higher initial site rents because their risks will be minimised and their rental obligations will be reduced if reality does not measure up to their initial expectations. The equity of the proposed rental review formula is underlined by the fact that the Development Corporations themselves will have the

major responsibility for the success or failure of the new growth centres, and thus for the extent to which expectations of lessees are, or are not, realised.

Lease Premiums

7.43 It is necessary to consider whether, in the case of commercial leases, it is appropriate for premiums or capital sums to be paid. The prevailing practice in the Australian Capital Territory is for a premium "to be paid but no rent.

7.44 Where a premium only is paid and no site rent obligations exist, the premium represents the value to the lessee of the right to use the land for the lease term. If the market value of the property increases during the lease term, the benefit will accrue to the lessee; the converse will be the case if the market value falls. Where a premium is paid

and there is also an obligation to pay a fixed site rent, the sum of the premium and the capitalised value of the defined rental payments represents the value to the lessee of the right to use the land for the lease term. Again, if the market value of the property

increases during the lease term, the benefit will accme to the lessee and the reverse also applies. Where a premium is paid and site rent obligations exist which include rental review provisions, the sum of the premium and the capitalised value of the future rental payments (as estimated by the lessee) represents the value to the lessee of the right to use

the land for the lease term. If the market value o f the property increases during the lease term, only the lessee will benefit from tire premium component; the reverse applies in the event of a fall in market value.

7.45 Acceptance by the lessor of premium payments therefore produces inescapable divergences in the lessor’s and lessee’s interests during the lease term. This completely ignores the fact that the initial development has fixed their financial interdependence for the period of the lease term. We are therefore opposed to the practice of requiring

premiums to be paid for commercial leases, because such a practice works against the mutuality of interest expressed in the lease document.

7.46 It is recognised that the substitution of rental payments for cash premiums will pose a financial problem for Development Corporations. In the light of current practice and recognising this difficulty, we believe that it will be possible for Development Corporations

to require payment of the first five or ten years’ site rent in advance (subject to adjustment in the light of subsequent rental reviews). Many variations to this approach are possible, irrespective of the particular method of allocation of land. But they should not involve any departure from the principle of fixing initial site rents and reviewing these

rents at frequent intervals by reference to the formula we have proposed.

Building Renovations and Re-development

7.47 The proposals which have been made will make it necessary for Development Corporations to develop expertise in estate management, but we believe that the rental review provisions will reduce rather than increase the problems of leasehold administra­ tion. This is because it is easier to establish market rental value for a whole property than to identify the site or unimproved value of a fully improved site which is being used for a

restricted purpose under the lease agreement. This is more so when there are no

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comparable sales o f freehold land from which the site or unimproved value can be deduced.

7.48 It will be clear that the suggested method of determining economic site rents is a logical consequence of the fact that, under typical forms of lease agreements, a lessee has no right to re-develop the site without negotiating a new lease. The rental review provisions will help to ensure that re-development takes place only when it is economically justified in terms of efficient land use. We have it in mind that Development Corporations

will stand ready to negotiate new leases with lessees who propose renovation or re­ modelling o f buildings before the expiration of their leases. Lessees will no doubt initiate such action when it promises to yield sufficiently high rates of return (as measured by the discounted value of the additional income which is expected to be generated and of the additional investment).

7.49 In the case o f re-development for a different land use or intensity, Development Corporations will be able to proceed in a manner consistent with the procedure described in Chapter V. This will involve terminating the leases concerned and negotiating new leases in which the initial site rent will be determined by reference to the value o f the land in its new use; subsequent rental reviews will proceed in the manner described in this

chapter, by applying to the current rental value the fixed proportion represented by the initial site rent to the initial rental value of the new development.

Terms o f Leases

7.50 If our proposals for rental review and re-development are adopted, the term of the lease becomes a matter of secondary importance. There was general agreement among witnesses that lease terms should be related to the expected economic life of buildings and that they should have regard to expectations about future changes in land use or intensity. It was also considered that lessees should normally have the right o f renewal and that they should be paid compensation for the residual value of improvements.

Finally, there was agreement that, in order to prevent degradation o f properties towards the end o f the lease terms, lessors and lessees should negotiate for renewal well in advance of expiration dates. Where resumption or negotiation is necessary for purposes of re­ development, Development Corporations should give lessees the maximum possible notice of their intentions. Having regard to these considerations and to the desirability of periodical reviews o f lease conditions, we believe that commercial leases should be terminating leases, subject to payment of compensation for improvements on termination of leases and a normal right of renewal. Obviously some leases will need to be for short periods, for example, where future re-development is already planned and leases are

offered for temporary use.

Attracting Commercial Enterprises to the New Growth Centres

7.51 It will be necessary to ensure that the system of rental leaseholds which we have proposed for commercial enterprises does not discriminate against development in the new growth centres. Some submissions and witnesses argued that fee simple tenure was necessary in the new cities even for non-residential land, in order that commercial enterprises might be attracted there by the prospect of capital gains arising from unearned value increments as the cities develop.

