Compulsory purchase and compensation

Journal of Property Investment & Finance

ISSN: 1463-578X

Article publication date: 1 April 2003

238

Citation

Sams, G. (2003), "Compulsory purchase and compensation", Journal of Property Investment & Finance, Vol. 21 No. 2. https://doi.org/10.1108/jpif.2003.11221bab.001

Publisher

:

Emerald Group Publishing Limited

Copyright © 2003, MCB UP Limited


Compulsory purchase and compensation

Gary Sams

Introduction

In July 2002 the Law Commission published a consultative report on compulsory purchase compensation. This is the first of two papers which review the existing law of compulsory purchase, and suggest the outline of a new compulsory purchase code. This first paper considers compensation matters, while the second paper, published in Autumn 2002, concentrates on compulsory purchase procedure. The paper comprises an overview, which sets out the main changes which are proposed to the compensation system, and the more detailed report itself which sets out all the arguments in support of these proposed changes. The proposals are based strongly upon the final report of the Compulsory Purchase Policy Review Advisory Group (CPPRAG), published in July 2000.

The paper suggests new legislation which would consolidate and reform the existing law of compulsory purchase. As this paper could well herald and most important change in the compensation system since the 1960 Land Compensation Act, I propose to concentrate in this year's paper on a summary of the proposals which are set out in the consultative report. Such a reform is well overdue, though the document should be welcomed with some caution, as similar projects in the past have gradually become watered down, as was the case with the Planning and Compensation Act of 1991.

I also consider two recent Lands Tribunal decisions which illustrate the problems which the reforms are intended to address. In one case the reforms will be successful but in the other the changes, if implemented as currently proposed, will not.

Proposal 1: A right to compensation

A number of minor changes are planned to the basic right to compensation, including the introduction of a right to compensation where a compulsory purchase order is abandoned after the date the order was published.

Proposal 2: Heads of compensation

The code will include a statement of the overriding principle of "fair compensation". This does not, however, appear to involve any change to the existing system. The principle would be similar to that established in Horn v. Sunderland (1941) 2 KB 26, that the claimant:

Gains the right to receive a money payment not less than the loss imposed upon him in the public interest, but on the other hand at no greater.

As at present, this principle would not give the Lands Tribunal a discretion to depart from the detailed rules in order to achieve "fairness", but would simply enable it to interpret those rules in accordance with the principle, in cases of doubt.

Proposal 3: Market value

The principal basis of compensation for land taken will remain "market value". This will be defined as the amount which the land might be expected to realise if sold in the open market by a willing seller to a willing buyer. It should be noted that the clear assumption of a willing buyer is the first significant change to be present approach.

Proposal 4: disturbance

There will, for the first time, be a clear statutory definition of "disturbance", though this does not appear to include a clear statement of the qualification rules. The definition will include a number of changes to the present system, including a right for a claimant to relocate, and claim compensation on that basis, even where that compensation exceeds that which would be payable on an extinguishment basis. No similar change is proposed where a claimant wishes to close down, but removal would be cheaper.

It is proposed that in appropriate circumstances, disturbance may include costs reasonably incurred in replacing buildings, as an alternative to market value. This is intended to address problems which have arisen in respect of agricultural buildings which have a very low market value, but which must be replaced by the farmer at a cost which far exceeds the compensation he receives. The change will not, however, be restricted to agricultural claimants.

Compensation will not be payable for any loss or expenditure incurred before the date of publishing the CPO. It should be noted that prior to Prasad v. Wolverhampton, it is generally accepted that compensation could not be paid for any loss incurred before the date the Notice to Treat was served, because a loss could not be the result of a compulsory purchase if it occurred before compulsory purchase took place. In that case the Court of Appeal decided that the test was one of cause and effect, and not of timing, and expenses prior to Notice to Treat could be claimed providing they were incurred as a natural and reasonable consequence of dispossession. The proposed change will restore a time limit to items of claim. While it is difficult to see how losses incurred before a CPO is even published could be said to be a consequence of that CPO, it is also hard to see why any time limit is necessary.

