LFD Homes Pty Ltd ATF The LFD Homes Unit Trust v The Council of the City of Sydney (No 2)

Representation: Counsel:
A Galasso (Applicant)
J Lazarus (Respondent)
Solicitors:
Mills Oakley (Applicant)
Council of the City of Sydney (Respondent)

File Number(s): 2023/428688

Publication restriction: No

JUDGMENT

1. COMMISSIONER: These proceedings are remitted to me to be re-determined according to law and Preston CJ’s reasons for judgment in LFD Homes Pty Ltd ATF The LFD Homes Unit Trust v The Council of the City of Sydney [2025] NSWLEC 145 (Appeal Judgment), following the appeal of my decision in LFD Homes Pty Ltd v The Council of the City of Sydney [2025] NSWLEC 1492 (Original Decision).

2. These proceedings are an appeal pursuant to the provisions of s 8.7(1) of the Environmental Planning and Assessment Act 1979 (NSW) (EPA Act) against the refusal of Development Application No. D/2023/700 for the conversion of an existing 32 room boarding house to provide four attached dwellings with associated alterations and additions, and associated subdivision of 58-64 Selwyn Street, Paddington (the site) from two lots into four lots (the proposal) by The Council of the City of Sydney (the Council).

3. The evidence before me is the evidence as it was in the Original Decision.

Issues

4. The Council contends that the proposal would result in the unacceptable loss of affordable rental boarding house accommodation.

The proposal

5. The proposal is for a change of use from a boarding house to provide four attached dwellings with associated alterations and additions including the demolition of the rear wings of the terrace houses, and subdivision of the site from two lots into four lots.

Statutory context

Sydney Local Environmental Plan 2012

6. The site is on land zoned R1 General Residential under the Sydney Local Environmental Plan 2012 (SLEP). The proposal for four attached dwellings is a nominate permissible use with consent in the zone. The objectives of the zone are:

• To provide for the housing needs of the community.

• To provide for a variety of housing types and densities.

• To enable other land uses that provide facilities or services to meet the day to day needs of residents.

• To maintain the existing land use pattern of predominantly residential uses.

State Environmental Planning Policy (Housing) 2021

7. The application involves an existing boarding house, which falls within the definition of “low-rental residential building” in s 45 of State Environmental Planning Policy (Housing) 2021 (Housing SEPP). As the boarding house is in Paddington, it is within the area described as the Eastern Harbour City, so that Part 3 of the Housing SEPP applies to the boarding house: s 46(1) (Appeal Judgment at [5]).

8. Section 47(2) of the Housing SEPP specifies relevant matters that a consent authority must take into account in determining whether to grant development consent to an application to carry out development in relation to a building to which Part 3 of the Housing SEPP applies. The relevant matters specified in s 47(2) of the Housing SEPP are twofold: first, the Guidelines for the Retention of Existing Affordable Rental Housing (the Guidelines, Exh 2, tab 4), and second, the eight matters specified in paragraphs (a) to (h) (Appeal Judgment at [11]-[12]). Section 47(2) of the Housing SEPP provides:

(2) In determining whether to grant development consent, the consent authority must take into account the Guidelines for the Retention of Existing Affordable Rental Housing, published by the Department in October 2009 and the following—

(a) whether the development will reduce the amount of affordable housing in the area,

(b) whether there is available sufficient comparable accommodation to satisfy the demand for the accommodation,

(c) whether the development is likely to result in adverse social and economic effects on the general community,

(d) whether adequate arrangements have been made to assist the residents who are likely to be displaced to find comparable accommodation,

(e) the extent to which the development will contribute to a cumulative loss of affordable housing in the local government area,

(f) whether the building is structurally sound, including—

(i) the extent to which the building complies with relevant fire safety requirements, and

(ii) the estimated cost of carrying out work necessary to ensure the building is structurally sound and complies with relevant fire safety requirements,

(g) whether the imposition of an affordable housing condition requiring the payment of a monetary contribution would adequately mitigate the reduction of affordable housing resulting from the development,

(h) for a boarding house—the financial viability of the continued use of the boarding house.

