Everything you need to know on when and how ‘site isolation’ principles really apply, and how best to navigate them 

By Anthony Whealy, Partner and James Oldknow, Senior Associate 

In recent years we have seen a sharp upswing in instances of development applications being delayed and/or refused by councils and planning panels, often quite incorrectly, on the basis of allegations that some other adjacent property will be left ‘isolated’, never to be developed, and that the developer should therefore somehow be forced or pressured to buy and incorporate additional parcels of land into their development site, and to then start the entire DA process over again with a new, larger scheme. In practice, this sometimes results in genuinely better development outcomes, but often it enables and indeed encourages adjacent landowners to ‘hold out’ and demand exorbitant sale prices from the developer, while objecting to and delaying the approval of the development application, essentially using and abusing the NSW planning system to directly extract financial gains from the developer. It also often results in wrongful DA refusals.

In this article, we analyse when these considerations really apply, how to identify and demonstrate when they do not apply, and how landowners and indeed consent authorities ought to navigate this seemingly complex and often hostile situation.  In doing so, we genuinely hope to clarify a number of misconceptions around ‘site isolation’ that appear to have worked their way into the typical DA assessment mindset under the NSW planning system. That said, please do contact us for bespoke advice on specific sites and situations.

What is meant by ‘site isolation’?

‘Site Isolation’ is not a defined term in the Standard Instrument Local Environmental Plan. At a high level, the term ‘site isolation’ is used frequently to describe situations where an individual allotment of land (or sometimes two or more land parcels) will be left undeveloped, or seriously underdeveloped, while other allotments around them are amalgamated and developed to higher densities. Really the concern arises where the allegedly isolated site will be too small to be developed in its own right, and where there are no longer any remaining adjacent / contiguous sites that it will be able to amalgamate with in the future. Think of a situation where tall tower buildings such as residential flat buildings are erected across large land parcels immediately on either side of a single storey dwelling house having a small allotment size. We often refer colloquially to such situations as “island sites” or “the broken tooth in the streetscape”.

Where a site cannot be developed at all unless it is amalgamated with other sites, it will very likely be an ‘isolated’ site. However, as we will explain below, it is where a site can be developed, but not to the highest and best use allowable (or the maximum height and FSR), that shades of grey arise. In these circumstances, one should not assume that a site is isolated simply because it cannot achieve a ‘maximum’ allowable height or GFA, particularly in zones where a broad variety of development types are permissible.

What planning controls regulate ‘site isolation’ in NSW?

Many councils and consultant town planners incorrectly jump straight to a well known Land and Environment Court ‘Planning Principle’, enshrined in the Court’s decision in Karavellas v Sutherland Shire Council [2004] NSWLEC 251 (‘Karavellas’). More on that shortly.

However, the correct starting point in considering site isolation issues must always be the directly applicable planning controls.  Often these are found in the relevant local government area’s Development Control Plans (‘DCP’). Sometimes they are found in the applicable Local Environment Plans (‘LEP’). We must emphasise, it is important to consider these specific controls before rushing into more generic Land and Environment Court ‘planning principles’ to determine a DA.

By way of example, A Council’s DCP may identify a minimum frontage width requirement, or minimum overall allotment size for specific types of development, such as residential flat buildings. This is one way that planning controls may incentivise multiple landowners to amalgamate. DCPs may even provide specific ‘lot amalgamation’ maps, which identify what allotments are envisaged to be developed in combination, irrespective of current ownership. Equally, such controls may be contained within an LEP, so that they have greater force. Recently we have seen examples of LEPs containing lot amalgamation maps but which then incentivise the amalgamation by providing ‘bonus’ height and / or FSR where sites are amalgamated and developed as one parcel.  It should be noted that where the controls are contained only within a DCP, then they have less force (they ‘are not statutory requirements’, pursuant to s3.42 of the Environmental Planning and Assessment Act (Act)) and, although their purpose is ‘to provide guidance’, these provisions in a DCP are required by law to be applied flexibly, rather than slavishly (s4.15(3A)(b) of the Act).