7.52 It will be clear from our earlier discussion that we believe that Development Corporations will be more successful in attracting firms to the new urban areas if they reduce risk and uncertainty than if they merely provide opportunities for capital gains

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which may never eventuate. Under a leasehold system the Development Corporations will be assuming most of the risks o f capital investment in land in the early stages of development especially if, as is possible under our proposals, site rents are less than sufficient to amortise the costs of acquiring and servicing the land. The level of site rents

will reflect lessees’ expectations about the profitability of operations in the new centres and it may be some years before rental reviews make it possible for costs to be fully recouped. The Development Corporations will thus need to evaluate their investment in the new areas in terms of long-term. prospects, and if the experience of Canberra and other new cities is any guide they will almost certainly need to commission building

construction on a significant scale in order to provide rental building accommodation for retail stores, warehouses, office buildings, factories and of course housing. To the extent that this eliminates the need for 'fixed capital investment by the private sector it will further reduce risks to the enterprises concerned.

7.53 The relative attractiveness of the growth centres may be improved not only by providing leasehold incentives in the new areas but also by removing some o f the advantages which accrue to fee simple tenure in existing cities. During recent years, taxation laws have made capital investment on leasehold land relatively unattractive.

Prior to 1964, deductions were allowed for income tax purposes, under certain conditions, in respect of depreciation on improvements of an income-producing character erected on leasehold land. This right was taken away by legislation in 1964, with the result that depreciation cannot be claimed by a lessee in respect o f improvements erected on land leased after that date. More recently, the Commissioner for Taxation has interpreted the

new legislation to deny any deductibility for plant and equipment included as fixtures in income-producing buildings erected on leasehold land, on the ground that these assets are not owned by the lessee although he has paid for them. This is a positive discrimination against leasehold tenure which should be removed; we believe that depreciation should be

allowed as a deduction for income tax purposes on all future improvements, plant and equipment erected on land leased by the Crown for all categories of use.

7.54 In addition to the provisions designed to provide incentives for Crown leasehold tenure, opportunities should be provided for voluntary conversion of existing non- residential land from fee simple tenure to Crown leasehold. Voluntary conversion could be encouraged in defined areas by offering taxation concessions such as: (a) amortisation

of both existing and future improvements on Crown leasehold for income tax purposes; and (b) exemption of Crown leaseholds from land tax. If the incentives are made attractive enough, landholders may be expected progressively to take advantage of the opportunity to convert.

7.55 In order to facilitate controls over urban land use, to appropriate a share of future unearned value increments on commercial property for the Crown and to achieve uniformity of land tenure for commercial purposes throughout Australia, we believe that governments should give consideration to the possibility of requiring commercial land in existing cities to be converted to leasehold when it is re-developed. This could be

achieved by making it a condition, in all development orders issued by Development Corporations, that fee simple titles be exchanged for leasehold titles. It would be necessary to establish principles of compensation but the need for cash outlays by governments could be avoided by offsetting compensation payments against proceeds

from development rights and/or by deferring the introduction of rental payments.

7.56 A number of related problems are still being considered by the Commission, but we

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believe that suitable methods are available to achieve the adoption and acceptance of leasehold tenure for all land used for commercial purposes.

Land Used for Industrial Purposes

7.57 Industrial premises comprise all property used for manufacturing purposes. Whilst much of what has been said about land for commercial purposes applies also to industrial land, there are some vital differences. First, locational factors are not so important in establishing the value o f most industrial land, so that the value of the goods which are produced on manufacturing premises reflects land costs to only a minor degree. Secondly, the absence of a substantial rental market for industrial land makes it difficult to establish any initial site or unimproved value. Finally, the need for public control over manu­ facturing land me is much more urgent than for other forms of land use, because of the undesirable effects o f industrial pollution on the quality of urban life. Despite these differences, the Commission received relatively few submissions dealing with the problems of industrial land tenure.

Pollution Control

7.58 The present system of fee simple tenure for industrial land requires constant revisions to legislation and statutory regulations in order to provide for unforeseen circumstances. A carefully prepared lease would permit more flexible, prompt and effective controls to be applied to the prevention or restraint of undesirable activities. It is obvious that some industrial land uses, permitted under existing legislation and administrative arrangements, produce environmentally unacceptable results. These problems are likely to increase with continued urban growth.

7.59 Overseas and Australian experience provides clear evidence that the pursuit of purely economic objectives leads to progressive deterioration of the physical environment. Measures then have to be introduced with the object of preventing further deterioration. Such measures, which take the form of legislation to control land despoliation and air, water, waste or noise pollution, are remedial in character and seek primarily to alleviate or cure existing unsatisfactory conditions. The controls are considered by many to be restrictions on inherent freedoms and provoke opposition based on the belief that freehold tenure permits unrestricted use of land. The processes of preparing new legislation, setting up administrative machinery, initiating checking devices and imposing punitive sanctions are usually slow, unwieldy and ineffective.

7.60 It would therefore seem more realistic to propose solutions which envisage prevention rather than cure. The powers of a public landowner to control the uses to which leased land is initially or subsequently put are inherently much stronger and much more effective than present public powers in relation to land under fee simple tenure.

Too often, individual public authorities grant development approvals to industrial undertakings without due regard to the implications of their decisions. Only later do specialist government agencies become aware of the problems which have been created. The remedial costs then usually have to be borne by the community because the industrial undertakings, public or private, have broken no law. This leads clearly to the conclusion that public ownership of industrial land will be more effective in protecting the community’s interest in its environment than the existing system of private ownership under estates in fee simple. It is therefore our view that social equity and the interests of the community can best be served by the adoption of leasehold tenure for industrial land disposed o f by Development Corporations. As in the case of commercial land, the

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principle of public ownership should be extended to existing industrial land by all practicable means.

