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Compulsory purchase and compensation - recent lands tribunal decisions
Compulsory purchase and compensation - recent lands tribunal decisions
Over recent years, I have reported in these columns on a number of cases in which the lands tribunal has considered the question of what constitutes the scheme underlying the acquisition. I have done so with a view to establishing some sort of pattern, which will enable valuers to predict whether the lands tribunal will decide that the scheme is merely the compulsory purchase order affecting the property, and whether it is a much broader concept embracing any associated plans and strategies designed to meet substantially the same purpose. Aware that no such pattern has emerged, I this year consider the new cases on the subject, from which I believe I can claim to have gleaned at least one useful principle which is likely to be followed in the future. First, however, I take a look at a rare example of a case in which the local authority was able to convince the lands tribunal that it knew better than the claimant on the question of whether it would be viable to relocate his business, or whether total extinguishment was inevitable. I also consider a decision in which I have strong reservations concerning the adjustments to accounts which the tribunal made in a permanent loss of profits claim, and provide an update on the tribunal's evolving attitude to the use of the residual valuation method. Finally, I consider a case in which the tribunal was asked to reimburse the claimant for the impact of taxation on his compensation claim, and maintained its reluctance to do so.
Relocation or total extinguishment
Lamba Trading Company Ltd v. City of Salford (1999) concerned a large cash and carry warehouse which was acquired for road widening purposes by the Trafford Park Development Corporation. While there was some difference of opinion as to the value of the freehold property, the principal issue between the parties was whether compensation should be assessed on the basis of total extinguishment of the claimant's business, or the basis of a hypothetical relocation. For the claimant, who had ceased trading, it was argued that the closure of the business was entirely due to the compulsory purchase. The acquiring authority claimed, however, that suitable alternative accommodation was available, and that by not relocating into that accommodation the claimant had failed in its duty to mitigate its loss.
In putting forward this argument the authority must have been aware that it was fighting something of an uphill battle, as it has long been established that the claimant is far better qualified than the acquiring authority to judge whether or not he will be able to trade successfully in alternative accommodation. In Knott Mill Carpets v. Stretford BC (1973) 227 EG 153, the Council acquired a carpet shop on a traditional shopping street, and argued that the shop had the option of relocating into the new pedestrianised Arndale Centre which had just been built in the district. By rejecting the offer of a unit in the Arndale Centre, albeit at a substantially higher rent, the company had not mitigated its loss and therefore compensation should be assessed on the notional relocation cost, rather than on the basis of total extinguishment. The lands tribunal came down firmly on the side of Knott Mill Carpets, who argued that with many years experience in the carpet trade, they were far better qualified and the local authority to judge whether turnover would increase sufficiently within the Arndale Centre for them to be able to afford the higher rent.
In order for it to succeed in its argument, the Development Corporation would, therefore, need to overturn the presumption that the claimant will generally know what is best for his own business.
Suitable alternative accommodation
The claimant's argument was weakened early on when it was disclosed that as early as 1988, five years before the compulsory purchase order was confirmed but in full knowledge of the impending scheme, they had purchased a former bus depot and applied for planning permission for a cash and carry warehouse, stating in the application that staff from the existing operation would be transferred there. The tribunal expressed some concern that this information had only come to light at the time of the hearing, and had not previously been disclosed to the Council. The claimant stated that it had immediately become apparent that the premises were not suitable for a cash and carry warehouse, and that the unit had eventually been let for storage and distribution.
It was argued for the claimant that due to the nature of the business, and the profile and location of its customers, there were three critical factors to be considered in any search for alternative accommodation. The premises would need to be close to the subject business, in a prominent location, and easily accessible. In late 1987, it instructed Chestertons to seek out suitable sites and buildings and in the keen market of that time, it purchased a nearby two acre site on Ordsall Lane for which, not without difficulty, it eventually obtained planning permission for cash and carry development. This scheme was also later abandoned; this time for insurance and security reasons, and an attempt to acquire another nearby property was unsuccessful. In the light of this history, the claimant felt that he had made exhaustive attempts to relocate but had been unable to do so. Possibly aware of the principles established in the Knott Mill case, counsel for the claimant stated that:
Nobody could know the cash and carry business as well as the person who was actually carrying on the business. The Council's experts and witnesses were ... conspicuously lacking in knowledge of cash and carry requirements. The suitability or otherwise of alternative premises would be ... best judged by the claimant, and it was not for others to second-guess this.