By way of a specific example, in the well known Land and Environment Court decision of Karavellas v Sutherland Shire Council [2004], the applicable site isolation controls were a combination of:

• The LEP contained a minimum allotment size of 1800sqm, applicable specifically to residential flat buildings within a particular zone, but subject expressly to any additional amalgamation controls in the DCP; and
• The applicable DCP included ‘precinct’ maps which specifically identified the subject development site for amalgamation together with the adjacent site.

Interestingly, the development site was nearly double the 1800sqm minimum allotment size, but it did not comply with the DCP amalgamation map, which in turn meant that neither the LEP control nor the DCP control were met.

As another example, in the well-known Court decision of Melissa Grech v Auburn Council [2004] NSWLEC 40, the isolation controls were far less prescriptive. In that case, a clause in the LEP simply provided that consent must not be granted if the consent authority “considers that the development will prevent the surrounding lots from being developed in accordance with this plan”.  There was no reference in the controls to development needing to achieve any maximum yield, leaving much room for interpretation.

The key point here is to initially consider ‘what do the planning controls in fact require for any particular site?’. The Senior Commissioner of the Land and Environment Court recently gave an important decision emphasising this, in Statewide Planning Pty Ltd v Canterbury-Bankstown Council [2021] NSWLEC 1210 (Statewide).  Here the Court held that:

• if there are specific provisions within a LEP or DCP that apply to a site and regulate ‘Site Isolation’, it is those provisions which must be considered (and not ignored) as part of any DA, including whether those provisions may be applied flexibly as permitted by s.4.15(3A)(b) of the Act;
• if the applicable LEP or DCP is silent on the regulation of ‘Site Isolation’, or if there are gaps in such provisions, it is necessary only then to consider the Court’s ‘Site Isolation’ planning principle, which is set out in Karavellas.

The Court explained this rationale as follows:

“The purpose of planning principles, as I understood them, is to fill the gaps where the planning control or policy is silent.  In circumstances where CDCP is specific, earlier decisions offering planning principle about different provisions are unhelpful, as each LGA and factual context is different.  And, while a flexible approach to the application of the CDCP is mandated by the EPA Act this does not mean that the intent of the provision can be distorted to achieve a particular end by applying an irrelevant planning principle and ticking a box’ (at [99]) (our emphasis).

When exactly is a site isolated?

We have noticed a general misconception that a site will be ‘isolated’ it if cannot be developed to the same height and density as other newly developed nearby sites, or to the maximum allowable FSR and height in the applicable zone. This is not the case.

Firstly, developers who argue that their DAs are compliant in terms of height and FSR are often rebuffed by councils who argue that height and FSR controls are “maximums, not entitlements”! (see for example Moore J. in Rebel MH Neutral Bay Pty Ltd v North Sydney Council (2018) 241 LGERA 107; [2018] NSWLEC 191 at [24]).  That being the case, we ask rhetorically how a site can be said to be isolated simply because it could not be developed to the absolute maximum allowable under the controls, when no such entitlement exists?

The reality is that ‘isolation’ is an overused term, as the question is really whether a site can be developed reasonably, having regard to the full range of planning uses allowable in the relevant zone.

This was clarified very plainly in the Statewide matter referenced earlier, where the applicant’s indicative schematic designs demonstrated that the neighbouring site could achieve an independent redevelopment, notwithstanding the key proposed redevelopment scenario was well below the maximum permissible planning controls achieving only 38% of the permissible FSR in the applicable R4 zone (at [90], [93]). The Senior Commissioner of the Court agreed that this was a reasonable outcome in the circumstances, accepting the evidence of the applicant’s expert town planner (at [92]-[93]) who opined that “not all development needs to be high rise or built to the maximum allowable FSR or height in order to achieve the R4 zone objective of providing “a variety of housing types within a high-density residential environment”. On that basis the Court held that “this does not necessarily make it an unreasonable development option accepting that it is a constrained site”.