Proposal 5: Injury to retained land

I have campaigned for many years for a change to section 7 of the 1965 Compulsory Purchase Act which gives a right to compensation for any depreciation in the value of retained land, as a result of the severing of that land from land taken under a CPO. My concern has been that section 7 does not give a similar right to depreciation in the value of the land taken as a result of severance. Therefore, if a strip of land, too small to be developed, is acquired from a development site, compensation will be based upon the market value of a narrow, undevelopable strip, and the claimant will receive less than the loss he has suffered (for more details see "Severance and the land taken" in Vol. 1 No. 11, of the Journal of Valuation (1982)).

This problem is addressed in the paper, by an unusual, but effective route. It is proposed that, if a claimant so requires, compensation for land taken and severance and injurious affection will be assessed by a "before and after" valuation, comparing the value of the whole of his land holding prior to the CPO, with the value of his retained land afterwards. It seems to me that the same result could be achieved more simply, by making section 7 applicable to land taken as well as retained land, but the actual proposal should achieve the same objective.

There is a further problem under the present regime, where public works cause damage to the value of property during the construction period, which in respect of major works can be very long. There has been considerable argument as to whether such temporary depreciation is compensatable under section 7, and there have been cases where the Lands Tribunal has awarded compensation based on loss of rental value. It is proposed that the Lands Tribunal should have a wider discretion to deal with special cases and on this point the Law Commission is seeking the views of valuers.

Proposal 6: Equivalent reinstatement

No significant changes are planned to the rules affecting equivalent reinstatement, except for clarification that compensation on this basis may be refused by the Lands Tribunal, if it is satisfied that in all the circumstances it would be unreasonable, having regard to the cost to the authority and the likely benefit to the claimant.

Proposal 7: Incidental rules

This proposal sets out a number of incidental rules, broadly in line with the present law. This includes a restatement of rule 4 of section 5 of the 1961 Act, that compensation should leave out of account any increase in the value of land caused by its use in a manner, or for a purpose, contrary to law. This goes against the CPPRAG view that this rule is at best unnecessary, and at worst could cause a claimant to receive less than is true loss, because of some technical infringement of planning or other rules. Again, the view of valuers is sought.

Other principles of the existing law which are restated, include another which comes from the Horn v. Sunderland case. Where compensation is claimed based on development value, compensation shall not be allowed under other heads, including disturbance, in respect of losses which would necessarily have arisen in realising the development potential. In other words the compensation claim must be consistent, and if compensation for land taken is based on development value, compensation under other heads cannot be based on existing use value.

Proposal 8: Date of assessment

This proposal confirms, and clarifies, the existing principle that the valuation date is the date of physical possession, or the date of assessment of compensation, if earlier.

Proposal 9: Disregarding the project

The Commission describes this group of proposals as the most difficult issue they have had to address. They devote a large proportion of their reports to this question, and understandably find the existing law extremely confusing. It also seems to me that as a result of this confusion, they arrive at a proposed solution which is entirely inappropriate.

In recent years a disproportionately large proportion of my legal briefings has been taken up by that part of the law of compulsory purchase which is aimed at establishing the principle that compensation should be assessed in the "no-scheme world". Many cases have gone before the Lands Tribunal, in which the parties argue about what exactly comprises the "scheme" in each case. The classical example of this problem arises where a Development Corporation has been set up. Property values increase in the area, due to the grant aid which is now available, as well as the many physical improvements which are undertaken to the environment and infrastructure. In pursuance of their many functions they acquire a property for a minor junction improvement scheme. The owner of the property argues that the scheme which is to be ignored is a minor junction improvement, and compensation should be assessed taking into account all the other improvements which are taking place in the locality. The Development Corporation, on the other hand, argues that the scheme is not only the junction improvement, nor is it all the highway works, or all the environmental and infrastructure improvements; it is the very existence of the Development Corporation, and all the effects it has had on the area. Compensation must, therefore, be based on the value which the property would have had if the Development Corporation has never been brought into existence. Any other interpretation would be unfair on them, as it would force them to pay compensation for increases in value which were entirely due to their efforts. If, however, this argument is accepted, the claimant will consider himself to be unfairly treated, as he will receive insufficient compensation to purchase a similar replacement property in the immediate locality.