While the purchasing authority suggested other possible reasons for the decision to close the business, including the death of a director and increasing competition, their case centred on a retrospective search which was undertaken in 1996 of the suitable alternative sites and buildings to which the claimant might have been able to relocate during the period from 1994 to 1996. This, they claimed, had revealed a total of 15 buildings and 12 sites which broadly met the three criteria, though the claimant could not accept that any of these sites was suitable, some of them being in backwater locations. The authority argued strongly that there was no good reason why the claimant could not have proceeded to develop the Ordsall Lane site, or to use the former bus depot. Far from being forced to extinguish the business, the claimant was actually continuing to operate a very similar operation (though as this was being undertaken from a Portacabin there must have been limits to the similarity).
The claimant is the best judge
The decision on the lands tribunal began by restating the principle that "the best judge of what is suitable and what is not must be the operator of the business". However, it was unconvinced that neither the former bus depot nor the Ordsall Lane site were suitable for relocation. The tribunal found that the claimant did have not one but two alternatives to extinguishing the business, even discounting the other properties put forward by the Council. Their decision not to do so may well have been influenced by factors other than the impending compulsory purchase order, such as the demise of their typical corner shop customer and increasing competition. The decision to close down the business was not the action of a reasonable businessman. The claimant may well have seen "an opportunity to diversify into other less cash intensive but more profitable areas, at the same time as picking up a significant payment for the extinguishment of the business". Accordingly, it did not take reasonable steps to mitigate the additional losses which would be caused by extinguishment, and compensation should be assessed based on the notional costs of relocation.
Lost opportunity to expand
On the facts of this case the acquiring authority successfully scaled the Everest of convincing the lands tribunal that it knew better than the claimant when it came to the decision to relocate or close down. It will no doubt be very relieved to have done so given that the sums claimed included not only »2,679,000 in respect of permanent loss of profits, but »1,520,000 for loss of opportunity to expand the business. The latter element of the claim did not, however, automatically die with the loss of the point of principle concerning relocation or extinguishment.
A forensic accountant expert witness argued that the claimant would have been likely, in the absence of a CPO, to have relocated to larger premises, particularly as the company's growth had been restricted in the period to March 1995, due to the inability to expand at the existing site. This does seem a particularly tenuous argument, because the suggestion that the claimant would have relocated to larger premises in the no scheme world appears to be in direct conflict with his earlier argument that no suitable alternative accommodation was available. The sum claimed, based on four times the estimated increase in annual profits, also seems ambitious. The tribunal gave this item of claim short shrift noting that, "in reality, there has been no lost opportunity, because those opportunities were there and could have been taken".
General items of disturbance
The remainder of the decision is taken up with heads of compensation typical to a large business disturbance claim, particularly the abortive costs incurred in seeking alternative premises. These items are particularly complicated due to the fact that, having decided the goodwill claim on the basis of notional relocation, the tribunal then had to be consistent by dealing with the other heads of claim on the assumption that relocation to the Ordsall Lane site had taken place. Substantial sums were awarded, including interest on the Ordsall Lane site purchase price, as it had to be acquired some time before relocation would take place. The claim for loss in value of the Ordsall Lane site during that period was, however, rejected on grounds that the local authority could not be held responsible for changes in the market value of land.
Other heads of claim considered included temporary loss of profits, management time, double overheads, costs of notifying customers, and specialist adaptations to the notional new premises. In short, the full gamut of a business disturbance claim is considered in some detail, making this case an ideal refresher course for students of the subject.