As such, the bottom line is that a neighbouring site does not need to be able to meet its full or maximum development potential in order for a development on adjacent land to be permitted, without “isolating” the neighbouring site in a planning context. The real question is whether the site can be reasonably developed in its own right, not whether it can achieve the absolute maximum yield.

Similarly, Statewide was a reminder that it is not necessary to demonstrate that an adjacent site can be put to the most desirable use or development type that is permissible in a zone. In that matter, the allegedly isolated site was located in an R4 zone which could accommodate high rise residential flat buildings, but also other permissible lower density uses such as dwelling houses and boarding houses. The Senior Commissioner held that a reasonable development might be for one of those lower-density purposes, in which case the site was not isolated at all:

“The R4 zone Land Use Table permits residential flat buildings as well as a number of other uses including dwelling houses… the planning controls anticipate a variety of housing types within the high-density residential environment of the R4 Zone… to require only high-rise development would preclude the variety of housing types and other uses anticipated by the land use table and its objectives” (at [90]-[96]).

A similar reasoning was provide in Limahart Pty Ltd v Kogarah Council [2006] NSWLEC 415, where the Court said (at [31]):

“whilst the schematic design does not meet a number of numerical requirements in the DCP…  It is reasonably apparent that as an isolated site its development potential may not be as great as a larger site, but a satisfactory outcome is possible.”

Can a Council or Panel force a developer to buy adjacent land parcels?

The short answer is no. This is a powerfully important factor which is sadly overlooked by many consent authorities.   Under NSW planning laws and indeed under property laws generally, there is simply no power available by which a person can be compelled to sell their property to a private developer, nor is there any power for a private developer to force an unwilling landowner / neighbour to sell their property (other than via strata renewal legislation, which still requires agreement of 75% of all of the unit owners, meaning a significant level of consent or agreement is required, and is a topic for another day).

In many cases, there will be personal or emotional or familial reasons why a landowner is not willing to sell their property, even for an inflated price. As such, Council amalgamation maps and site isolation controls must be understood in this context. They may be desirable, and they can be seen to incentivise developers to make genuine efforts to amalgamate, but they are subject to other legal and market constraints. Equally, as will be discussed below, site isolation and amalgamation controls can only require developers to make reasonable offers to purchase, and for a reasonable period before a DA is lodged. Properly understood, planning controls and Principles cannot legally be used to hold developers to ransom by requiring offers above market value to be made, or to be retabled after those offers have been rejected.   There is a finite window of time during which reasonable offers can and should be made where a site will genuinely be isolated. But there is no mechanism under NSW planning laws (or otherwise) to force the sale of private land to another private landowner or developer.

As such, a Council or Panel cannot force a developer to buy adjacent land parcels. They can refuse a development application, if not satisfied that reasonable offers were made (as we will discuss below), but the reality is that this will simply leave both of the relevant sites undeveloped, and therefore cause additional sterilisation and isolation and delay.

In that context, the point of the exercise is to encourage and incentivise amalgamation through fair market transactions, but not to penalise a developer for refusing to pay above market pricing on a property transaction, or to delay the development assessment process by requiring ongoing negotiation after a reasonable offer has been rejected.

What does the Karavellas Planning Principle require?

The Planning Principle in Karavellas dates back nearly 20 years (to 2004) and is therefore reasonably well known, at least at face value. As such we will outline it only briefly.

In Karavellas, Commissioner Tuor of the Land and Environment Court brought together the principles arising from the slightly earlier decisions of Commissioner Brown in Melissa Grech v Auburn Council [2004] NSWLEC 40, and her own decision in Cornerstone Property Group Pty Ltd v Warringah Council [2004] NSWLEC 18, distilling them down to these considerations:

1. Firstly, is amalgamation of the sites feasible? (the First Limb); and
2. Secondly, can orderly and economic use and development of the separate sites be achieved if amalgamation is not feasible? (the Second Limb).

