Rate claim over airport land fails to take off after Australian Federal Court decision

Introduction

Councils’ ability to expand the areas over which they can charge federally leased airports “rates” has taken a blow in the recent Federal Court decision of Clarence City Council v Commonwealth of Australia [2019] FCA 1568. This translates to potential cost savings for the 22 federally leased airports, including those in Australia’s capital cities. It is also a good thing for customers of businesses on airports and for airline passengers, as increased costs for airport operators generally filter through to these end users.

The decision, however, still leaves open airports’ primary gripe in relation to “rates” payments, namely that in calculating these payments, some councils fail to take into account that airports themselves provide a lot of the services that councils charge for in setting the levies.

This update examines the Federal Court decision and its implications for federally leased airports and their customers.

Background

When the Commonwealth Government privatised the nation’s airports in the 1990s, it granted airport operators long term leases of those sites.

As the land leased by those airport operators is Commonwealth land, it is not subject to council rates or State land tax by virtue of section 114 of the Constitution¹.

The Commonwealth therefore included in its leases to airport operators (as tenants) a requirement that the tenant:

• pay to the relevant government authority an equivalent amount as notified by that authority had rates been payable (ex-gratia rates). In the judgement, ex-gratia rates are also referred to as a “fictional” or “notional” equivalent of the rates; and
• use all reasonable endeavours to enter into an agreement with the relevant government authorities to make those payments (ex-gratia rates agreement).

The areas over which these Commonwealth leases require tenants to pay rates are restricted to areas which:

• are subleased to tenants; or
• on which “trading or financial operations” are undertaken. These include retail outlets and concessions, car parks and valet car parks, golf courses and turf farms. Runways, taxiways, aprons, roads, vacant land, buffer zones and grass verges, are expressly excluded.

The Government included these provisions in airport leases due to the principle of “competitive neutrality”. The Commonwealth and the States and Territories agreed to this principle in the “Competition Principles Agreement” which they entered in 1995. One of the overarching purposes was “to achieve and maintain consistent and complementary competition laws and policies which [would] apply to all businesses in Australia regardless of ownership”. The ex-gratia rates clauses were therefore included in Commonwealth airport leases to “level the playing field” so that Commonwealth airport tenants would not enjoy a net competitive advantage over their private sector competitors simply because they occupy Commonwealth land and were therefore not required to pay rates.

The decision in Clarence City Council v Commonwealth of Australia

Hobart Airport and Launceston Airport (Airports) took issue with the quantum of the ex-gratia rates charges levied on them by the respective local councils (Councils) within which their Airports are located. The Councils sought to impose rates on all areas used by the Airports except where they were expressly excluded. For example, the Councils said that ex-gratia rates were payable for land in the terminals such as departure and arrival lounges, baggage claim areas, security facilities, bathrooms and waiting circulation areas. They argued that “trading or financial operations” were undertaken on all these other areas of the Airport sites.

Hobart and Launceston Airports and the Commonwealth disagreed. They argued that having regard to the principle of competitive neutrality, “trading or financial operations” was not intended to apply to areas used for “aeronautical services and facilities” because those services and facilities were not “contestable”. In other words, the Airports could not enjoy a competitive advantage in not being charged rates for those areas because there was no comparable business over which they could enjoy such an advantage.

If the Councils’ view was correct, the Airports would be responsible for paying the relevant Councils in excess of $1.7 million each in back payments. It would also mean that the rates payable by those Airports to the relevant Councils moving forward, would be significantly more.

Neither Airport had entered into an ex-gratia rates agreement with the relevant Council. Rather the Councils sought a declaration from the Federal Court in reliance on the Commonwealth airport leases (to which the Councils themselves were not a party) to effectively require those Airports to pay the increased ex-gratia rates amounts.

Justice O’Callaghan held in his judgment that the Councils had no standing to seek the declaration due to the principle of privity of contract. Privity of contract is the general common law rule that only the parties to a contract are bound by, and entitled to enforce its terms. The proceedings were therefore dismissed.

What the decision means for airports

For federally leased airports this is a small victory.

It means that if airports have not entered into a direct agreement with their relevant local authority about the quantum of ex-gratia rates, it will be difficult for those authorities to bring proceedings to challenge the amount paid by the airports as they are unlikely to have the required standing. This ultimately weakens the bargaining position of local authorities in negotiating ex-gratia agreements with airports.

As the party to the lease, the Commonwealth would need to step in and support the view taken by the council that the amount paid by the airport is not reasonable and seek to enforce the covenant on the airport tenant’s part to “use all reasonable endeavours” to enter to an ex-gratia rates agreement with the council.

The Commonwealth is already placed on the record in the material in these proceedings as supporting Hobart and Launceston Airports’ more limited view of the areas over which airports must pay ex-gratia rates. This would make it difficult for other councils to levy rates over these areas unless the airport otherwise agreed.

What the decision means for customers

The decision is also a minor victory for passengers and airport customers.

The reality is that increased airport operating expenses are ultimately passed down the supply chain to the end users.

Not unreasonably, airport operators consider their overheads in determining the airport charges payable by airlines. Airlines in turn pass these costs onto customers when deciding ticket prices.

Council ex-gratia rates charges are also taken into account by airport operators when setting the rent and outgoings to be charged by airport operators to their sub-tenants. Those sub-tenants take these costs into account when setting their prices for goods and services to be paid for by their customers on airport.

In one way or another, these charges filter through to ordinary consumers, whether it be higher car parking charges, higher airline ticket prices or more for a cup of coffee at an airport.

The big issue is ‘still out there’

The decision in Clarence City Council v Commonwealth of Australia does not, however, address the major point of contention between airports and local authorities in relation to ex-gratia rates.

In some cases, the key sticking point in negotiating ex-gratia rates agreements can be that the council seeks to impose its standard rates levy, without making any allowance or discount for the fact that many of the services which the council provides off-airport, are provided and paid for by airports themselves where sites are located on airport. These include services such as waste disposal, road construction and maintenance and lighting.

By failing to allow airports a discount for any services which it provides itself, airports effectively pay twice for these services.

A necessary corollary of the concept of competitive neutrality is that businesses operating from Commonwealth land should not be placed in a position of disadvantage vis-a-vie businesses that operate from privately held land. Former Minister for Transport and Regional Services, Mr Truss, as far back as 2006 acknowledged this issue during a parliamentary debate on airport tenant companies, stating that:

“Where it can be shown that the services normally funded through rates are not provided at [airport lessee company], we would expect a reasonable approach by councils would be to make an appropriate adjustment to rates assessment.”²

The role of a properly drafted ex-gratia rates agreement

As noted earlier, in the case of Hobart and Launceston Airports, there were no ex-gratia rates agreements in place.

The importance of airports and local authorities entering into a clearly drafted ex-gratia rates agreements cannot be undervalued so that these type of issues do not end up in court. A properly drafted ex-gratia rates agreement should include agreement on issues such as:

• land valuation methods for the land to be “rated”;
• the areas to be excluded for the purposes of calculation of ex-gratia rates; and
• the interplay between the agreement and the principles of competitive neutrality.

So that these types of disagreements do not arise in the future, it would also be helpful for the Commonwealth Government to produce guidelines and principles to be followed by the parties when negotiating ex-gratia rates agreements. This should include that there is to be no ‘double dipping’ by councils for costs which are paid for by airports themselves, keeping in mind that these costs are ultimately passed on to ordinary people who use the airports.

It has been reported in the media that one of the Councils involved in Clarence City Council v Commonwealth of Australia is considering an appeal³. If that happens, we will provide a further update.