Compensation for goodwill
In Bud and Jet Ltd v. Warrington BC (1999) the tribunal was asked to decide a number of preliminary points concerning a claim for total extinguishment of a leasehold business. One of these points concerned the compensation to be paid for the loss of the leasehold interest, based on capitalisation of the profit rent. Although not argued by the acquiring authority, the tribunal decided that, as the lease contained an absolute prohibition against assignment or subletting, the leasehold interest had no value in the open market. Compensation under the head of land taken should, therefore, be nil.
Moving on to the item of claim relating to permanent loss of profits (goodwill), the tribunal decided that it first had to adjust the calculations submitted to reflect its initial decision concerning the valuation of the leasehold interest. Both parties had made a deduction from the profits shown in the accounts to reflect their own assessment of the profit rent. The tribunal felt that, having decided that no compensation was payable in respect of the profit rent, such a deduction was no longer appropriate, commenting:
I did mention, however, that there is a corollary to my decision in this respect. It relates to the adjusted net profit figure to be used in calculating compensation for total extinguishment of the claimant business. It is standard practice to deduct from the actual profit a figure representing the profit rent (in this case of a leasehold property) or the full rental value (if the property is held freehold). The reason for this convention is to avoid a double counting, as the full rental value of the property is normally reflected in the capital value of the claimant's interest. Since there is no value to that interest in this case, it is only the actual rent payable that should be taken into account in arriving at the net profit of the business.
I must disagree with the tribunal on this point, as it seems to me that there is a more substantial reason for adjusting for notional or profit rent. The purpose of any adjustment to profits shown in accounts is to assess the true profitability of the business, unsullied by any exceptional, personal, or extraneous income or outgoings. If a business is conducted from leasehold premises with an annual rent of »10,000, then it is self-evident that the net profits shown in the accounts will be »10,000 lower than if the same business was operated from freehold premises. Is the leasehold business therefore more profitable than the freehold business? Of course not: in order to look at both businesses in a consistent manner it is necessary to deduct notional rent from the profits shown in the freehold business. To put it another way, the owner of the freehold business has the option of closing down the business and letting out the shop at »10,000 per annum. Therefore, although his profits appear to be higher than the leasehold operator, »10,000 of those profits could be obtained without the effort of running the business at all. That »10,000 is actually a return on the ownership of property, not on the operation of the business, and not to adjust for it overestimates the true profitability of the business itself. Exactly the same principles apply where, as in the subject case, the property is leasehold, but the current rent payable is less than open market rental value. The profit rent should be deducted to assess the true profitability of the business, and exclude any value which is more correctly attributable to an interest in land. The fact that in this case the tenant is prohibited from assigning his leasehold interest is a matter for consideration under the head of land taken, and should not influence the disturbance aspect of the claim.
Capitalisation of adjusted net profit
Not only is the advice of the tribunal not to make an allowance for profit rent of dubious validity, it will also cause problems when it comes to the capitalisation of the average adjusted net profits, once all adjustments have been made. As stated above, this case concerned preliminary points of principle, and the tribunal was not required to consider calculations in detail. It did, however, confirm the correctness of the usual approach, which is to apply a YP or multiplier (normally between 1 and 5), to the average adjusted net profit, in order to capitalise the compensation payable. The tribunal added that, having decided that it would not be appropriate to deduct for the profit rent in analysing the accounts, "in capitalising the profits, it will also be necessary to reflect the fact that, following the rent review in June 1996, the rent payable would have increased". Therefore, instead of simply calculating an average adjusted net profit assuming that the premises are let at open market rental value, and applying a simple multiplier of between 1 and 5, the surveyors for the two parties are faced with an extremely complex calculation. Having made no adjustment to the accounts in respect of the profit rent, they must somehow reflect in their multiplier the fact that this profit rent, which will have varied from year to year in any case, will disappear completely only one year after the valuation date.
It seems that the lands tribunal has unwittingly arrived at a further good reason for always adjusting accounts to reflect the property being let at full open market rental value - the fact that not doing so renders the capitalisation part of the calculation virtually impossible.