Similar, but reversed, arguments will arise where, for example, houses are acquired for road widening purposes, in order to improve access to an airport, which is expanding with the construction of a second runway. In this case the acquiring authority will argue for a narrow interpretation of the scheme: that compensation should be assessed disregarding only the highway works but reflecting the fact that the houses are close to the new airport runway which will create additional noise and vibration. The householders will argue that the road improvement and the airport runway are all part of the same overall scheme which should be left out of account. Compensation should, therefore, reflect house values of the assumption that no second runway was to be built.

In recent years I have commented in these columns on many Lands Tribunal cases concerned with the question of "what is the scheme underlying the acquisition". In doing so I have willingly admitted a complete failure on my part to discern any noticeable pattern to the decisions, which is likely to be of assistance when the question arises in the future.

To deal with this problem the Law Commission proposes first to dispense with the term "scheme", which it considers to be too imprecise, and to replace it with the alternative term "the relevant project", meaning the project for the purpose of which the authority has been authorised to acquire the subject land. They then appear to be particularly confused, and suggest that the relevant project should be left out of account, only to the extent that it affects to the subject land. As "the subject land" is earlier defined as "any land of the claimant which is subject to compulsory purchase" they appear to be suggesting the return to an historic situation when the scheme was to be left out of account only to the extent that it affected the actual land being acquired from the particular claimant. It is clear from the context that this is an error, and that what the Law Commission actually proposes is that "the relevant project" should be left out of account to the extent that it affects all the land in the CPO which includes the subject land.

Even this would be an extremely narrow interpretation of "the relevant project". It is therefore also proposed that if the authority wishes to contend that the relevant project extends to land outside the particular CPO, they shall include in the order a statement defining the nature, extent, and purpose of that project. The claimant would then have the right to challenge that statement before the Lands Tribunal.

The solution to the thorny question of a defining the "scheme", which is proposed by the Law Commission, is likely to be effective in circumstances similar to those outlined above concerning a Development Corporation. Where an acquiring authority wishes to argue that the scheme is broader than simply the compulsorily purchase order which affects the subject property, they will need to state that fact in the order, and it necessary be able to justify before the Lands Tribunal. What the Law Commission seems to forget is that the majority of schemes have a detrimental effect on property values and create situations close to those described above concerning an airport runway. In these circumstances the narrow definition of "the relevant project" which is proposed will be advantageous to the acquiring authority, and it will be impossible for a claimant to argue that the scheme is something greater than that which is taking place on land included in the CPO which affects his property. In many cases it will be advantageous for the acquiring authority to acquire land for schemes by creating a number of small CPOs, rather than including all the land which is acquired for the scheme within a single order. To put it another way, if it is proposed that the acquiring authority should be allowed to argue that in certain circumstances the relevant project is something larger than simply the CPO affecting the claimant, then it is essential for a claimant to be given a similar right, where a broader interpretation of the relevant project would be to his advantage.

In any event, the proposal is likely to be of limited benefit, as any dispute as to what comprises the relevant project is to be resolved by the Lands Tribunal, which has clearly shown itself to be unwilling to provide any consistent guidelines which can be used as a precedent in future cases.

If the Law Commission is ever able to establish exactly what comprises the scheme underlying the acquisition, then it has a further problem in deciding exactly how that scheme is to be left out of account. The first option is to value the land being acquired on the assumption that the scheme had never been in existence or even been considered. The second option is to value the land on the assumption that the scheme had been abandoned just prior to the valuation date. The problems of the first approach were amply illustrated in the case of English Property PLC v. Royal Borough of Kingston upon Thames (1996). The subject property in that case was part of a paved forecourt to a mixed-use development, which had been constructed some 17 years earlier. It was being acquired for road widening and there was little doubt that, but for the road proposals, this land would have been incorporated into the development when it originally took place. The Lands Tribunal adopted the approach of imagining that the scheme had never been in existence. It therefore valued the land as if the development, which had actually taken place 17 years previously, had not yet happened and valued it for inclusion into the development scheme. The dubious justification for this approach was section 9 of the 1961 Land Compensation Act, which does not appear to me to give any justification for valuing land other than in its actual physical state of the date of valuation. The Law Commission proposes that the more sensible second option should be adopted and that land should be valid on the assumption that the scheme has just been abandoned.