Charges for the Use of Industrial Leasehold Land

7.61 There is a problem in determining the charges for the use of land for industrial purposes. While a readily available market rental value exists for commercial premises, there is no comparable yardstick for most manufacturing properties because they are unique in the nature o f their operations and subject to rapid changes in technology.

Properties used for manufacturing purposes are less directly involved in the production of income than properties which have significant locational advantages.

7.62 We have come to the view that the method of charging for the use of industrial land should reflect the paramount need to protect the community from environmental deterioration and abuse. Provided this objective is achieved and other arrangements are made to enable the community to recoup the value of land made available for industrial purposes, it may not be appropriate to charge continuing site rents for such land. It

seems to us that the value of land made available for industrial purposes will normally approximate the cost to the Development Corporations of acquiring and servicing the land. Where particular land has locational advantages or is used partly for industrial and partly for commercial or other profitable purposes, the price charged should reflect these

factors and a variable rent might be reserved.

7.63 We therefore have it in mind that the Development Corporations will normally dispose o f industrial land on the basis of capital premiums determined by auction, tender or negotiation at prices which will not reflect any general shortage in the supply of such

land. This method of disposal will permit charges below cost where this is necessary to attract manufacturing enterprises to new growth centres. It will also enable Development Corporations to negotiate separately with undertakings that cannot be clearly distin­ guished as either commercial or industrial in terms of our definitions.

7.64 Under the system of leasehold tenure for industrial uses of land which we propose, there should be reserved to the Development Corporation adequate and flexible controls over the manufacturing activities which are carried out. These controls should include powers to deal with occurrences unforeseen at the time the leases were granted but

detrimental to the public interest. Industrial leases should be for fixed terms and the right to transfer leases should be restricted by giving Development Corporations first right of refusal.

Land Used for Community Purposes

7.65 This category comprises premises used by private non-profit organisations, such as private schools, churches, clubs, community centres and charitable organisations. Land allocated for any of these purposes should be on a leasehold basis. Charges should not exceed the estimated cost of making serviced land available. Where the non-profit

organisations are conducted for the benefit of small groups, it would be appropriate to require the payment of capital premiums intended to cover the costs of providing and servicing the land, perhaps with provision for payment by instalments. The leases should be drawn up in such a way as to permit lessees to obtain building finance on reasonable

terms. Where the non-profit organisations benefit the community generally, nominal rents only should be charged. Given the goal of providing the best community facilities at the lowest possible cost, it would be inappropriate to exact economic rents from such organisations.

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7.66 The leases should normally be granted for a term of years approximating the expected life of the improvements. In the event of a contemplated transfer of a lease, the Development Corporation should have first right of refusal.

Land Used for Public Purposes

7.67 Much of the public criticism o f the misuse of privately owned land is equally applicable to land held by government agencies and statutory corporations. Many of these bodies are not bound by the numerous statutes in force in the several States and Territories, so that a consequent conflict and fragmentation of decision-making ensues. The terms on which such bodies acquire and hold land will require further consideration and definition.

7.68 Subject to constitutional limitations, the development controls which we have proposed elsewhere should apply to all land held by public authorities. In addition, the acquisition powers of such authorities should be transferred to Land Commissions or Development Corporations. This should facilitate the making o f more enlightened land use decisions. It should also emphasise the accountability and responsibility of public authorities in relation to land use.

Summary of Recommendations

7.69 We conclude by summarising our recommendations in respect of land tenure arrangements: (a) Land disposed o f fo r residential purposes should be granted on the basis o f fee simple titles subject to improvement conditions and the reservation o f develop­

ment rights. Until such time as legislation has been enacted to reserve development rights in all existing estates in fee simple, grants in which development rights have been reserved should be issued under new titles, suitably designated by a term such as ‘residential grants’ or ‘residential freeholds'. I f and when development rights to all land have been vested in the

Crown, grants in the new growth centres will be similar to those in existing cities and, like the latter, might then be called grants in fee simple. Residential grants should be purchased by capital sums which might be paid over a term o f years by instalments at rates o f interest comparable with those used for housing loans. (b) Land disposed o f by Development Corporations fo r commercial purposes should

be the subject o f leases fo r a term o f years reserving an economic rent subject to periodical re-appraisal. For purposes o f rented review, the initial site rent should be related to the initial market rental value o f the whole property (land and buildings), in order to establish a fixed proportion to be applied to the current market rental value at the time o f each rental review. (c) Voluntary conversion to Crown leasehold o f existing non-residential estates in

fee simple could be encouraged by offering taxation concessions such as: (i) the amortisation fo r income tax purposes o f both existing and future improvements on Crown leaseholds; and (ii) exemption o f Crown leaseholds from land tax. (d) Consideration should be given to the possibility o f requiring all development

orders issued by Development Corporations in existing cities to include condi­ tions requiring conversion o f fee simple titles for non-residential land to leasehold. (e) Land disposed o f by Development Corporations fo r industrial purposes should

be the subject o f leases for a term o f years. Fixed capital premiums approximat­

es

mg the cost o f acquiring and servicing the land should normally be payable. All industrial leases should be subject to controls to prevent pollution and protect the environment. (f) Land disposed o f fo r community purposes should be the subject o f leases fo r a

term o f years, under which charges might be nominal and should not exceed the cost o f providing and servicing the land. (g) Land used fo r public purposes should be subject to development and land use controls. -