The no-scheme world
When considering which cases to include in these pages, one of my main criteria is whether the decision of the lands tribunal will assist surveyors practising in the field of compulsory purchase and compensation to understand the likely attitude of the tribunal on points of principle. It is my hope that surveyors acting for the claimant and for the acquiring authority will thereby gain an element of certainty as to how any point in dispute is likely to be resolved, and perhaps even avoid a reference to the lands tribunal entirely.
In some areas, such as the acceptability of residual valuations, and the valuation of land with ransom value, I would claim a measure of success, as a number of cases to which I have referred in recent years have shown a consistent approach, albeit involving an element of evolution in the case of residual valuations. I hope to throw further light on these areas later in this article. On another regularly featured topic, the question of what constitutes the scheme underlying the acquisition, my efforts have met with abject failure. Not a year has gone by without reference to one of more cases in which the lands tribunal has had to decide the nature of the scheme. On referring back to these decisions, the only pattern which emerges is that for every decision in which the lands tribunal opts for a narrow interpretation of the scheme, there is another in which a broader interpretation is adopted. To some extent this is inevitable, as the tribunal is constantly at pains to stress that the decision can only be made on the facts of each individual case. Perhaps the time has come to stop looking for a consistent policy and accept that the only pattern is that there is no pattern.
The broad scheme and the narrow scheme
The classic scenario is that plans are announced to regenerate an area and spend large sums of money in improving the infrastructure, supporting existing businesses, and attracting inward investment. Property values quickly rise due to increased demand. Part of the infrastructure works include a number of road widening and a junction improvement schemes, one of which results in a compulsory purchase order being served on a particular property. The acquiring authority offers compensation based on open market value. However, in assessing the open market value they are required to ignore the effect on value of the scheme underlying the acquisition. They argue that the scheme underlying the acquisition is the whole regeneration and investment programme. They therefore offer compensation based on the value of the property before the programme was announced. Not unreasonably, the claimant feels this is very unfair, as this gives him insufficient money to buy a replacement property locally, now that values have risen. He argues that the scheme is simply the narrow proposal underlying the compulsory purchase order, namely the road-widening scheme. In the absence of this scheme his property is in an area where property values have recently risen and he should be compensated accordingly.
In deciding this sort of case, it seems to me that there should be scope for the lands tribunal to adopt an approach which reflects some element of consistency. I must, however, admit a sneaking admiration for the fact that the tribunal appears willing to adopt whichever interpretation produces a compensation payment which it considers to be fair to the claimant in the circumstances of each individual case. A number of cases this year seem to illustrate this approach.
A matter of fact in each case
In Tudor Properties Ltd and C.N. McGrath and N.D. Walsh v. Bolton Metropolitan Borough Council (1999) the lands tribunal set out the principles in some detail, quoting from Widgery LJ in the case of Wilson v. Liverpool City Council (1971) 1 All ER 628:
The extent of the scheme is a matter of fact in every case ... the ultimate question for the valuer is to decide to what extent the dead ripe value of the land on the day on which the valuation is to be made has been increased by reason of the existence of the scheme. We were invited by junior counsel for the claimant to lay down rules and regulations governing the assessment of this element, but this, in my judgement, would be entirely wrong. It is essentially the duty of the valuer, using his skill, to decide what part of the open market dead ripe value of land is fairly to be regarded as having been contributed by the scheme. It is entirely a matter for the valuer, not a question for this court at all ...
The subject properly is situated in the Tonge Valley, a project area set up with a view to the reclamation of derelict land and buildings, access improvement, landscaping and general promotion for industrial development. The subject property was being acquired to assemble a site for a leisure development. The grounds were therefore set for a classic dispute as to whether a narrow or broader interpretation of the scheme should be adopted. Even on a narrow interpretation, this part of the Tonge Valley was semi-derelict and in several different ownerships. The developer would be faced with a site which had yet to be assembled, with uncertain ground conditions, and with the possibility of two ransom strips and a tenancy. It did, however, have the benefit of access road improvements and the further infrastructure put into the area by City Challenge. The narrow interpretation of the scheme "would involve disregarding any enhancement solely due to the facts that the acquisition was compulsory, that the CPO guaranteed the land assembly, and that the local authority and City Challenge were pursuing a joint approach with the developer for the assembly and development of the land".