The First Limb goes to the question of whether an adjacent site can reasonably be purchased, for the purposes of lot amalgamation. It further details that:

• negotiations between the owners of the properties should commence at an early stage and prior to the lodgement of the development application; and
• where no satisfactory result is achieved from the negotiations, the development application should include details of the negotiations between the owners of the properties. These details should include offers to the owner of the isolated property; and
•  A reasonable offer….is to be based on at least one recent independent valuation and may include other reasonable expenses likely to be incurred by the owner of the isolated property in the sale of the property.

 It can be seen that the First Limb assists in understanding how to approach and document the negotiations to acquire an adjacent site.

The Second Limb instead goes to the question of whether an adjacent site will be isolated at all, by assessing what uses it may be put to, or what built form outcomes might be achieved, if it is not amalgamated with the subject site. In Karavellas, Commissioner Tuor elaborated on this by clarifying that the Second Limb requires the following consideration:

•  whether both sites can achieve a development that is consistent with the planning controls…will both sites be able to achieve a development of appropriate urban form and with acceptable level of amenity? and
• To assist in this assessment, an envelope for the isolated site may be prepared which indicates height, setbacks, resultant site coverage (both building and basement). This should be schematic but of sufficient detail to understand the relationship between the subject application and the isolated site and the likely impacts the developments will have on each other, particularly solar access and privacy impacts for residential development and the traffic impacts of separate driveways if the development is on a main road.

It can be seen that The Second Limb provides more practical guidance on what level and content of urban design analysis should accompany a DA, to demonstrate that adequate consideration has been given to site isolation issues.  Of course, any such analysis carried out in respect of an adjacent site can only be conceptual, and is not binding on the owners of that adjacent site.

Mills Oakley’s practical tips and observations, arising from Karavellas

Firstly, it is our firm belief that Karavellas somewhat puts the cart before the horse. This is because the First Limb of Karavellas (dealing with the process of negotiating a purchase) in fact expressly only applies “where a property will be isolated by a proposed development” (see Karavellas at para [18]).  It follows that if a site will not be isolated, it is utterly unnecessary to make attempts to acquire and amalgamate that site (unless lot amalgamation maps expressly apply). Therefore, the first step must be to determine whether a site will be isolated at all. This means addressing the Second Limb of Karavellas before jumping headlong into the First Limb.

Regrettably, we often see councils and Planning Panels demanding to see evidence of negotiations to acquire a site, before even understanding or determining whether the adjacent site will be isolated. We repeat that the Karavellas planning principle only requires negotiations “where a property will be isolated by a proposed development”.

This means that if an applicant can initially and sufficiently demonstrate that a neighbouring site will not become isolated because of their proposed development, the principle and issue of ‘Site Isolation’ does not need to be further considered in the assessment process, at all. This is a very practical observation by the Court as it would be a waste of resources to require every applicant to jump through unnecessary negotiating hurdles prior to DA lodgement and assessment where there will not be any isolation caused by a proposed development (albeit many councils fail to understand this fundamental point).

Secondly, in terms of timing, the Karavellas planning principle calls for any reasonable offers to purchase a site that is be isolated, to be made “at an early stage and prior to the lodgement of the development application”. This obviously makes great sense because a successful negotiation, resulting in an additional land parcel being added into a DA site, is likely to require a complete redesign, with a larger amalgamated development across the combined allotments. This realistically means starting again with a new DA.

Equally, where an adjacent landowner rejects a proposal, they are unlikely to be able to simply change their mind at a later time, when a DA is lodged and has been assessed or is up or determination. It would be unreasonable to require a proponent to continue to negotiate with a landowner even after a DA is submitted, given that this may lead to fundamental design changes or even the need for the entire design and process to go back to the drawing board via a new DA.  This seems to be precisely why Karavellas requires (a) evidence of negotiations and (b) that they pre-Date the DA lodgement.