Implications o f Proposals

7.70 The foregoing proposals have the following implications: (a) in the case of land used for residential purposes, they reflect the strong public preference for what is popularly called freehold tenure (that is, estates in fee simple) and avoid the disadvantages in equity of rental leasehold systems; (b) in the case of land used for commercial purposes, they provide for continuing

public control and participation in the economic growth and profitability of commercial enterprises by the reservation of an economic rent; (c) in the case of land used for industrial purposes, they permit more effective control over industrial pollution and the quality of the environment;

(d) they provide for ultimate uniformity of tenure throughout Australia with fee simple titles for all residential uses (other than the Australian Capital Territory, where a premium perpetual leasehold system can operate to the same effect) and leasehold tenure for all other forms of land use; (e) they provide incentives for conversion of non-residential properties from fee

simple to leasehold tenure; ( 0 in the case of land used for non-profit community activities, they permit use for the designated community purposes without undue economic burden; and (g) in the case of land used for public purposes, they require public authorities to

be subject to the same kinds o f development and land use controls as the private sector.

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VIII TENURE ARRANGEMENTS FOR DIFFERENT GEOGRAPHICAL REGIONS

8.1 The proposals we have made in earlier chapters have been directed especially towards the establishment of principles o f land tenure which may be applied to the development of new metropolitan and regional growth centres throughout Australia. At the same time we have set out to establish principles for the control of development in existing cities and to devise forms o f tenure for different types of land use in those cities which will be consistent with the recommendations we have made for the new growth centres. We have it in mind that our proposals for the reservation of development rights, development control and land tenure for different forms of land use should apply without qualification to all new growth centres in the States for which the Australian Government provides financial support.

Metropolitan and Regional Growth Centres

8.2 Before turning to the special problems of the Australian Capital Territory and the Northern Territory, we offer some concluding comments on the role of Development Corporations in the new cities. The responsibilities of the Corporations will include the control of planning, development, land use and re-development. But the planning of the new centres must embrace economic, social and financial planning as well as mere physical planning. To this end the Corporations will need to receive briefs from

governments directing them to operate within the general framework of the governments’ urban land policies, to encourage and respond to community participation in the planning processes and actively to promote the new centres so that they are seen to combine economic opportunities with an attractive human and natural environment.

8.3 Five aspects of the administration o f Development Corporations seem to us to be important. First, it will be necessary to ensure that prospective residents and business enterprises proposing to establish themselves in the new cities fully understand the implications of the new system of land tenure and development control. Secondly, it will be necessary to provide maximum scope for private initiatives in order to ensure that the Development Corporations do not degenerate into powerful agencies of bureaucratic and monopolistic control. Thirdly, appropriate appeal procedures will need to be established

to enable decisions by the Development Corporations to be reviewed by courts or impartial tribunals. Fourthly, recruitment and training programmes will have to be organised to provide professionally qualified staff to plan and manage the development of the new centres. Because there is already a marked shortage o f such skills within Australia, difficulties in making suitable appointments to senior professional and managerial posts may impose serious constraints on the effectiveness of Development

Corporations in carrying out their role. Finally, financial guidelines and financial resources must be geared to the responsibilities which the Corporations will have for acquiring, developing and managing urban estates as well as for regulating the activities of the private sector.

8.4 Our general proposals avoid the necessity for large-scale land price freezes or for public acquisition of all future residential land, although land will still need to be acquired for commercial, industrial, public and community purposes. We nevertheless propose that in the new regional growth centres the Development Corporation should acquire a stock of land sufficient to supply housing needs for the first few years of development. The main reason for this suggestion is to facilitate the work of the Development Corporations. Most land on the fringes of major cities has already been assembled by professional

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developers following the publication of strategic plans by planning authorities. In these areas the issue of development orders can be used effectively to bring serviced residential land on to the market. In the new regional growth centres, land has not yet been so assembled. To impose development orders on a large number o f rural holdings could be

cumbersome and in any case it would divert the attention of administrators from other important issues. One such issue, to which we attach considerable importance, is the manner in which the public acquisition of such land is conducted.

8.5 We believe that administrators of land acquisition programmes should resist any temptation to allow unscrupulous demands by a few landowners to colour their attitude towards all whose land is being acquired. When a new growth area is first designated for development, the only people in the area are those who are being dispossessed of their

land. To many, this is more than a matter of mere monetary compensation but in any case there should not be long delays in making financial settlements and compensation should include damages for disturbance and severance to facilitate re-instatement. The image created by the Development Corporations in the acquisition phase will largely

determine public attitudes when development proceeds to its subsequent phases. We believe that most people in the community will react favourably to firm but just conduct in this difficult field.

The Australian Capital Territory

8.6 We have been asked to report separately on the existing leasehold arrangements in the Australian Capital Territory and the Northern Territory and to make specific recommendations about the systems in force in- those Territories. The position in those Territories is different from that of the States in that the Australian Government has full

legislative authority and can make such laws as are necessary to ensure orderly develop­ ment without the need for co-operative or complementary action by State Governments. Nevertheless, we believe that the general principles of land tenure and development control which we have proposed can and should be applied to the two Australian

Territories.