A wider interpretation of the scheme would involve leaving out of account the wider plans and resulting works for the Tonge Valley. On this approach, for valuation purposes the site would have comprised contaminated industrial land, accessed by a very poor quality unadopted cul-de-sac. The surrounding land would have been used for low-grade industrial purposes. Other significant regeneration works in the valley, which had actually taken place, would not have occurred and should be disregarded. On this basis the most likely uses for the subject land would have been low-level industrial purposes and storage which, with poor access and major reclamation costs, would have commanded very low values. Clearly, a broad interpretation of the scheme would greatly reduce the compensation payable to the claimant.
The lands tribunal decided on the facts of the case that a narrow interpretation was appropriate, and set out three main reasons for its conclusion. First, there was no evidence to suggest that other parts of the Tonge Valley improvements were dependent on the leisure scheme, and in fact it was clearly taking place independently. Second, the leisure scheme was expected to be achieved by the private sector, and third, the evidence of both of the expert witnesses in the case pointed to the narrower no-scheme world as being the most appropriate.
Could grant availability be taken into account?
In M.S. and B. Takhar v. Wolverhampton Metropolitan Borough Council (1998) the circumstances were similar though only on a much smaller scale. At the valuation date the subject premises were vacant and badly vandalised. Because of this and the lack of satisfactory proposals from the owners for their refurbishment, local authority made a compulsory purchase order in 1994. This was with a view to the demolition or refurbishment of the properties, though in the end refurbishment was the chosen option. They were situated in an area of urban regeneration which included City Challenge, a renewal area, and a housing investment programme. This created the possibility of grant aid being available for refurbishment of the houses which were the subject of the referral.
A broad interpretation of the scheme was proposed by the acquiring authority. This would exclude from the assessment of compensation any possibility of grant aid being forthcoming for the refurbishment of Waterloo Terrace from City Challenge funds. The authority argued that "such funding, which was actually made available for the refurbishment following the compulsory purchase, arose out of the renewal area, which in turn was declared as a result of city challenge", and that the renewal area was the scheme which underlay the CPO.
The narrower interpretation, proposed for the claimants, was that the scheme was simply the agreement to acquire the property and refurbish it, partly with City Challenge funds. In the absence of this scheme, there was the possibility that City Challenge funding would be forthcoming for the refurbishment of Waterloo Terrace. This possibility existed before the scheme came into existence and any effect on value which it had can be taken into account in assessing compensation. This narrow scheme did not come into existence until 1994 when it was decided to make the CPO.
In this case, the member of the lands tribunal opted for the broad definition of the scheme, saying:
In the instant case I am satisfied on the evidence that the CPO would not have been made but for the existence of City Challenge and its objective of declaring the renewal area and regenerating the private sector housing within it and that such a regeneration constituted the scheme for Pointe Gourde purposes. It follows that no account is to be taken of the value, if any, which the prospect of grant aid from City Challenge funds may have added to the value of the subject property, with a before or after the making of the CPO.
Unfortunately, the member did not attempt to justify his conclusion, except by reference to the similar approach adopted by the Court of Appeal in the case of Bird and another v. Wakefield Metropolitan District Council (1978) 33 P&CR 478.
Was the scheme responsible for vandalism?