Proposal 10: Planning status

Another area which is in need of a substantial reform is the planning assumptions as set out currently in sections 14 to 16 of the 1961 Land Compensation Act. I have argued in the past that, at best, these planning assumptions serve no useful purpose. Do valuers, for example, really need to be told by section 14 that when valuing land, account is to be taken of any planning permissions in existence at the valuation date? At worst, the provisions may require the valuer to assume planning permission for development which could not actually have taken place in the "no scheme world". An example of this is section 16 which requires planning consent to be assumed for a development, where the site is defined in the current development plan as the site of that proposed development, regardless of whether or not planning permission could have been expected in the real world. While this may be more of a theoretical problem that a real one, there can surely be no justification for the assumption of schedule 3 development, schedule 3 being of purely historical relevance, as a transitional provision following the introduction of modern town and country planning law in 1947.

In order to deal with these problems, the Law Commission proposes a new set of planning assumptions which can be summarised as follows:

  • account is to be taken of any planning permissions in existence at the valuation date;

  • planning permission is to be assumed such as would permit the carrying out of the development proposed by the acquiring authority; and

  • planning permission is to be assumed for a development such as would reasonably have been expected to be granted on the valuation date in the "no scheme world".

These rules still state the obvious but are in a simplified form and do not require planning to be assumed for any development for which planning permission could not reasonably have been expected in the absence of the scheme.

Section 17, which allows either party to apply for a "Certificate of appropriate alternative development" will be retained in broadly its present form, thereby allowing the Secretary of State to deal with appeals, where there is a dispute as to what planning permission should be assumed. As an alternative, however, the Law Commission is considering transferring appeals to the Lands Tribunal. This, it considers, would be a more efficient use of resources, as the Lands Tribunal would have to deal with any dispute as to compensation at a later date. The Tribunal would, however, need to borrow expertise from the Planning Inspectorate if it were to become an arbiter of planning disputes.

Miscellaneous proposals

Proposals 11 to 16, cover relatively minor matters including re-statement of the provisions concerning advance payments and the payment of interest, and compensation for interference with easements or the acquisition of rights over land.

Proposal 17: Injurious affection where no land is taken

Sweeping changes are proposed to the rules covering compensation payable to claimants who have no land actually acquired, but who are adversely affected by public works. At present, they have to rely on Part I of the Land Compensation Act 1973 or section 10 of the 1965 Compulsory Purchase Act. Both provisions are extremely restrictive and section 10 is particularly complex. Part I applies to only limited categories of claimant, and compensation is limited to depreciation in the value of property caused by the use of public works. No compensation is therefore payable to the extent that the construction of the works causes depreciation in the value of the claimant's property. In order to qualify under section 10 is necessary to satisfy the four "McCarthy rules", and in this context the words "camels" and "eyes of needles" come to mind. Even if those rules are satisfied, compensation is limited to depreciation arising from construction of the works, and then only to the extent that the works would have been actionable as a nuisance, but for the statutory powers.

It is proposed to merge section 10 into an expanded Part I which will provide a complete code of compensation for injurious affection where no land is taken. The qualification rules will be relaxed by deleting the present rateable value limit of £24,600 on business claimants, and there will be marginal improvements to the basis of compensation, by deleting the present requirement that this will be based on existing use value only. The question of whether compensation should be payable for disturbance, in addition to depreciation in land value, is left open for debate.

In formulating its proposals, the Law Commission has had regard to a policy statement produced by the DTLR in response to the CPPRAG review. This sets out as one of its aims that:

All those affected should be entitled to compensation for any and all of the actual losses which they can show that they have sustained as a result of the acquiring authority's actions; such an entitlement should apply irrespective of whether land actually taken from the claimant for the scheme.