8.7 We have seen that the form of land tenure in the Australian Capital Territory is determined by the Seat o f Government (Administration) A ct 1910, which provides that ‘no Crown land in the Territory shall be sold or disposed of for any estate of freehold’. Evidence placed before the Commission indicated that leasehold tenure was adopted for

Canberra in order that speculation in undeveloped land could be avoided, unearned increments could be retained for the people and the expenses of establishing the national capital defrayed; in the words of the first Prime Minister (Sir Edmund Barton): ‘as a mere business proposal a system of leases with periodical re-appraisement will be about

the best manner in which we can set about the meeting of any expense which we may incur in connexion with (the national capital) project’.

History of Canberra Leasehold Tenure 8.8 The conditions under which leases were first offered in Canberra in 1924 included the following: (a) a distinction was made between residential and different types of business

leases;

(b) lease terms were not to exceed 99 years; (c) leases were to be disposed of either by auction or by tender, subject to reserve prices with amounts bid representing the unimproved values on which land rent 67

was to be payable; (d) land rent, the first year o f which was payable at auction, was to be 5 per cent o f the unimproved value which had been bid or the reserve price, whichever was flie higher, (e) unimproved values were to be re-appraised after the first twenty years and

thence every ten years, provision being made for appeals against the re-appraised values; and (f) leases could not normally be transferred prior to completion o f approved buildings, minimum costs of which were nominated and which were required to

be commenced within two years and completed within three.

8.9 Despite many vicissitudes in the intervening period, most o f these features of the Canberra leasehold system were in force in 1970 but there were one or two important differences. Following legislation in 1935, any excess of amount bid for unimproved value over reserve value was required to be paid as a capital premium, leaving the land rent to be determined by reference to the reserve value, while the period of second and subsequent re-appraisals was increased from ten to twenty years.

8.10 After the National Capital Development Commission had been established in 1957, Canberra entered a phase of very rapid growth. Planning, development and leasehold management became more complex, group auctions o f residential leases were introduced in 1959 to enable builders to achieve economies o f scale, and restricted auctions were introduced in 1962 in which eligibility was restricted to persons who had not held leases

during the previous five yean (or since 1962 following a change in conditions in 1967). During the 1960s the rapid growth in Canberra’s population and continuing shortages in the supply of land led to substantial increases in amounts bid for residential leases. Premiums payable on all three classes o f residential leases (at unrestricted, restricted and

group auctions) increased substantially in 1962 and remained high during most of the 1960s. The increase in unimproved values was reflected in higher land rents until a decision was taken in 1965 to peg rents of residential leases at 1962 values.

8.11 By the end of the decade, the Canberra leasehold system was under attack from several directions. Some of the criticisms were concerned with the supply of serviced land and methods o f disposal, some were concerned with arrangements for financing land development while others were concerned with pricing policies in respect of both rates and rents. It was clear that, despite the high premiums currently being bid, rental revenues were insufficient to provide a reasonable return on development outlays. At the same time rate revenues were falling increasingly behind costs of providing municipal services. But the absence of any system o f land development accounting or municipal accounting made it impossible to judge what the level of rents or rates should be if financial balance was to be achieved in each o f these areas. Ih e long periods between rental re-appraisals and the low rate (5 per cent) applied to unimproved value meant that it was unlikely that the cost o f acquiring and servicing land would ever be recouped. The long delays before re-appraisal resulted in such substantial increases in land rent as to evoke considerable opposition from lessees (and cause hardship to some) and to create considerable problems in equity as between holders o f equivalent leases. Evidence placed before the Commission indicated that in 1970 a residential block re-appraised in 1969 attracted a land rent of $228 per annum while a similar block valued in 1954 attracted an annual rent of only $40. A business lease valued in 1955 had an annual rent of $324 while an adjacent similar site re-appraised in 1969 attracted an annual rent of $10,000.

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8.12 Submissions to the Commission showed that, in the face o f what it believed to be legal and other difficulties in introducing more frequent re-appraisals, the Government decided in 1970 to reduce land rent to a peppercorn value of 5 cents per annum ‘if and when demanded’ and to increase rates to a level which initially would be equal to the

revenue previously obtained from both rents and rates, and subsequently would be increased having regard to increases in municipal expenditure in Canberra and in rates in other capital cities. New leases continued to be disposed of by auction, but reserve prices were calculated at levels to return overall the costs of land acquisition and development.

Following the introduction of the new system on 1 January 1971, premiums were usually well in excess o f reserve prices.

8.13 Other features of leasehold tenure, notably those relating to lease terms and improvement conditions, were preserved under the new system. In the terminology we have used earlier in the Report, it is clear that the main effect of the change was to substitute a premium leasehold system for a rental leasehold system. The Government

gave up, along with land rent, its right to receive unearned increments based on the twenty-year re-appraisals. It retained its right to unearned value increments arising from approved variations in purpose clauses but, as we have seen, it introduced a scheme which requires a lessee to pay to the Government a premium equal to only half the increase in

market value resulting from the variation o f purpose, less $1,500. Power to approve the change in purpose is vested in the Supreme Court, which considers both applications by lessees and objections from the public, but the Minister has a power of veto if the variation is considered repugnant to Canberra’s development.

8.14 In retrospect it is clear that, although the new system was intended to improve the equity of leasehold tenure arrangements, the change-over produced substantial inequities of its own. In particular, the abolition of all future land rental obligations had the effect of giving substantial capital gains to all existing leaseholders (including holders of business leases), while the substitution of tax-deductible rates for rents gave greater

benefits to high-income residential lessees than to those on low incomes.

