An expert in property law foresees the day when compensation paid to freehold property owners for mining developments reflects the wealth that exists below their land.

Phillip Sheridan, principal of Victorian country law firm, Palmer Stevens & Rennick, told the recent Property Rights Australia conference in Roma that when mining or petroleum rights were granted over a parcel of freehold land by the State, often that grant amounted to an acquisition of part or all of the rights attached to that property by the State.

There was no question that the minerals below the ground were owned by the State. However problems arose with open cut or other high disturbance mining activities that must, by their nature, take control of the surface of the land as well.

Mining and petroleum legislation empowered the State to allow a mining company to do what it must on the surface of the land. In those circumstances the land owner had little option but to negotiate over the amount of compensation they could receive in return. “There is no veto, it's a question of price,” Mr Sheridan said.

An imbalance existed between the compensation farmers generally received – often the market value of their property plus a nominal percentage such as 20pc – and the value the State received in royalty payments from a mine or a gas field.

To illustrate he pointed to a landholder who spoke at the PRA forum. The farmer’s freehold property was worth $2 million.  He had calculated that the amount of coal that was likely to be mined under his property was worth $240 million in royalties to the Government alone.

As further evidence of the legislative imbalance, he said that if that same farmer was to clear endangered vegetation on his property he faced a fine of $166,000, and the prospect of having that part of the property locked up for 30 years.

"But if the same farm was bought by a mining company to establish a coal mine, the top layer of dirt and vegetation would be scraped off to one side so the coal could be accessed, endangered vegetation or not,” Mr Sheridan said.

“If that same farmer sought approval from the State to undertake an irrigation enterprise that involved storing hyper-saline water in ponds on the surface of the land, he would likely be laughed the length of George Street."

Mr Sheridan believes current developments in valuation practice in the United States could lead to a reassessment of how land is valued for compensation purposes across the world, including Australia.

Under the concept of “highest and best use”, land valuation and compensation are calculated based on what is deemed to be the “highest and best use” of the land in question. Using conventional practice, the highest and best use of a parcel of rural land is generally deemed to be agriculture, regardless of the mineral wealth that exists beneath. Compensation is then calculated according to that property’s value as an agricultural concern.

In the United States, however, compensation calculations were moving towards an assessment of the “future potential” of land. If a coal or gas mine development is planned, the highest and best use of that farming or grazing land may well be as a coal or gas mine.

The compensation figures that were arising for landholders following that method of assessment were “astronomical” compared to the value offered for the same land as farming or grazing concern, he said.

While US legislation is a long way from Australian legislation, Mr Sheridan believes a test case could rebalance the equation in favour of freehold property owners receiving much higher valuations for land that is, for all practical purposes, confiscated by the State and given to another for the benefit of the State.

“Sooner or later a landholder is going to put that argument before a court, and a court may well be convinced of it,” Mr Sheridan said.

“And then, instead of people getting paid what it is worth as a farm, they are going to be looking at astronomical land values for the activities they are conducting.”

“I don’t think that day is far away.”

Mining companies required to pay landholders legal and accounting bills

Mr Sheridan also offered advice for landholders who have mining companies circling their properties but have not yet engaged independent legal representation because of the high costs involved.

Legal, accounting, valuation costs incurred by a landholder in negotiating and preparing agreements are compensable by the mining company.

“If you have got a block of land and a mining or gas company comes and wants to do something on your land it is their bright idea not yours. They must pay all reasonable costs of you negotiating with them to further their commercial interest, at the loss and detriment of your own. It's not a difficult concept.” Mr Sheridan said.

“You think,  well I am happily chasing cows around out there and suddenly a bloke comes and I have got to spend time dealing with them, I have got to get lawyers because they have got them, and I have probably to get financial advice and scientific advice about what the impact and loss is going to be."

“You have really got to assess what they’re going to do on your land in a proper manner and the losses you may incur. This is your fundamental business asset. You can’t stumble along blindly."

“All these mining companies have in-house lawyers, employ law firms, scientists and financial experts."
“So you are just reckless if you don’t approach them in the same manner. And they must then compensate you for it. That is no great trick of the law, just normal commercial behaviour.

There were examples all over the bush of landholders who failed to engage legal and financial expertise during initial consultations with mining companies being run over and run ragged, he said. "There are also examples of landholders who have reached good agreements, in good faith with good companies. And then there are others."

He said landholders were also entitled to be compensated for the time they spend negotiating and meeting with mining companies.

“Landholders always undervalue their time. They are running multi-million dollar businesses. Their time is valuable. Their hourly rate is worth more than a ringer, more than a tractor driver and more than a plumber. So they are selling themselves short there. The simple message is keep good records, get good advice and don't sign anything until you do.”

Phillip Sheridan, former Brisbane barrister and now principal of Victorian country law firm, Palmer Stevens & Rennick, provides legal advice to Property Rights Australia and has acted for freehold and leasehold landholders, native title claimants, plantation developers and telecommunications companies on both sides of the acquisition fence in WA, Queensland, the NT, NSW and Victoria. He spoke at the organisation’s recent annual conference in Roma in western Queensland.