A third case in which the definition of the scheme was considered is Anthony Green v. Doncaster Metropolitan Borough Council (1999). This case also concerned a property which had become vacant and badly vandalised by the valuation date. However, in this case it was the claimant who was arguing for a broad interpretation of the scheme, and the acquiring authority which took the narrower view. The property was situated in an area which had been designated for regeneration and redevelopment for many years. This had clearly had a blighting effect, and had adversely affected the value of property in the area. If the claimant was correct, and the redevelopment proposals were to be ignored in their entirety, then the property would fall to be valued as if it was in an area which had not been in steady decline over a number of years. If, as the Council proposed, only the actual compulsory purchase order which included this site were to be ignored, then the valuation would reflect the actual situation of a property in a generally vacant and vandalised area. Clearly this is a situation where sympathies must lie with the claimant, and the tribunal member gave careful consideration to the leading cases concerning the extent of the scheme underlying the acquisition. It again quoted from the Wilson v. Liverpool City Council case, this time using the more well-known words of Lord Denning MR , when he said:
A scheme is a progressive thing. It starts vague and known to few. It becomes more precise and better known as time goes on. Eventually it becomes precise and definitive and known to all.
The tribunal decided that the "scheme" in this case was the need for environmental improvement in the area and, that the acquisition of the derelict shops and other nearby properties was considered to be a key element of these environmental improvements. Therefore, although the compulsory purchase order affecting the subject property was for a specific redevelopment proposal, this proposal was unlikely to have existed in the absence of the broader scheme for environmental improvements in the area, and it was the whole of the broader scheme which was to be left out of account. This conclusion did, however, raise a further question as to whether or not the vandalism was attributable to the scheme, and this is considered in more detail below.
Having three separate cases, each considering the extent of the scheme underlying the acquisition in some detail, and giving comprehensive reasons for the decision, it should be possible to identify some broad principles. Certainly one firm principle seems to emerge, as expounded in the Anthony Green case. Where the narrow scheme would not have been likely to take place in the absence of the broader scheme, then this is an indication that they are one and the same scheme and should be wholly left out of account. In the Tudor properties case, this principle was again followed, the tribunal opting for a narrow interpretation of the scheme on the grounds that the broader elements of the scheme were not dependent on the leisure scheme affecting the subject property, and that they were clearly taking place independently. While not specifically referred to, the principle also appears to have been at the forefront of the tribunal's mind in the Takhar case when it decided that the CPO, the narrow scheme, was unlikely to have taken place but for the existence of City Challenge, the broad scheme, and therefore it was the broader scheme which was to be left out of account.
Hopefully, I have identified at least one guideline which will be useful to surveyors in the future. However, I have little doubt that this will be subordinated to the overall principle set out in the Anthony Green case, and taken from Lord Denning that "the extent of the scheme is a matter of fact in every case ... It is for the tribunal of fact to consider just what activities - past, present or future - are properly to be regarded as the scheme within the meaning of the proposition".
Rebus sic stantibus
Rebus sic stantibus - take the thing as it stands - requires that the property is to be valued in its actual physical condition as at the date of valuation. This requirement has, however, the potential to conflict with the principle that the property is to be valued ignoring the scheme underlying the acquisition. If in the no-scheme world, the property would have been in a different physical condition to the actual condition that the valuation date, which of these principles should be followed?
Until recently rebus sic stantibus has held sway, the only significant exception being Gateley v. Central Lancs New Town (1984) 270 EG 1197. A more significant breach of the rule was made in the recent court of appeal case of English Property plc v. Royal Borough of Kingston upon Thames (1998), when a small piece of land was not valued in its actual condition, as a useless paved forecourt to a modern development, but as it might have been in the no-scheme world, as an area of land capable of being incorporated into the development. It should, however, be noted that this rather questionable aspect of the valuation was not argued by the parties and was not considered in detail by the Court of Appeal. In Anthony Green v. Doncaster Metropolitan Borough Council, considered previously, the circumstances were very similar to those in Gateley. The premises were derelict and badly vandalised by the valuation date, and the claimant argued that this was due to the blighting effect of the scheme, and therefore the premises should be valued as if they were in good condition, as they were likely to have been in the no-scheme world. The tribunal member described the question which he was required to answer as follows:
It seems to me that the general rule is that any diminution in the market value of the reference property that is attributable to vandalism will be at the claimant's loss unless he can prove that vandalism was due to the scheme of the acquiring authority. The question for me to determine is whether in the instant case the claimant has discharged that burden of proof.