8.15 Rapidly escalating lease prices after 1971, which appear to have been due partly to shortages in the supply of serviced land and partly to demands that were intensified by abnormally high levels of housing finance, led to the suspension of the auction system in

August, 1973 and the subsequent adoption o f new methods of allocating land. Under the new arrangements, a waiting list was established for first-home buyers and residential leases were to be offered in order of application, at predetermined prices, either over the counter or through limited access auctions. First-home buyers were also to be able to buy project houses, built by private builders by arrangement with the Government, at

predetermined prices. Until the needs of first-home buyers were met, all other land becoming available was to be allocated to builders, who would be free to sell to any purchasers on the basis o f indicated prices for houses and land prices fixed by the Government.

Evaluation of Present Canberra System and Proposals for Change

8.16 We believe that the present problems of the Canberra land system are attributable not so much to land tenure arrangements as to inadequate supplies of serviced land and methods of allocation. The system of development and land tenure which has emerged in Canberra nevertheless has many advantages, including efficient acquisition, assembly and

servicing of land, substantial success in avoiding speculation, effective planning and control over development and provision (through public ownership) of a continuing 69

public interest in the different forms of land use.

8.17 In previous chapters, we have made proposals for the new growth centres which would involve the reservation o f all development rights, the implementation of more effective arrangements for development control, the disposal of residential land on the basis o f residential or fee-simple grants subject to improvement conditions and the reservation of development rights, the disposal of commercial land on leasehold tenure subject to economic rents and the adoption o f special leasehold arrangements for land

used for industrial and community purposes. The existing Canberra leasehold system is consistent with the arrangements we have proposed except in a number o f important respects which we shall now discuss.

Development Rights in the Australian Capital Territory

8.18 The first weakness of the present system is that it does not succeed in capturing the whole of the unearned development value increment which results from a change in the purpose clause o f a lease. This is partly because of the formula which requires the lessee to pay the lessor only half the increase in value less $1,500, and partly because of the manner in which the increase in value is determined, namely the difference between the market value for the new purpose (assessed when the application is made) and the market value of the lease for its original purpose (assessed at the same time). This difference fails to reflect the true measure o f the unearned increment because the market value of a lease for its original purpose includes a component representing the value of a prospective permitted change in lease purpose. Thus in localities where a change in use has been approved for one lease, the values of all adjacent leases will rise because of the probability of a similar change o f use being approved.

8.19 Subject to the qualifications made in Chapter IV (which may have the effect of recognising current market value at the base date as the value for the purpose of calculating the development value increment), the value increment resulting from a change in lease purpose should in future be calculated as the whole of the difference between the existing use value of a lease and its value in its new use. Further, the whole of the difference should be appropriated by the Crown and not merely half less $1,500.

8.20 It was argued in official submissions that the partial levy is needed to provide financial incentives to encourage desirable re-development. It will be clear from earlier sections o f this Report that we reject this argument. The initiatives for development need to come from the planning authority (in the case of Canberra, the National Capital Development Commission) and from developers prepared to acquire the development rights or to pay the full economic rent o f leases in their new uses, and not from existing lessees seeking profits from changes in land use. The Canberra leasehold system will not be consistent with our proposals for reserving development rights unless the whole of the true development value increment is appropriated by the National Capital Development Commission when it approves a change in land use or intensity of use.

Development Controls

8.21 We have pointed out in Chapter V that the National Capital Development Com­ mission already has the powers needed to implement our proposals for development control, subject to a number o f areas in which its powers and responsibilities need to be extended or confirmed:

(a) it should be responsible for all development and re-development, in the

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public sector as well as in the private sector; (b) it should make more effective use of the abilities of the private sector; (c) it should have its financial powers and responsibilities strengthened so that it is clearly responsible for the management as well as the development of estates

under public ownership.

Residential Land in the Australian Capital Territory

8.22 Although we have recommended that residential land in the new growth centres should be disposed o f on the basis of fee simple tenure (subject to improvement conditions and the reservation of development rights), we believe that the substance of our proposals can be achieved in Canberra while retaining the form of leasehold tenure

(subject to some modifications). Just as we were impressed by the strength o f the psychological attachment to freehold land in other Australian cities, so does it seem that many Canberra residents are very strongly attracted to the leasehold form of tenure. However, we believe that support for earlier leasehold systems has depended on failure to

charge full economic rents for residential leases and that, for the reasons given in Chapter VII, the adoption of a rental leasehold system for residential leases would be neither politically viable nor socially desirable.

8.23 If the residents of Canberra wish to retain leasehold tenure, it would be consistent with our proposals on other growth centres to change the existing 99-year premium leasehold system to a perpetual premium leasehold system. As in the case of fee simple grants, this will permit a number o f important advantages to be achieved. It will be

possible to recoup fully the cost of acquiring and servicing residential land and, subject to the arrangements proposed in Chapter VII for financial assistance to lessees, to ease the financial burden of development and to release resources for other uses. The elimination of rents will give Canberra residents the same equity in their land as the residents of other

cities. Conversion to perpetual leases accompanied by reservation of development rights will likewise give Canberra residents the same security in respect of existing land uses as we propose for the residents of other cities. Finally, the retention of leasehold tenure will enable the continuation of existing controls over residential land use, in a form which

seems to be accepted by the Canberra community. Only in this last aspect will the residential leases we are proposing for Canberra differ from the residential grants in fee simple we have proposed for other growth centres.

