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Landowners Are Not Entitled to Compensation for Illegally Constructed Buildings

posted 3 months ago

Introduction

The Federal Court in the recent case of MMC Tepat Teknik Sdn Bhd v Pentadbir Tanah Daerah Klang & Anor and other appeals [2023] 5 MLJ 520 held that the clear intent of the Land Acquisition Act 1960 (“LAA 1960”) is that there would be no compensation for buildings constructed on acquired land which are in contravention of (i) the category of land use and conditions in the land title; (ii) planning laws; and/or (iii) zoning conditions.

Therefore, the landowners of compulsorily acquired land are not entitled to any compensation and losses arising or related to the use of such buildings.

BACKGROUND FACTS

The landowner, MMC Tepat Teknik Sdn Bhd (“MMC”) owned 3 adjacent properties (Lots 1604, 1605 and 1608) in Klang, Selangor, where it operated a heavy steel fabrication plant for about 25 years.

Parts of Lot 1604 and the entire of Lots 1605 and 1608 was compulsorily acquired for the construction of the West Coast Expressway by Lembaga Lebuhraya Malaysia (“LLM”). The Land Administrator (“LA”) awarded compensation in the total sum of RM59,282,800.90 to MMC, which included the value of buildings on the lands.

However, both MMC and LLM were dissatisfied with the award, and the LA referred the award to the High Court.

HIGH COURT AND COURT OF APPEAL

The High Court maintained the award of compensation for both the value of land and buildings for Lot 1605. However, the award of compensation for the value of buildings for Lots 1604 and 1608 were set aside.

Dissatisfied with the decision of the High Court, both MMC and LLM appealed to the Court of Appeal:

MMC main complaint was the lack of compensation for the buildings and compensation for contractual damages of ongoing projects.

LLM’s appeal was against the award of compensation for the industrial building on Lot 1605.

The Court of Appeal allowed MMC’s appeal but only to the extent of reinstating the Land Administrator’s award on the contractual losses in ongoing projects or existing contracts. LLM’s appeal was dismissed in its entirety.

DECISION AND RULING OF THE FEDERAL COURT

The question of law posed before the Federal Court concerns the issue of whether buildings, especially industrial buildings constructed on lands contrary to conditions as to category of land use as appearing in the documents of title and also contrary to the relevant planning and/or zoning laws, may nevertheless be recognised and awarded compensation under the terms of LAA 1960. Related to this question is whether the losses arising or associated with the loss of these buildings, may be compensated.

Adequate Compensation under Article 13(2) of the Federal Constitution

The Federal Court highlighted that adequate compensation must be paid for deprivation of another’s property, more so where that deprivation is the result of compulsory purchase or acquisition. This is a guarantee under Article 13(2) of the Federal Constitution which stipulates that “No law shall provide for the compulsory acquisition or use of property without adequate compensation”.

Although the term “property” is not defined, it is quite apparent that the term extends to both immovable and movable property. In the reading of our Federal Constitution, a prismatic flexible approach must be adopted to give the terms used. Therefore, compensation must be paid not just for the lands acquired but also for the buildings built on such lands, and the loss of the trees or crops planted on such lands.

Compensation for Buildings

Paragraph 1(3A) of the First Schedule of the LAA 1960 provides that:

“The value of any building on any land to be acquired shall be disregarded if that building is not permitted by virtue of –

the category of land use; or

an express or implied condition or restriction,”

The Federal Court ruled that it is evident from paragraph 1(3A) that while the existence of buildings on any acquired land is acknowledged, their value however shall be disregarded where the buildings are not permitted to be on those lands in the circumstances set out in paragraph 1(3A)(a) and (b).

It is the clear intent of LAA 1960 that there will be no compensation for such buildings and by necessary extension, any losses related to the use of these same buildings. Under the principle of adequate compensation, compensation is only fairly and reasonably ordered for the proper and valid use of the lands acquired.

Compensation cannot be awarded for a wrongful or invalid use as that would be encouraging furtherance of wrongdoings, which is contrary to principles of justice.

It would be wrong to recognise the right to compensation in respect of the buildings built and used in contravention of law, particularly in the circumstances of this case where the owners well aware of the illegality from the time the buildings were built.

The land titles for Lots 1604 and 1608 contain the implied condition that the land shall only be used for agricultural purposes. Pursuant to Section 115(1) of the National Land Code (“NLC”), only a building for the purposes of agriculture or for the purposes of a dwelling-house may be erected on such lands.

The buildings constructed on Lots 1604 and 1608 are part of a heavy machinery fabrication plant, which are clearly in contravention of the NLC.

Lots 1604, 1605 and 1608 were located in an area zoned for residential use. The building on Lot 1605 stands conflicted with the planning laws as it was used in contravention of the residential zoning status under the local plan prepared under the Town and Country Planning Act 1976 (“TCPA 1976”). It was not open to the LA to ignore the clear terms and application of TCPA 1976.

The Federal Court further ruled that this reasoning extends to not only the buildings illegally constructed on the subject lots but also to the use of these buildings. The claims related to such use are thus not compensable.

Determination of Compensation 

Under LAA 1960, the Land Administrator is required to have in mind not just the matters under the NLC, but also any other laws affecting the use of the land.

When determining and considering the compensation for the use of the land, it is not enough that such use accords with the conditions, express and implied in the documents of title, the use must also be consistent with planning laws.

Unless the use of the land is proper, valid and legal, there can be no question of compensation, let alone the matter of adequacy of compensation.

COMMENT

The denial of compensation and associated expenses for the industrial buildings located on Lots 1604, 1604 and 1608 underscores the significance of strict adherence to zoning laws and planning permissions in the case of compulsory acquisition.

This ruling gives precedence to lawful land use, the adherence to zoning laws and planning regulations, by explicitly stating that compensation is granted only when landowners are in compliance with the provisions mandated by the LAA 1960 and all related legislation.

About the authors

Chew Jin Heng
Associate
Dispute Resolution
Halim Hong & Quek
[email protected]

Khew Gerjean
Pupil-in-Chambers
Dispute Resolution
Halim Hong & Quek
[email protected]

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