9. Some of the matters specified in s 47(2) are explained or defined in s 47(3) and (4) and s 48 of the Housing SEPP. The matter in s 47(2)(b) of whether there is available sufficient comparable accommodation is explained in s 47(3), which deems sufficient comparable accommodation not to be available (Appeal Judgment at [13]):

(3) Sufficient comparable accommodation is conclusively taken not to be available if, for the 3 months occurring immediately before the development application is lodged, the average vacancy rate in private rental accommodation for Sydney, as published monthly by the Real Estate Institute of New South Wales, is less than 3%.

10. The matter in s 47(2)(g) concerning the imposition of an affordable housing condition requiring the payment of a monetary contribution to mitigate the reduction of affordable housing resulting from the development is explained in s 48(1), (2) and (3) of the Housing SEPP, including the circumstances in which any monetary contribution can be required to be paid and the amount of any such monetary contribution (Appeal Judgment at [14]).

11. The matter in s 47(2)(h) of the financial viability of the continued use of the boarding house is explained and defined in ss 47(4) and 48(4) of the Housing SEPP. Section 47(4) deems the continued use of the boarding house to be financially viable “if the rental yield of the boarding house as determined under section 48(4) is at least 6%.” Section 48(4) prescribes how the rental yield of the boarding house is to be determined (Appeal Judgment at [15]):

“In this section—

rental yield means the rental yield for a period, expressed as a percentage, determined by the consent authority in accordance with the following formula and taking into account the Guidelines for the Retention of Existing Affordable Rental Housing, published by the Department in October 2009—

where—

RY is the rental yield.

Y is the gross rental income from the boarding house for the period.

E is the total expenses for the boarding house, excluding expenses that have been charged to residents, for the period.

D is the capital depreciation of the boarding house for the period.

V is the total value of the boarding house were it to be purchased for the purposes of continuing its use as a boarding house.

U is the estimated cost of carrying out work referred to in section 47(2)(f)(ii).”

Consideration of the matters under section 47(2) of the Housing SEPP

12. The obligation under s 4.15(1) of the EPA Act is to consider the matters that are of relevance to the development the subject of the development application. This task requires taking the matters in s 47(2) of the Housing SEPP into account in determining whether to grant development consent to development for a purpose specified in s 47(1) in relation to a building to which Part 3 of the Housing SEPP applies (Appeal Judgment at [65]). I must complete my assessment of the matters in s 47(2)(h) and (g) and then go on to engage in a “balanced consideration” of the matters as required by the Guidelines (Exh 2 tab 4) (Appeal Judgment at [71]).

(a) of the Housing SEPP: whether the development will reduce the amount of affordable housing in the area

13. The social planning experts agreed that the proposal would result in the reduction of 32 boarding rooms of affordable housing suitable for very low to low-income earners in the area, which would reduce the amount of affordable housing in the area (Original Decision at [68]-[71]).

(b) whether there is available sufficient comparable accommodation to satisfy the demand for the accommodation

14. The town planning experts agreed that the average vacancy rate in private rental accommodation for Sydney, as published monthly by the Real Estate Institute of NSW, was 1.6-1.7% for the three-month period preceding the lodging of the application (Exh 4 [19]). As the average vacancy rate in private rental accommodation for Sydney as published monthly by the Real Estate Institute of New South Wales was less than 3% for the 3 months prior to the lodgement of the application, then sufficient comparable accommodation is conclusively taken not to be available, as deemed under s 47(3) of SEPP Housing (Original Decision at [72]-[74]).

(c) whether the development is likely to result in adverse social and economic effects on the general community

15. I accepted Ms Heller's evidence that there was insufficient comparable accommodation available in the locality to satisfy the demand for affordable rental housing (Exh 6, p 27). Less housing choice contributes to a loss of household diversity increasing the social isolation of remaining low-income residents. Insufficient comparable accommodation increases competition for existing affordable rental housing which can lead to an increase in rents, making housing less affordable for the community generally. (Original Decision at [77]). The displacement of the boarding house residents was likely to have resulted in social dislocation for those displaced residents and the community they have been displaced from (Original Decision at [79]).