It noted that in the subject case, the claimant had made considerable efforts to keep his property secure and maintain insurance cover. It considered that there was some risk that in the no-scheme world the reference property would have been subject to some vandalism but that on the evidence it was unlikely that this would have involved criminal damage to the fabric of the property. Demolition of nearby properties added to the existing dereliction of the order land. The manner in which the authority implemented the scheme gave encouragement to vandalism and therefore the authority ought to bear some part of the loss attributable to the damage caused to the property. It apportioned the responsibility for the diminution in value 60 per cent to the acquiring authority and 40 per cent to the owner. Interestingly, this principle was applied not only to the land taken element of the compensation claim, but to the disturbance claim and in particular to the claim for permanent loss of profits. The Tribunal decided that the premises would have been trading at the valuation date but for the vandalism. As the authority was 60 per cent responsible for the vandalism, it should pay a disturbance claim based on 60 per cent of the sum it would have paid had the premises been operational at the valuation date. This aspect of the decision is a new, but logical, extension of the exception to the rebus sic stantibus rule which was established in the Gateley case.
The progress of residual valuations towards full acceptability in front of the lands tribunal has continued over the last year, though the tribunal remains reluctant to mention this method of valuation, without first referring to its traditional reservations about the vulnerability of the method to relatively small changes in the underlying assumptions, and its preference towards direct comparable evidence. Such was the case in Tudor Properties Ltd and C.N. McGrath and N.D. Walsh v. Bolton Metropolitan Borough Council, referred to, where the tribunal commented:
Since I cannot feel able to base my determination of value on the land sales or only option prices, it is necessary to rely on a residual approach, which formed a very considerable part of both experts' evidence. In doing so, I didn't overlook the fact that members of the lands tribunal have on various occasions expressed their reluctance to accept residual valuations which are prepared solely for the purpose of proceedings in the tribunal. I entirely agree. This case should be considered as being exceptional, where the absence of any reliable comparable land transactions elsewhere has meant that the residual valuation method is effectively the only one available.
Computerised appraisal used
The member of the tribunal in this case then considered all the elements of the residual valuations put forward in some detail, and as it has done in the past, borrowed the computerised appraisal programme of one of the valuers in order to produce its own residual valuation, on which it based its decision.
In Takhar and Takhar v. Wolverhampton Metropolitan Borough Council, also referred to, both direct comparable evidence and residual valuations were put forward by the parties. The member of the tribunal managed to restrain himself from any adverse comment on the residual method, and appeared to give equal weight to both approaches in arriving at his decision.
Capital gains tax
The tribunal has always been reluctant to become involved in the matters of taxation, and it forcefully maintained this policy in John Henry Harris v. Welsh Development Agency (1999). This was a complex case concerning a building which was partly occupied by the claimant for his business as an optician and partly let as an investment. A number of interesting matters were raised concerning the claims for both land taken and disturbance. In particular, the tribunal disallowed sums claimed in respect of works of adaptation to a replacement property. It did so on the grounds that he had received the market value for the property he had lost, and paid the market value for his new building, and those values no doubt reflected any works which were required. Having compensated the claimant for loss of accommodation of a certain size and a certain standard, the acquiring authority could not be expected to pay for alterations to the replacement property to provide similar accommodation. To do so would be double counting.
The most potentially significant aspect of this claim concerned, however, capital gains tax. Although Mr Harris had purchased a smaller property in which to relocate his business, he had not replaced that part of the property which had been let as an investment. On the sale of the subject property to the authority, he had, therefore, incurred a capital gains tax liability of around »32,500. It was argued on his behalf that in the absence of the acquisition he would have retained the building as an investment, even after his retirement from his business. He would have owned an asset worth »275,000. He had received the market value of the property, but had incurred a tax liability of »32,500. His net estate had been reduced by that amount and it would not have occurred if he had not been compulsorily forced to convert his assets into cash. The claimant should be paid this additional loss as disturbance, in order that he would be placed in the same financial position after the compulsory purchase, as before.