Conversely though, where an applicant has failed to negotiate before a DA was lodged, it is not necessarily too late to do so after lodgement.  The Court in Adam Hughes Pty Ltd v Penrith City Council [2018] NSWLEC 1369 (at [85]) held that early negotiations are ‘best practice’ but if later negotiations are unsuccessful, these are still able to be considered by the consent authority. In that case, although negotiations commenced late, they were unsuccessful, and the Court noted that the adjacent owner ought to have been “aware of the implications of the offer and was provided an opportunity to weigh the offer and the impacts of the development”.

Thirdly, in terms of the valuation exercise, Karavellas makes it clear that “a reasonable offer….is to be based on at least one recent independent valuation” and “may include other reasonable expenses likely to be incurred by the owner of the isolated property in the sale of the property”.  This means that any offer should be preceded by and informed by a professional, bona fide valuation report. It need not necessarily be provided to the adjacent landowner, although it sometimes helps to show the valuation methodology. But the requirement is only that the offer be “based on” that valuation. We also recommend that the offer be a little higher than the valuation amount. This is to ensure that it covers the incidentals that the vendor will likely incur in the sale process, as suggested in Karavellas at [18] (an itemised breakdown of these is not necessary).

In terms of what a conceptual scheme ought to show, the Planning Principle is reasonably clear. Be sure to think of whether vehicular access will be available to the adjacent site, particularly on main roads, or whether easements and potentially shared basement access from the subject site (via break-through panels) could be demonstrated on the drawings.

Lastly, in our view, the valuation methodology is a matter best left to the professional valuer to decide and guide, but there is a risk in valuing a site as a standalone property when it is intended to be purchased as part of an amalgamated site. We have seen offers criticised regularly on the basis that they are unreasonable if they were based on a ‘standalone’ site valuation (Mackenzie Architects International Pty Ltd v Ku-ring-gai Council [2017] NSWLEC 1273).  That said, in both Statewide and Karavellas, the Court reminded that a consent authority should not involve itself whatsoever in price negotiations. We expand on this below.

What then is the consent authority’s role in the valuation and negotiation process?

The Court answered this quite affirmatively in Karavellas, stating plainly that the consent authority should in no way involve itself in the negotiation process, nor should it require an applicant to increase its offer simply because the parties are close in price. In that matter, the Court rejected the Council’s arguments that as the parties were only $50,000 apart, amalgamation was feasible, saying:

“While it appears feasible to amalgamate the sites, it is on the basis that Mr Khoury’s counter offer is accepted. I do not see it as the role of the Court to enter into negotiations on a final purchase price but rather to be satisfied that a reasonable offer has been made”.

This was reiterated by the Senior Commissioner in Statewide, stating at [114]:

“I have evidence of an offer that is reflective of market value plus a premium from the…expert valuer…. I only need to be satisfied that the threshold point of negotiations has passed and I do not need to delve into the negotiations to decide who’s being more reasonable or unreasonable”.

Put simply, once the consent authority is satisfied that a reasonable offer has been made, then unless that offer was accepted, the consent authority should have no more involvement in the negotiation process whatsoever, bearing in mind too that there is no legal power in NSW to compel the sale or purchase of land by a private developer, and certainly it would be unlawful in the extreme to require the developer to pay above fair market value.

Ultimately, an offer is either accepted or it is not. Even a price gap of only $50,000 was held in Karavellas to be a rejection of the offer, by an owner who was, or ought to have been “in full knowledge of the implications for his site” (para [23]).

Where a site is truly isolated, does it follow that an adjacent DA ought to be refused?

In our opinion, the answer is clearly no. Firstly, this is the point of the Karavellas planning principle – to ensure that reasonable efforts to acquire have been made. The planning principle does not say that where negotiations fail, consent must not be granted. Instead it says that “the level of negotiation and any offers made for the isolated site are matters that can be given weight in the consideration of the development application”. In other words, it becomes a discretionary consideration, guided by the Planning Principle.

Secondly, any such refusal may only lead to the sterilisation or isolation of the development site as well, possibly long into the future when ownership of one or both properties have changed hands, and even then, assuming both owners are willing to develop or sell. This would be another discretionary consideration, making it difficult for a consent authority to outright refuse a DA in circumstances where an adjacent owner is unwilling to accept a reasonable purchase offer. Ultimately, what purpose would the DA’s refusal serve? The delay of having to start a DA all over again may kill off the viability of a proposal completely.