Such a statement is rather idealistic. When, for example, a bypass is constructed around a town, the implications for individuals, and particular businesses, can be widespread and unpredictable. Every petrol station, convenience store, and fish and chip shop along the old main road through the town centre will lose custom, and be entitled to claim compensation if the above principle is followed. However, people still need petrol and food, and it follows that other businesses, perhaps fronting spur roads leading to the new bypass, will benefit. Is it fair that every business which suffers a loss following the construction of a bypass should be compensated, while those which benefit are allowed to retain their windfall? If so, how can the losses be proved and quantified? What if the petrol station which suffers, and the one which benefits, are both owned by the same multinational oil company? In practice, there will inevitably be limits to the compensation payable where no land is taken, and whenever there are such limits there will be borderline cases which appear unfair.

This is recognised by the Law Commission, which proposes relatively minor reforms based on Part I of the 1973 Act. The provisions of section 10 will be merged with Part I, though the commission admits to being "not clear precisely what CPPRAG had in mind when recommending 'merger'". This confusion seems apparent in the wording of its proposed reform. It is suggested that a new section could be added to Part I, providing additional compensation where the market value of an interest in land is depreciated by "physical factors" caused by the construction of public works, but only to the extent that a claim would have arisen at common law but for the immunity conferred by the statute. This does not appear to be what CPPRAG had in mind at all. First the concept of "physical factors caused by the construction of public works" is difficult to understand, and can only be applicable during the construction period. Normally it is accepted that when a motorway is built close to a house, then depreciation is caused to the house by two factors. Firstly, the fact that there is now a new motorway where once there was open countryside will cause depreciation. Secondly, the physical factors (noise, fumes, smoke, vibration, etc.) caused by traffic using the motorway will also cause depreciation. At present, it is necessary to first calculate how much depreciation has been caused to the value of the house, and then to an arbitrarily apportion that sum between depreciation caused by the physical factors, which is compensatable under Part I, and depreciation caused by the construction of the road, which is not. As I understand it, the CPPRAG recommendation is that section 10 the should be repealed, and the compensation should be payable under Part I for all the depreciation, whether due to construction or physical factors.

The Law Commission proposal would not appear to achieve this objective. First, the concept of "physical factors caused by the construction of public works" would appear to exclude depreciation caused by the existence of the works. Second, the compensation will still be subject to the test that a claim would have arisen at common law apart from the immunity conferred by the statute. This test would exclude any claimant who could not show interference with a personal legal right, such as a right of way.

While the other qualification rules will be relaxed, there will be no change to the requirement that claimants must be occupiers, as well as owners. Owners of investment and development properties will still, therefore, have cause to feel aggrieved.

The Law Commission accepts that its proposals are somewhat limited and seeks consultation on a number of points including the question of whether loss of profits and other forms of disturbance compensation should be payable in addition to depreciation in the value of land, and whether compensation for the effect of "physical factors" due to construction of the works should be restricted to circumstances for which a claim would have arisen at common law.

Injurious affection where no land is taken

Horton and Griffin v. Worcestershire County Council (2001) (unreported), concerned two claims under Part I of the Lands Compensation Act 1973. The owner-occupiers of houses claimed compensation for depreciation in the value of their properties, caused by the construction of a by-pass at a distance of around 150 metres. There was almost complete agreement on the value of the properties, both before and after construction of the by-pass, and it was not, therefore, the amount of depreciation suffered which was in dispute. The problem arose because Part I gives a right to compensation for depreciation caused by physical factors arising from the use of the works, such as noise, vibration and artificial lighting, but not to depreciation arising from the construction and existence of the road. The arguments, therefore, centred on the question of how much of the depreciation arose from physical factors, and was compensatable, and how much arose due to the construction and existence of the road, which was not.

For the claimants, it was argued that the whole of the depreciation was due to physical factors, particularly noise. The acquiring authority, however, said that prior to the scheme the properties had already suffered noise nuisance from the old road, and that a substantial proportion of the depreciation was due to "loss of view, privacy and inconvenience (changes to access)", which are not compensatable under Part I. The authority argued that the proportion of the total depreciation which was allowable was 43 per cent in respect of one of the properties, and 50 per cent in respect of the other.