(d) whether adequate arrangements have been made to assist the residents who are likely to be displaced to find comparable accommodation

16. I was satisfied, based on the evidence, that adequate arrangements had been made to assist the residents who had been displaced to find comparable accommodation (Original Decision at [83] and [85]).

(e) the extent to which the development will contribute to a cumulative loss of affordable housing in the local government area

17. The social planning experts agreed that the loss of 32 boarding house rooms, as a result of the proposal, would contribute to a cumulative loss of affordable housing in the local government area (Exh 6, p 9). I accepted Ms Heller’s evidence that while the loss was a relatively small proportion of the overall count of housing classified as affordable to very low-income earners, it was significant in relation to the diminishing supply of older style traditional boarding houses and other private rental housing affordable to the lowest income earners (Exh 6, p 10) (Original Decision [86]-[87]).

(f) whether the building is structurally sound, including—

(i) the extent to which the building complies with relevant fire safety requirements, and

(ii) the estimated cost of carrying out work necessary to ensure the building is structurally sound and complies with relevant fire safety requirements

18. I found that the primary structure of the building is in a reasonably structurally sound condition, but structural defects would need to be rectified (Original Decision at [55]). Fire safety works need to be carried out, including to address the Fire Safety Order issued for one of the terrace houses (Original Decision at [59]-[60]). I estimated the cost of carrying out works to ensure that the building is structurally sound and complies with fire safety requires to be $1,000,000 (Original Decision at [65]).

(g) whether the imposition of an affordable housing condition requiring the payment of a monetary contribution would adequately mitigate the reduction of affordable housing resulting from the development,

19. I must determine whether the imposition of an affordable housing condition requiring the payment of a monetary contribution would adequately mitigate the reduction of affordable housing resulting from the development (Appeal Judgment at [31]).

20. I am satisfied that the imposition of an affordable housing condition requiring the payment of a monetary contribution would not adequately mitigate the reduction of affordable housing in the area. The quality of the accommodation being lost is extremely poor and the boarding house was providing very low to low rental accommodation only because of its sub-standard condition. There is insufficient comparable accommodation in the area because the low levels of rent demanded for the boarding rooms were responsive to the poor and unhygienic accommodation on offer. I accept the applicant’s submission that accommodation classified as affordable to very low-income earners and of an acceptable condition could not be provided in Paddington by an investor and be financially viable. Rents at the bottom of the market in a desirable inner-city location like Paddington are unlikely to be affordable for the cohort who were residing at the boarding house and this is demonstrated by Dr Ryan’s evidence that the former residents of the boarding house were not relocated to the same or a neighbouring suburb (Original Decision at [78]). The payment of a monetary contribution cannot mitigate the fact that very low rental accommodation cannot be provided by the private market in this area.

21. I accept the applicant’s submission that the State Government has determined that boarding houses of such low viability as to have a rental yield of 3% or less are not required to pay a monetary contribution because this likely reflects the policy decision not to penalise the redevelopment of severely non-viable boarding houses.

(h) for a boarding house—the financial viability of the continued use of the boarding house.

22. Given the agreement of the parties that the rental yield of the boarding house was less than 6% as determined under s 48(4) of the Housing SEPP, I do not need to determine the rental yield of the boarding house for the first purpose of s 47(2)(h) of the Housing SEPP, because it is deemed to be financially unviable by s 47(4) (Appeal Judgment at [20]).

23. I must make a finding regarding the rental yield for the second purpose of s 47(2)(h) of the Housing SEPP to determine whether a monetary contribution may be sought, and if so, the amount of the contribution (Appeal Judgment at [21]). The rental yield, as determined in the Original Decision and corrected by his Honour in the Appeal Judgment, is 2.75% (Appeal Judgment at [25]). Under s 48(3)(a) of the Housing SEPP, if the rental yield of the boarding house is 3% or less, no contribution may be sought. As the rental yield of the boarding house is less than 3%, no contribution is payable.

A balanced consideration of the criteria under section 47(2) of the Housing SEPP

24. The remitted proceedings require a holistic reconsideration of the matters under s 47(2) of the Housing SEPP (Appeal Judgment at [71]). The balanced consideration of the criteria under s 47(2) must be undertaken only by reference to the continued use of the existing boarding house (Appeal Judgment at [2]-[4]).