In Vanovac Tuon Architects Pty Ltd v Ku-ring-gai Council [2016] NSWLEC 1558, the Court considered a familiar circumstance where negotiations to purchase a site had failed, and held the following, in the plainest of terms:

“It does not follow that simply because negotiations with the owner of an isolated site have not been successful that any development that may leave a site isolated must be refused. In my view, it would be unreasonable to withhold an approval, even if it results in a site that cannot be developed to its full potential if all reasonable attempts have been made to address the potential isolation issue.”

Similarly, in Karavellas, the Court expressly acknowledged that there are obvious consequences for a party who chooses to ‘hold out’ rather than accept a reasonable purchase offer. In approving that DA, the Court in Karavellas expressly said it had “given weight to the efforts made by the applicant to initially amalgamate the sites…and the rejection of the latest offer by Mr Khoury in full knowledge of the implications for his site” (at [23]). Further, and equally aptly, the Court noted that the owner of the isolated site in that case “is fully aware that access through his site is not required and the implications for re-development of his site in the event that it is not amalgamated with the adjoining sites” (at [20]).

Most importantly, in Karavellas the Court expressly acknowledged that even though amalgamation might achieve a better planning outcome, a party can frustrate the process by rejecting reasonable offers, and this type of conduct must be taken into account:

“Amalgamation of the sites to achieve a desirable outcome must be balanced against one property owner frustrating the overall development and the property interests of other owners” (at para [23]).

And in Hamdan Co Group Pty Ltd v Canterbury-Bankstown Council [2018] NSWLEC 1255, the Court accepted that:

“It should not be required for the applicant to ensure that adjoining owners can redevelop their site to the highest and best use of an RFB when those owners do not agree to sell their site to the applicant at a market rate to create a sufficiently wide site to enable an RFB redevelopment over both properties.”

Of course, there will be circumstances where site isolation can lead to the refusal of a development application, for example where reasonable purchase offers have not been made, or where the design of the subject DA is outright unreasonable in terms of managing its own impacts. As noted in Karavellas:

“The subject application may need to be amended, such as by a further setback than the minimum in the planning controls, or the development potential of both sites reduced to enable reasonable development of the isolated site to occur while maintaining the amenity of both developments”.

As such, where a site will be isolated, and it cannot reasonably be purchased, the onus will fall upon the DA design team to ensure that the design of the new development is carefully or skilfully managed. But this obligation arises for all DAs under the NSW planning system. Nevertheless, as the Land and Environment Court often reminds us, the task when assessing a DA is simply to determine whether it is acceptable, not whether it achieves ‘design nirvana’ (Ausling v Willoughby City Council [2015] NSWLEC 1226 at [105]).

Concluding comments

As you can expect, a significant body of case law has developed in the Courts on the topic of ‘Site Isolation’.  It is clear to us from those cases, that what the principle of ‘Site Isolation’ seeks to do is to ensure that a landowner has a fair opportunity to sell a property before their site is isolated. If they do not take that opportunity, when presented with a reasonable offer, they may well suffer the consequences, as no one can force a landowner to sell, and some sites may simply become isolated – that is just a reality of the matrix of laws applicable to property ownership in NSW. The obligation is for an applicant to give that landowner a fair and reasonable opportunity to sell and move on before such isolation occurs and this will need to be presented and documented as part of a DA in accordance with specific ‘Site Isolation’ provisions within LEPs, DCPs and/or the Court’s planning principle in Karavellas.

Need further assistance?

If you need further assistance to determine whether the issue of ‘Site Isolation’ is a relevant consideration for your current (or next) DA and if it is, how to address it, we are ready able to assist. As mentioned, we are often asked to provide our opinion on this subject in a format suitable to be presented to councils and various planning panels. Of course, we also specialise in DA appeals should any dispute arise with on this topic needing resolution in the Courts.