The claimants' valuer pointed out that any such apportionment was completely arbitrary, an argument which was unlikely to succeed as the Tribunal has often made such apportionments in the past, often disallowing around one-third of the claim on these grounds. In its decision the Tribunal makes the, perhaps surprising, statement that "valuation is an art", and that "it is rare for it to be possible to be precise".

It accepted the argument for the acquiring authority in principle, but felt that a higher proportion of the depreciation was due to noise, and it awarded compensation amounting to 67 per cent of the depreciation in respect of one of the properties, and 75 per cent in respect of the other.

This case is one of a very few which are considered in detail the need to apportion depreciation in Part I claims. It amply illustrates the problems with the present compensation code which are under consideration by the Law Commission. There appears no logical reason to distinguish between depreciation caused by the use of public works, and their construction, and the fact that the present law makes such a distinction is the result of the haphazard way in which the present law has developed over the last 150 years. Unfortunately, the changes proposed by the Law Commission would not remove this problem. The Commission proposes that Part I should be expanded so that it is a right to compensation for depreciation caused, not only by physical factors arising from the use of public works, but for depreciation caused by "physical factors arising from the construction" of such works. This would appear to include temporary damage due to noise and vibration, etc. suffered during the construction period, but not to permanent depreciation caused by the existence of those works. As stated above, this does not appear to be what was intended by the CPPRAG, and it is to be hoped that following consultation, the Law Commission proposals will be amended so that Part I claims will provide a right to compensation for depreciation caused by the construction and existence of public works, as well as by physical factors arising from their use or construction.

The planning assumptions

A problem area which does appear to be adequately covered by the new proposals was considered by the Lands Tribunal in the case of Purfleet Farms Limited v. Secretary of State for the Environment Transport and the Regions (2001) (not reported). The case concerned the compulsory purchase of development land, and the assumptions as to planning permission which are required to be made under sections 14 to 16 of the Land Compensation Act 1960. In particular, section 16 states:

Where land consists of or forms part of a site defined in the current development plan as the site of proposed development of a description specified in relation thereto in the plan.

It is to be assumed that planning permission would be granted for such development. Unlike some of the other planning assumptions, this assumption is not subject to the test that planning permission could reasonably have been expected for the development in the absence of the scheme. In this case, the land was defined in the structure and local plan as the site for an industrial and commercial development, and the claimant therefore argued that it should be assumed that planning permission for such use was available at the valuation date. The acquiring authority, however, claimed that in the real world, it was the policy of the planning authority that any such consent would be subject to a section 106 agreement requiring a developer to pay a contribution of £40,000 per acre towards the cost of general highway improvements. They also considered that any planning permission would not have been granted for some years, and that a deferment of development value was appropriate.

The Lands Tribunal noted that the planning assumptions were written at a time when there were old-style development plans which made a clear distinction between sites defined for specified developments, and areas allocated for specified uses. It found difficulty in applying those assumptions to the present situation under which a development plan is made up of the structure plan and local plan, which do not define sites or allocate areas in the way that the old-style plans did. It was, however, necessary to apply the language of section 16 to the new style development plans and in doing this it found that planning permission was, indeed, to be assumed for industrial and commercial development of the site. It considered that no deferment was appropriate. The claimants argument that in practice it would take time after the valuation date in order to achieve planning permission for development of the reference land was rejected, as the assumption is that planning permission "would be granted", and wording did not leave open for argument the question of when planning permission would be granted. Even if there was evidence that from the valuation date onwards planning permission would never be granted for the development:

The assumption, nevertheless, would have to be made that the planning permission would be granted for the defined development and no question of deferment, including therefore perpetual deferment, could arise.

The Tribunal also rejected the argument that planning permission would be subject to a section 106 agreement, though it did so on the facts of the case, and did not need to consider whether this was also in conflict with the planning assumptions.

This case is a clear example of how the existing planning assumptions can, in certain circumstances, require compensation to be assessed with an assumption of planning permission, regardless of whether there would have been a prospect of obtaining planning permission for the development in the no-scheme world. Proposal 10 of the Law Commission consultation document, will effectively tackle this problem, by considerably reducing the planning assumptions, so that only planning permissions which could reasonably have been expected in the absence of the scheme, need to be taken into account.

Related articles