25. The assessment of financial viability for a boarding house is a “crucial part of the assessment… the underlying principle is that it would be unfair and counterproductive to seek the continued operation of a boarding house where that operation could not provide a reasonable return on investment” (Guidelines, Exh 2, tab 4, p 11). The method used to evaluate financial viability under s 47 of the Housing SEPP is based on rental yield calculated in accordance with the formula at s 48(4), and the boarding house is not financially viable if the rental yield is 3% or less, at s 48(3). The rental yield of the boarding house was determined to be 2.75%, so the boarding house is not financially viable within the meaning of Part 3 of the Housing SEPP. It is unfair to seek the continued operation of this boarding house in its current condition as it cannot provide a reasonable return on investment. I accept the applicant’s submission that compelling private landowners to continue using their land as a boarding house when it is not financially viable would undermine the economic incentives designed to encourage private investment in such accommodation.

26. The affordable housing framework under the Housing SEPP and the Guidelines expects affordable housing to be both affordable and to achieve an acceptable housing standard. The Guidelines state, “It is vitally important that acceptable levels of health, amenity and safety be maintained in low rental housing. In some cases, a building may be currently providing low rental accommodation only because it is in sub-standard condition” (Guidelines, Exh 2, tab 4 p 9). The current condition of the boarding house is well below acceptable living conditions, which was evident during the site view. It is vitally important that acceptable levels of health, amenity and safety be maintained in low rental housing (Guidelines, Exh 2, tab 4 p 9). I accept and agree with the applicant’s submission that it is unreasonable to expect lodgers to access affordable housing at the expense of their health and safety. The boarding house is unsuitable for use as affordable housing in its current state.

27. There is insufficient comparable accommodation in the area because the low levels of rent demanded for the boarding rooms were responsive to the poor and unhygienic accommodation on offer. I accept the applicant’s submission that accommodation classified as affordable to very low-income earners and of an acceptable condition could not be provided in Paddington by an investor and be financially viable.

28. The historic displacement of the lodgers caused a break down in their established social networks (Original Decision at [79]). Requiring the continued operation of the boarding house would not change this adverse social effect within the local community.

29. Despite the proposal being assessed as having negative outcomes under some of the criteria in s 47(2) of the Housing SEPP, the application warrants approval as these considerations are outweighed by two critical facts, as follows:

30. the boarding house is only providing low to very low rental accommodation as a function of its sub-standard condition including the deficiencies identified by the structural engineering and fire experts; and

31. the boarding house is financially unviable and as such, is a burden to the investor as it cannot provide a reasonable return on investment.

32. Although the proposal will reduce the amount of affordable housing in the area and there is insufficient comparable accommodation to satisfy the demand; it is not a solution to retain a boarding house that does not achieve an acceptable housing standard and is financially unviable. I am satisfied, having considered the criteria under s 47(2) holistically, that it would be unreasonable to seek the continued operation of this boarding house in its current condition.

Conclusion

31. The assessment of the application requires consideration of all the relevant matters under s 4.15(1) of the EPA Act. The proposal for attached housing, as a nominate permissible use in the zone, is compatible with the objectives for the R1 zone, consistent with the presumption that development for a purpose that is classified as being permitted with consent in the zone will be compatible with the objectives of the zone. The Council raised only the issue of an unacceptable loss of affordable rental boarding house accommodation. Balancing the issue raised under s 47(2) of the Housing SEPP against the other relevant considerations identified for consideration under s 4.15(1) of the EPA Act, I am satisfied that it is appropriate to grant consent to the application.

32. The conditions of consent are agreed by the parties.

Orders

33. The orders of the Court are:

34. The appeal is upheld.

35. Development Application No. D/2023/700 for the conversion of a boarding house to provide four attached dwellings with associated alterations and additions, and subdivision of the site from two lots into four lots, at 58-64 Selwyn Street, Paddington, is determined by the grant of consent, subject to the conditions of consent at Annexure A.

36. The exhibits, other than Exhibit 1, are returned.

Susan O’Neill

Commissioner of the Court

Annexure A (363 KB, pdf)

**********