Allocation o f Residential Leases

8.24 To the extent that disadvantages and injustices have been revealed by recent and existing methods of allocating residential leases in Canberra, we believe that these can be alleviated by a number of steps which are intended, in effect, to apply to the Canberra situation the proposals made in Chapter V.

8.25 First, in order to prevent scarcity factors exerting such a strong upward pressure on the market, there should be a substantial increase in the supply of serviced land. As in the case o f other growth centres, we consider that the supply position could be improved by the allocation to private developers of large areas of raw land for sub-division,

servicing, and disposal either as vacant land or with dwelling houses already erected. Such arrangements with private developers should require compliance with broad planning concepts laid down by the National Capital Development Commission and, in order to ensure that developers make a substantial contribution to the satisfaction of the housing

needs of average home buyers, conditions should be imposed requiring a prescribed 71

number or proportion of parcels in each syb-division to be allocated to the Commission on the basis of fixed prices. The remaining parcels should be available for disposal to any buyer without any limit or restriction on price. There may also be some benefit in allocating blocks of land prior to completion of services. This would give potential home buyers the opportunity o f organising the financing and building o f their homes pending completion of the land development.

8.26 Secondly, it is consistent with our recommendations in Chapter V that the Government’s recent decision to make preferential allocations to first-home buyers should be confirmed and that land should continue to be made available to applicants in this category on the basis of cost. There should be close screening of applicants and, in order to ensure that the first-home buyer list is kept up to date and includes only genuine applicants, payment o f a deposit of, say, $100 should be required to be lodged with each application.·

8.27 Thirdly, subject to the supply position being improved and some modifications being made in the auction system as proposed in Chapter V, auctions should be resumed both for first-home buyers (restricted auctions on the basis of the new criterion) and for other buyers (unrestricted and group auctions). Each restricted auction should be so conducted as to permit only first-home buyers who are highest in the priority list to participate and the number attending should equal the number o f blocks to be offered. No block should be sold at less than the reserve price, but provision should be made for the price accepted to be payable with interest by instalments and secured in such a way that the debt can be merged in a mortgage executed to finance the erection of a dwelling house.

8.28 In addition to restricted auctions there should be, as in the past, group auctions for builders and unrestricted auctions which any intending home buyer may attend to bid for the purchase o f residential land. To the extent that group and unrestricted auctions yield prices above the cost of acquisition and servicing, reserve prices at restricted auctions could be reduced below cost. We defer for consideration in a later report the question whether profits from group and unrestricted auctions (and from the disposal of commercial and other non-residential leases) should be used to reduce prices at restricted auctions. Even if a pricing policy based on the average cost of all leases is adopted, cost should be interpreted to include appropriate amortisation charges and provide a reasonable overall rate of return on the funds invested by the Government in Canberra development.

Non-residential Leases in the Australian Capital Territory

8.29 Insofar as commercial leases in the Australian Capital Territory are concerned, we recommend that all new leases should be allocated on the basis of the principles proposed in Chapter VII, which include the abolition of lease premiums, provision for economic rents (re-appraised regularly on the basis o f the market rental value of properties) and fixed terms related to the expected economic life of improvements. Likewise, land should be allocated for industrial and community purposes in accordance with the principles established in Chapter VII.

Conversion of Existing Leases

8.30 The recommendations we have made in the preceding paragraphs relate principally to new leases but we are of the view that, so far as possible, they should be applied also to existing leases in the Territory. Existing residential leases merely require conversion to perpetual tenure but the reservation of all future development rights should be clearly

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specified along with the designation of purpose. In the case o f non-residential commercial leases, the restoration of land rent would create problems in equity because some lessees will have held leases since the time when rents were abolished, some will have disposed of leases at prices which reflect the abolition of rents and some will have purchased either

existing or new leases for capital premiums which likewise reflect the absence o f rental obligations. In effect, the restoration of land rents would impose substantial capital losses on all existing lessees, and we do not believe that the fact that some o f the lessees concerned previously received windfall gains would justify the re-introduction of rents on

all existing leases. On balance, we think that equity can best be served by deferring the restoration o f rents on existing commercial leases until such time as they are terminated or surrendered for new leases. But every possible means should be sought to encourage voluntary conversion to rental leases, including the use of the taxation concessions

proposed in Chapter VII to encourage conversion of freehold to leasehold tenure.

The Northern Territory

8.31 The Northern Territory differs from other parts of Australia in that a system of dual urban land tenure has applied during most of the Territory’s history.

History o f Land Tenure in the Northern Territory

8.32 Under South Australian administration until 1911, fee simple grants had been the basic form of urban land tenure, but after the Commonwealth assumed control o f the Territory in 1911 it passed legislation which required all future grants of urban land to be in the form of perpetual leases purchased at auction on the basis of bids for annual

rentals. Fee simple tenure for new grants was re-introduced in 1926 but, following the bombing and civilian evacuation of Darwin during World War II, all land in Darwin and its environs (90 square miles in area) was acquired by the Government. At the same time,

legislation was passed which restricted grants of both residential and non-residential land to leasehold tenure, which provided for maximum terms of 99 years, rents based on 5 per cent o f unimproved capital value (which was the basis of the initial reserve value and

was to be re-appraised in 1970 and thereafter every twenty years) and, except in the case of direct grants to some privileged groups, capital premiums where amounts bid at auction exceeded the reserve value. In 1961 amending legislation provided for conversion of all Darwin town leases to perpetual leases. Few conversions were made.