Clearly, if the claimant were successful in this argument, it would have wide repercussions, as a large number of claimants must find themselves in a similar position following a compulsory purchase. The lands tribunal noted that it was unaware of any attempt to claim such a loss in the past, though the claim need not necessarily fail because it breaks new ground. It did, however, comprehensively dismiss this item of claim on a number of grounds. It stated that three conditions must be satisfied for the claim to be payable:
Three tests to be satisfied
Firstly, there must be a causal connection between the acquisition and the loss in question. Secondly, the loss must not be too remote. Thirdly, the claimant must have acted reasonably to mitigate his loss.
Not only did the tribunal decide that the claim failed to meet two of the above three tests, it felt that it also failed a prior test which needed to be satisfied before those three tests fell for consideration.
The sum was claimed as disturbance under rule (6) of section 5 of the 1961 Compulsory Purchase Act. The prior question was whether the claim properly fell within this provision. Rule (6) applies to "any other matter not directly based on the value of the land" and can only arise out of dispossession. Although Mr Harris was dispossessed of part of the property which he occupied, this aspect of the claim arose out of his ownership and disposal of the property. The capital gains tax liability arose because there had been an increase in the value of the property between purchase and sale. The loss was, therefore, based directly on the value of land and could not fall within rule (6). Having decided that, even if a loss had been suffered, it was not claimable under rule (6) and there was no strict requirement for the tribunal to consider the three tests which it had set for itself to decide whether there had been a genuine loss. Perhaps wary of the possibility of an appeal, it decided to do so in any event.
To meet the first condition it is necessary to show a causal connection between the acquisition on the loss in question.
The loss must be the natural, direct and reasonable consequence of the acquisition. The acquisition was a disposal for CGT purposes. The effect was to convert a contingent liability into an actual liability. The amount of that liability, now claimed as a compensatable loss, was not caused by the acquisition but arose out of the existing state of affairs surrounding Mr Harris's purchase and improvement of the property which established the amount of tax payable. The natural and direct consequence of the acquisition, and the extent of the causal connection between acquisition and loss, was that it constituted a CGT disposal. Any liability arising out of that disposal was caused by Mr Harris's position in relation to the property. There is therefore a break in the chain of causation between acquisition and loss.
In other words, Mr Harris already had a liability to capital gains tax; all that the compulsory purchase did was to convert that contingent liability into an actual liability. If the whole of his tax were to be reimbursed, he would be placed in a much better financial position than had he held on to the premises.
Loss too remote
The second condition was that the loss must not be too remote. In the opinion of the tribunal, the amount claimed was too remote because it was incapable of accurate assessment. The tribunal had already decided that to compensate Mr Harris for the whole of his tax liability would place him in an improved financial position. It could be said that the liability had been accelerated by the acquisition and therefore the extent of his loss was the difference between the tax payment made at the time, and some payment that he may have been required to make at a future date when the property might have been sold. The identification of that future date is an impossible task.
Mitigation of loss
The third condition is that Mr Harris must have acted reasonably to mitigate his loss. Mr Harris could have mitigated his tax liability by applying the whole or part of the consideration to the purchase of another property and claiming roll-over relief. The tribunal was, however, satisfied that Mr Harris could have made reasonable attempts to do this but had been unable to buy a suitable alternative property within the time available. He had not therefore failed to reasonably mitigate his loss, and the third condition was satisfied.
The fact that the third condition was satisfied would be of little comfort to the claimant, having failed the other two requirements, as well as the prior test which had been imposed by the lands tribunal. This is confirmation of the traditional view of the tribunal that it is for the Inland Revenue deal with matters of tax, and for the lands tribunal to arrive at a fair measure of compensation, without worrying about how the workings of the Inland Revenue might subsequently act to defeat its intention.