8.33 In 1962 new legislation was passed which provided for conversion of urban leases to fee simple tenure on payment of the current unimproved capital value, either by lump sum or by instalments over a period not exceeding ten years. Relatively few conversions were made until 1971, presumably because rents based on earlier unimproved capital values were lower than financial costs of conversion. (In 1969, also, unimproved values

and rents on new Darwin leases were pegged at 1967 values following steep increases in land prices.) More conversions were made after 1971 when, as a corollary to the introduction of a premium leasehold system, the cost of conversion to freehold was

reduced to a fixed fee of $100. In May 1973, the Government suspended further conversions to fee simple at least until 30 June 1974.

8.34 On 1 January 1971 a new system of disposing of urban land was introduced for Darwin and other municipalities (Alice Springs also became a municipality in 1971). This paralleled the new system which came into force in the Australian Capital Territory in 1971, and involved the virtual abolition of land rent (on existing as well as new leases)

and the auctioning of new leases on the basis of reserve prices intended to ensure that

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costs o f acquisition and servicing were fully recouped. As in Canberra, premiums bid could exceed the reserve price but in Darwin maximum prices were fixed for both restricted and unrestricted residential blocks. Provision was likewise made for payment of the differences by instalments when amounts bid at restricted auctions fell short of reserve prices.

Development Controls in the Northern Territory

8.35 Development controls are exercised partly through leasehold conditions and partly through the provisions of the Town Planning Ordinance 1964-1971, which provides for statutory planning o f a negative character by means of a town and zoning plan. Improvement conditions are included in lease agreements but land which has been converted to freehold tenure is no longer subject to positive planning controls. Evidence was submitted to the Commission that a lease granted in 1937 with a building covenant of $6,000 could be converted unconditionally to freehold even though it was in a valuable area of the town and contained an obsolescent building. Under these circum­ stances, development cannot be controlled in a satisfactory positive way.

8.36 The same provisions relating to development levies on approval of a change of use apply to Northern Territory leases as to leases in the Australian Capital Territory; that is lessees must pay half of the increase in Value resulting from the permitted change in purpose, less $1,500.

Evaluation of the Existing Northern Territory System and Proposals for Change

8.37 The dual land tenure system which has emerged in the Northern Territory tends to suffer from the disadvantages of both fee simple and leasehold tenure. In particular, by failing to reserve development rights while permitting conversion to fee simple tenure, the Government has sacrificed its opportunity to participate in development value increments and has created compensation problems for itself when development or re-development becomes necessary. Positive development controls are also lacking under the present dual system and there is no provision for public participation in income arising from land used for business purposes (irrespective o f whether the land is held on fee simple or leasehold tenure). -

8.38 The growth of Darwin and some other towns in the Northern Territory is proceeding at a rapid rate and the orderly development of new residential and business precincts is essential to cater for this growth. The compulsory acquisition of substantial tracts of land for this purpose is being undertaken and should, we think, be continued. After sub­ division and servicing, this land should be disposed o f in the same way as we have recommended for other urban growth centres, namely on fee simple tenure for residential land (appropriately designated and subject to improvement conditions and the reservation

of development rights) and leasehold tenure for land used for non-residential purposes (subject to economic rents in the case o f commercial leases).

8.39 More generally, we recommend that the following steps be taken to systematise and unify development control and urban land tenure arrangements in the Northern Territory: (a) All development rights attaching to either fee simple or leasehold lands should be acquired by and reserved for the Crown in accordance with the principles

enunciated in Chapter IV. (b) Development Corporations should be established for the main urban centres and given responsibility for the functions described in Chapter V.

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(c) All residential land should be converted to fee simple title with development rights reserved, and new grants for residential purposes should be made on the same basis subject to improvement conditions and the payment o f capital premiums (with provision for payment by instalments). (d) The right to convert non-residential leases to freehold should be abolished, all

new non-residential leases should be for fixed terms and subject to rental or premium payments in accordance with the principles described in Chapter VII, and holders of existing non-residential fee simple estates should be encouraged to convert to leasehold by means of taxation concessions or development

orders as proposed in Chapter VII.

Summary o f Recommendations for the Australian Capital Territory and the Northern Territory

8.40 We conclude by summarising our recommendations with respect to the Australian capital Territory and the Northern Territory: 1. Recommendations relating to the reservation o f development rights, the introduction o f development controls and forms and conditions o f land tenure

should apply generally, insofar as they are applicable, to both the Australian Capital Territory and the Northern Territory. 2. Residential land in the Australian Capital Territory should be held under perpetual leases, subject to the reservation o f development rights and to the

payment o f capital premiums on allocation but not to rental obligations. 3. Residential land in the Northern Territory should be granted under fee simple title subject to improvement conditions and the reservation o f development rights, and existing residential leases should be converted to such titles.

4. Non-residential urban land in the Australian Capital Territory and the Northern Territory should be leased for fixed terms in return for economic rents on commercial leases and capital premiums on industrial leases. Encouragement should be given to convert existing non-residential leases and fee simple estates

to the new forms o f leasehold tenure.

5. The right to convert non-residential leasehold land in the Northern Territory to fee simple tenure should be abolished.

We therefore have the honour to present this, our first Report, in accordance with our Letters Patent.

DATED this twenty seventh day of November, 1973.

R.L. MATHEWS

G.J. DUSSELDORP

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